September 2020 Archives

This is definitely not a "Who you gonna call?"

I've done a couple articles on the two ratios, debt to income and loan to value. These are the basic and most important parts of loan qualification. Nonetheless, there exist a plethora of reasons why someone can be turned down for a loan even though they make it on the ratios.

The first of these is time in line of work. "A paper" from Fannie Mae and Freddie Mac looks for two years in the exact same line of work. One change that trips a lot of people is going from being employed by a company to being self employed in the same line of work. Believe it or not, a promotion can also sink a loan if your job title changed, for instance from salesperson to sales manager. If it was with the same company, it can sometimes be okay, but if you changed companies to get the promotion, that's a really tough loan. Subprime loans will accept shorter time periods, but real subprime is almost nonexistent today.

Making payments on time is probably the most common deal buster for A paper. In general, you are allowed no more than one mortgage late, or no more than two other lates within the last two years, a late being defined as thirty days or more delinquent. The reason does not matter. It does not matter how justified you were in not paying. The fact remains that you are reported as being late. The only way to remove these reports is for the company to admit it was in error in reporting you late. Many people will not pay the charge as it gets marked later and later and later. This is self defeating. Pay it now, dispute it afterwards. Yes, it's harder to get your money back - but the money it saves you on your home loan is typically much larger.

Store credit cards are one of the biggest headaches here. If you buy merchandise with a generic credit card, you've got the card company, who are neutral, looking at the transaction. Both you and the merchant are their customers, and the merchant needs to take credit cards. They're not going to quit taking them. If you use your store credit card, the dispute department is pretty much guaranteed to take the view that you bought that merchandise at their store and therefore you owe the money. I run across five or six store card problems for every generic card problem I encounter.

Bankruptcy is another deal buster. People in Chapter 13, or just out of Chapter 7. Most banks won't touch them. It's not really rational, but you there you are. Some lender are fine with them, however. This is one place where going to a broker or a correspondent is likely to save you, because they know what lenders will take a Chapter 7. (Chapter 13 is almost certain to kill you via late payments, disqualifying you from A paper)

Reserves can be a deal buster. There actually is a reserves requirement for regular full documentation A paper, but it's pretty much a non-issue as responsible people get uncomfortable if they can't lay hands on a month's mortgage payment. Reserves were really an issue for stated income loans when we had stated income loans. A paper stated income required six months PITI reserves somewhere that you can get to it. Subprime is less demanding, but if you don't have the lender's requirements, you won't get the loan. Would you loan hundreds of thousands of dollars to someone with absolutely no cash in the bank? Payment shock, where your monthly cost of housing is increasing, can increase the reserve requirements. You were paying $1200 per month for housing, now you'll be paying $2000. That takes some adjustments to lifestyle, and some people take a while to adjust.

Related Party Transfers are another questionable point. All of the background for loans assumes that the transaction is between unrelated parties, who have no reason to cooperate in order to do the lender dirt. If you're buying the house from your brother or some other family member, that assumption goes out the window. Ditto between partners and their partnerships, and so on. Some lenders will do them, others won't. Some will but charge extra. Others will but have special requirements. Whatever they are, you have to meet them.

The appraisal coming in low is another. The lender evaluates the property on a "lower of cost or market" basis. The Appraisal is the "market" part of that, and the lender will only loan money based upon the lower of these two methods of evaluation. I have people tell me all the time that their new purchase is worth $20,000 more than the appraised value (or the purchase price). No it isn't. By definition - it's worth what a willing buyer and a willing seller agree upon. The bank's evaluations are necessarily conservative, and they don't want to take over the property. They're not in that business. They want you to pay back the loan. That's the business they're in.

Late payments. Whatever you do, while the loan is in progress, keep making all your payments on time. Whether just indirectly due to the credit score dropping, or directly because now you've got a(nother) thirty day mortgage late, this can raise your rate or even break the loan.

Sourcing and seasoning of funds to close. Just because you've got $100,000 in the bank doesn't mean the bank is happy. Nobody rational keeps that kind of money outside of investment accounts. At least nobody rational who needs a loan - Bill Gates might. Lots of folks attempt to hide loans that way. The bank is going to what to see that you've had it a while (seasoning) or prove where you got it from (sourcing). If you really just got $400,000 from the sale of a previous property, you're going to have the escrow papers and HUD 1.

Final credit check: I have a set spiel I go through, "Until this loan is funded and recorded, don't breathe different without getting my okay. Make the payments you've been making. Make them on time. Don't take out any new credit. Don't allow anyone (other than mortgage providers!) to run your credit. Just before the loan gets recorded, the lender will pull a final credit report. Woe be unto the person whose situation has deteriorated, and it means we'll have to start all over again, if there even is a loan that makes sense."

Failures of verification. Three biggies here: employment, rent or mortgage, and deposit. I do not know why people bother lying, but they do. Don't you be one of them. World of hurt if the lender wants to prove a point. Don't quit your job, don't change anything about your employment. I once had a guy quit to become an independent contractor two days before the loan due to be was funded. Guess what? No loan.

Lines of credit/credit history/no credit score: Most lenders want to see at least 3 lines of credit with a 24 month history of making payments on time. Freezing your credit cards in ice is a wonderful idea, but you need to use them to demonstrate a payment history. Once per month, I use mine for something small and stupid that I would otherwise pay cash for - just to show payment history (it also helps your credit score). Pay if off as soon as the bill gets there. Waivers for two lines of credit are fairly easy, but if a given bureau doesn't know you have two open lines of credit, they may not score your credit profile. If you don't have at least two credit scores among the big three - no loan.

Property is structurally unsound, is not certified for habitation, unsuitable or not zoned for intended use, etcetera. Wouldn't you really find out about this before you have a very large debt to pay? Okay, this can cost you money, but it's a "Thank (deity) I found out now!" moment. Finding out now means you can change your mind while it's still the seller's $400,000 problem, before it's your $400,000 problem.

So there you have them, most of the most common reasons why loans - and therefore real estate deals - fall through for people that are otherwise qualified.

Caveat Emptor

Original here

how soon should I start shopping around to refinance my home? I have a 2yr interest only and it's up in (four months)

Okay, the 2/28 loans which you are describing all have prepayment penalties for at least two years. Figure it's going to cost you 6 months worth of interest, on top of the cost of the refinance, if you refinance before the penalty expires.

(you could have specifically bought it off by accepting a higher rate, but that's unlikely to have been the case)

That said, about three weeks before the penalty expires you can start the refinance process. Be advised that until the day the penalty expires, the current lender will be quoting a higher payoff, but once it has actually expired, the payoff should be correct, at least in theory. You should not sign final loan documents until such time as your penalty will expire with or prior to your Right of Rescission expiring. No more than two to three days prior to expiration.

Indeed, sometimes lenders will want to keep charging penalties even after they're no longer due. I'm not certain if they just don't update the payoff correctly or what, but I've seen lenders try to charge penalties a month after they expired. Once they've got your money, they can make you pay a lawyer and go to court to get it back.

For this reason, I would avoid "cash out" refinances any time within three months after the penalty expires. Matter of fact, if you're refinancing during that period, not only don't refinance for cash out, but don't have an impound account for taxes and insurance, and don't plan to put any money at all into the loan balance if you can avoid it. Here's why: When escrow officer goes to request a payoff from the soon to be former lender, the payoff quote may include the penalty even if it's no longer due. if the money they have from the current lender covers the whole thing, they have two choices. Pay it and have a completed transaction (not to mention getting their company paid), or don't, and leave everybody hanging. If they pay it, this means that you, the consumer, only get a much smaller amount of money, but I'm disgusted at how often consumers are shorted by the loan process, and this is one more way it happens. You're expecting $20,000 cash, and that $20,000 was the entire reason you did the loan. Comes the proceeds check, and you've only got a check for $9000. You want the other $11,000, you're going to have to go through the whole process again. Not the kind of situation you want to be in. Not the kind of situation I want my clients to be in.

If, however, the escrow officer does not have enough money available to them to pay off the loan plus the penalty, they have no choice but to leave the transaction at that stage until the quote is correct. They won't let it sit - they'll find out what's going on and everybody involved will be doing what's necessary to resolve the conflict between the two issues. Not having any more money in the loan than necessary to pay off the old loan is a good way to insure that the escrow officer won't pay a penalty you don't owe.

Don't let the rush to pay off the old loan cause you to cut corners on either your shopping for a new loan or asking all the questions you should ask prospective loan providers. Rushing into a refinance because your loan is going to readjust is one of the best ways to waste large amounts of money that there is. To illustrate, let's look at a larger than average loan amount that sees a huge jump in the actual rate. $400,000 at 6%, and it goes to 9%. This makes a difference of $33.33 per day, or $1000 per entire month. That's the equivalent of a quarter point on the cost - basically nothing on the scale of differences between subprime loans, and not very much on the scale of differences between A paper loans. I'll usually beat the retail branch of the lender I place a loan with by several times that amount. If it makes a difference of 0.25% on the rate, that's $1000 per year that you're going to be stuck with the new loan. If you're still a subprime borrower, multiply that by the length of your new prepayment penalty in years. Doesn't it sound worthwhile to take an extra day which your old lender bills you $33 extra for, to shop the loan around for real and ask the hard questions that enable you to save $2000 or more on the new loan? Even if you're putting the money into your balance, you're still paying the extra. Not only that, but you're paying interest on it as well. On the scale of costs for a new loan, paying the soon to be former lender for a few more days at the increased cost is likely to be a wonderful investment if it gives you the opportunity to find a better loan.

On a note of personal relevance, at the time this was originally written, written rates were higher than they were two years previous, and the person who asked was in an interest only loan, while interest only loans were extremely difficult to get then (and harder now). The payment is likely going to end up higher in such circumstances, especially if you roll loans costs in even if the interest rate (i.e. actual ongoing cost of money) is lower. If the reason a borrower is in an interest only loan was that their debt to income ratio couldn't qualify for the real payment on a sustainable loan, that refinance is probably not going to happen for you. With prices having decreased locally by 25 to 30 percent at the trough of the market, your loan to value ratio may not support refinancing either. If a refinance is not going to happen, and you can't afford your current payment, it's time to sell now. You owe what you owe and the rates are the rates. If the numbers don't work, get it sold. (On the plus side, due to underwriting paranoia the rates for those who can qualify at this update are very low)

One more piece of advice: Start improving your credit score now. Four months is plenty of time to bring your credit score up fifty points or more. If you can get into "A paper" loan territory, where penalties are much less common, you'll be much happier with your new loan than you are with this one. If you're in subprime territory and able to improve your loan to an "A paper" loan, your rate may go down despite the fact that the rates are higher.

As I cover in Getting Out of Paying Pre-Payment Penalties, if you're willing to refinance with the current lender, either directly or through a loan broker, your lender may be willing to waive the penalty in favor of sticking you for a brand new prepayment penalty on a larger amount. This is usually making a bad situation worse. As I said, you're likely to get a higher rate, be limited to an amortized payment on the new loan, and the new loan amount is likely to be higher (people in the situation usually roll the costs in), and all without even the benefit of lowering the tradeoff between rate and cost like penalties usually do. This seems pretty much the definition of lose-lose-lose-lose to me. Longer prepayment penalty on a higher balance at a higher rate, without getting any benefits in exchange. This is kind of why the best way to deal with prepayment penalties is not to accept them in the first place.

Caveat Emptor

Original article here

Section 1031 of the IRS Code has to to with tax treatment on the exchange of one parcel of real estate for another. It's similar to Section 1035 which covers most non real estate exchanges. Car for a car. Boat for a boat. Business for a business. But section 1031 allows indirect exchanges so long as you follow certain guidelines. After all, how often do folks want to trade two parcels directly? It happens, but not very often. Usually, if A is buying B's parcel, then even if B wants to replace it with another piece of real estate, it probably isn't owned by A.

Why would you want to do this? Taxes. No other reason but taxes. If the taxpayer makes the exchange according to the provisions, they defer the gain. But we're talking capital gains, not ordinary income, so keep in mind it's not worth going gonzo over. The maximum long term capital gains tax rate for most folks is 15 percent. Getting to keep 100 percent of your gains instead of 85 is worthwhile, and when we're talking sometimes about multiple hundreds of thousands of dollars or even millions, that's quite a bit of motivation. It's nice to be able to invest and use those (potentially) tens of thousands of dollars, rather than basically forking them directly to the tax man, but there are additional costs to the 1031 exchange that you would not otherwise pay, costs that vary between a low of about $4000 per property involved in a straight exchange or $7000 per property in a 'reverse' exchange, and can be significantly higher. This erodes tax benefit in a hurry.

Your primary residence is not eligible for 1031 Exchange. Second homes are severely limited in eligibility (general rule: You can't occupy it more than 10 percent of total occupancy, although you get up to fourteen days per year. Check with your accountant for details. Matter of fact, check everything with your accountant. This is just a basic overview, and the devil is in the details). Section 1031 is for investment property, of whatever nature.

Section 1031 is not for "flipping". I am not aware of any explicit minimum holding time requirements for 1031 exchanges in general, but the IRS looks hard when the held period is less than a year. Questions arising from Section 1031 exchanges are good jumping off points for general audits - the IRS gets out the big magnifying glass to go over your taxes. Be careful. If the properties are being sold between related parties, there is a two year minimum holding rule, and nobody can end up with cash. For this reason, 1031s with a related party transaction are tough. If it's a property you bought as investment that you later made into a personal residence (or vice versa) the minimum holding time is five years.

There are some significant complexities in duplexes where one unit is for personal use, or personal use dwellings where there's a home office. I've gotten to the point where I don't understand the attractiveness or value of a home office deduction for many people, but people keep insisting upon trying for them.

There are three major requirements for a standard "forward" 1031 Exchange. You can not have constructive receipt of the funds. You must designate replacement properties within 45 calendar days of the sale of the relinquished property, and you must consummate the sale within 180 days or before you file your tax return, whichever comes first.

Constructive receipt is a fancy way the IRS has of saying control of the funds. If escrow sends you the check, or if the check is in your name, you have constructive receipt of the funds and the 1031 will be disallowed. So what happens is that you need to pay a 1031 accommodator (most title companies have one) to act as trustee for the money, and the actual transaction is done in the name of the accommodator. If you see something about cooperating with a 1031 exchange at no cost to you as part of a sale or purchase, this is what it's about. Makes no difference to the other party in the transaction, but the Grant Deed has to be made out to (or by) the accommodator entity, not the people who are actually taking part in the transaction.

There are three rules I'm aware of to use in identifying replacement property. The 3 property, the 200 percent, and the 95 percent. Keep in mind that this is investment property, often commercial in nature, and that even within major metropolitan areas it can be difficult to replace the property with something similar within the time frame. This is one case where the law is a lot more flexible than most of the people. As long as it's real estate within the United States not held for personal use, the law doesn't care what the use of the property you replace it with is, but lots of folks are trying to find something as specific to their purposes as possible. Also, in hot markets, there may be difficulties created with finding a property you can afford and that the seller will agree to sell to you in that time frame.

Keep in mind always that we're not necessarily talking a straight one property for one property exchange here. It can be multiple relinquished properties for one replacement (in which case the sale of the first relinquished property starts the clocks), it can be one relinquished for several replacement properties, or any mix of A properties now and B properties later, where A and B are nonzero, whole, and positive. Counting numbers, to use the technical mathematical name. For every additional property in the exchange, you can expect to spend more in fees to the accommodator, exclusive of all other costs to the transaction.

The first method of designating replacement properties is what's called the 3 property rule. You may designate up to three properties of any value, and as long as you actually acquire one or more that fits the parameters within 180 days, you've met this requirement. The second rule is any number of properties but no more than 200 percent of value. The final rule, 95 percent, is basically worthless and a good way to get in trouble, because unless you only designate one replacement property, you're not going to be able to acquire 95 percent of the total value of the designated properties. Identification of these properties must be precise and unambiguous. "Land at the corner of First and Main" won't work. You need something like a legal description or an Assessor's Parcel Number (APN).

Finally, you need to acquire the replacement property within 180 days of selling the property, and before filing your tax return for the year. This can and often does require the person undertaking the 1031 exchange to be forced to extend their taxes.

Where the person making the exchange wants to buy the replacement property before selling the relinquished property, that's called a "reverse" 1031 exchange. It's basically the same concept switched around. You have 45 days to designate which property will be sold (usually not difficult), and 180 days to actually sell it, which may be a problem in slow markets. Reverse exchanges are also more expensive, as they require accommodaters to take title to an actual piece of land, and they are not, in general, for the weak of wallet. Any financing must be non-recourse financing, because the accommodater is in title and they're not going to agree to be on the hook for the value of the loan if you can't sell the property. This can also cause a requirement for larger down payments.

There are also "partial" 1031 exchanges, where you end up not only with a replacement property, but also something else you didn't have before. For the exchange to qualify as for full deferral of the gain, the replacement property must cost at least as much as the relinquished was sold for, the equity in the replacement property must be at least as large as the equity in the relinquished was, and the loan must be at least as large as the previous loan. If any of these three conditions is not satisfied, you've probably ended up with what the IRS code calls "The part of a like-kind exchange transaction which is not like-kind exchange" but most accountants and other people in the real world call "boot," as in "you've got this, and that to boot." Boot is taxable, so if there's a lot of boot, it may defeat the purpose of a 1031 exchange.

One final thing I should mention is that a 1031 exchange can force you to delay filing your taxes. If you start the exchange in December, selling one property, and concluded it in June of the following year by buying the replacement but filed your taxes on April 15th, the IRA will disallow the deferral. The 1031 exchange must be absolutely complete before you file your taxes for the relevant year.

There are a lot of pitfalls to 1031 exchanges, and with typically large amounts under consideration, the IRS is notorious for being hard nosed about all the particulars of 1031 exchanges, whether they are forward or reverse. Don't try this without the aid of a tax professional, and for real estate purposes, an agent who has a good understanding can save your bacon. But if you do fulfill the requirements, it can be a good way of keeping money in your hands that you can continue to have invested in your new property, reducing your mortgage on that property, further saving you money, where otherwise nobody would be happy but the tax collectors.

Caveat Emptor

Original here

Several times a month I get calls and emails. Sometimes, it's even people stopping in. "I've heard you're good at finding bargains." Well, yes I am. "Please tell me the addresses of some bargains so I can drive by."

Well, facts are cheap in the age of transparency. I will quite joyously look at stuff on the internet, even set up an MLS Gateway or feed for someone on the speculation that they'll come back to me later for a showing or to make an offer. Setting up such a feed takes very little time, and about the expertise of an eleven year old that has learned to fill out internet forms. Oh, and MLS access. Can't forget MLS access. We've got a system that lets me custom define the search area now - I can click the corners of a search area I want on a map, and it will return only the results within that area. It's a really neat feature, and using it takes about ten seconds of training, and maybe ten minutes to do the whole thing. I'll happily do it as the possible prelude to a limited service commission, and even if the prospects end up using another agent, I've risked and lost nothing significant. No agency contract required, or even asked. I've even done it for folks who didn't want to give me their phone numbers so I could follow up. If they come back to make an offer, my compensation will be set in the offer paperwork.

But good analysis, experience, and expertise are not free - or even cheap. Furthermore, my time is valuable - and you're asking for a lot of it. I might find three or even four real potential bargains when I spend a full day searching - and that's in a target rich environment. Furthermore, I've got a lot of experience and a lot of knowledge to draw upon that many agents don't, and I look at a lot of properties. I can winnow 100 listings on the internet to twenty possibles in about an hour, go through them in about five hours, of which I might show a client who has made the commitment to work with me six, with usually one or two standouts among those. The rest will have something that to experienced, knowledgeable eyes, are reasons why it is not a viable choice for these particular clients. Maybe it's overpriced and I have reason to believe the owner won't negotiate. Maybe the location or surroundings have an unsolvable issue - one reason you can only tell a bargain by getting out of the office and looking at property. Given the area I work, most often there's something going on with the property itself that's not worth what it's going to cost to fix. I love the older East County suburbs of San Diego - they are good places to live, and when you consider what you get for what you spend, they blow the rest of the county away as far as value. Furthermore, I think the conditions are getting right for the housing buzz to rediscover them. But anytime you consider structures that mostly vary from thirty to eighty years old, you have to watch for maintenance and repair issues, and it really helps to know what you're looking for. Furthermore, it is always necessary to understand the market the property is being listed in. The only way you can do that is by having been in the properties that have sold recently, and the only way you can do that is to go out and look at them while they are still "for sale" because it's not likely the new owners will let you in after it sells.

What I'm trying to say is that the fact of the existence of a listing on MLS is cheap - basically free. You want me to send you addresses of properties for sale meeting certain criteria, that's easy and I'm happy to do it, no strings attached. Anything like that, that can be done by automated computer search, is not a part of what I'm really offering for sale, and I'll give it away on the speculation that sometimes, I'll make something when that person comes back to me to write an offer.

But the ability to recognize a bargain and equally important, what is not - that's the largest part of what I'm really selling as a buyer's agent. Winnowing those 100 listings to a few standout values is a valuable skill. If you don't agree with this, you shouldn't need or want that skill, and you shouldn't be talking to an agent about finding bargains. For people that want access to that skill, there is a fee - they must sign a standard non-exclusive buyers agency agreement. This is precisely equivalent to the difference between a computer programmer giving away some old boilerplate code for free - but they want to be paid for a brand new custom program. This requires all of the same things: Expertise, analysis, experience, knowledge of the area and the current market, the time it takes me to build, run, and debug the bargain-finding program in consultation with the client, and everything else that's involved. The mental ability to do those things did not suddenly appear one morning and it does not maintain itself. Furthermore, the liability for doing this if I make a mistake is huge. Agent mistakes cannot be undone by simply re-writing a few lines of code to work correctly, and having the ability to sue me and my insurance company if I do make that mistake is a huge benefit to the client in and of itself. If they make the mistake, they're stuck - and to be blunt, the probability of a non-professional making that mistake is both much larger than most home buyers believe and many times the probability that I will make that mistake - while if I make that mistake, they can get a lawyer and sue me for everything they might have lost, plus court costs, plus other damages ad nauseum. The idea isn't to sue, but rather not to make that costly mistake in the first place. An amazingly large percentage of buyers make mistakes of a magnitude that I find incomprehensible, all in the name of saving a fraction of what the mistake costs.

The ability to recognize a bargain property is a valuable skill. If you disagree with this, what reason do you have for looking at properties before you buy them? Why don't you simply pick out the cheapest property that meets your specifications on MLS, make an offer, come to an agreement, and pay the price, all sight unseen? Remember, you're claiming that the ability to recognize a bargain does not have value. Why would you want to take the time to look if there's no value in it? When there are ten thousand identical items in a warehouse or on the grocery store shelves, you grab one and get on with your life. You might look at the label to make certain it was manufactured to fill the need you have. You don't bother opening the box - if it's defective, you can just exchange it for another. They're all interchangeable.

But that isn't the case even on everything in the grocery store. There's a reason they wrap meat in transparent plastic - so you can see the piece of meat you're buying. To view the cut, how much fat is on it, how large a piece of meat it really is, how fresh it is - in short, the value of the meat. If you know what good meat looks like, you've seen people that have no clue as to what to look for choosing crummy meat that you've just rejected. It happens most of the times when I'm at the meat counter, as a matter of fact. It's why the grocery stores keep putting out bad cuts of bad meat. Somebody who doesn't know any better will buy it.

The same thing happens in real estate. I have dealt with people who bought into just about every bad situation imaginable - and now they're trying to unload the results of that onto someone else at a premium price. When I list a property, it's even my job to help them do so. But a significant percentage wouldn't even be selling if they had made the right choice in the first place!

The point I'm trying to make is this: Because the ability to find and recognize a bargain is a valuable skill, if you want it, you're going to pay for it. You can either pay me consultant rates by the hour, or you can pay me by doing the transaction with me. In either case, you're going to sign a contract that spells out exactly what that pay is. If you want bargains I've already found, those are valuable also. I can use the basic information as a lure to attract other people willing to work with me. If you buy it and you are not my client, the simple physical reality is that it's not available for people who are my clients. You got the benefit of my expertise without paying for it - and those who are willing to pay for it didn't. Contrary to something I read by a listing agent the other day, I have no responsibility to market the property - I haven't accepted agency, sub-agency, or anything else. When I'm acting as a buyer's agent, I have no obligation to any owner to sell their property. And until some prospective buyers sign my agency contract, I have no responsibility to them as far as locating and evaluating property. So if they're not going to sign my contract - and a non-exclusive agreement is all either one of us needs - I have no responsibility to give them the benefits of my expertise for free, any more than a lawyer or a computer programmer does.

As a matter of fact, that non-exclusive contract is me betting that I will find something sufficiently above and beyond the market that they want to buy it - because if they don't buy it, the contract says I don't make anything because they don't owe me anything. It's me betting that my expertise will cause them to want to stick with me - because if it doesn't or they don't want to, there's no reason they have to. If that bargain I find isn't a bargain, they can walk away with no obligations. But if it is a bargain, they use me as buyer's agent. The only reason to refuse to sign a non-exclusive agency contract is if you're not willing to work with the agent who brings you the bargain.

And that describes most of those who call or email. When asked to sign my non-exclusive contract, they'll say, "I'm working with someone." To which the answer is, "No, you're not. They're not doing the job. If they were, you wouldn't have come to me. What you are asking for is no different than asking one lawyer to do for free what you're paying another lawyer to do, or asking one computer programmer to do for free what you're paying someone else for. If you didn't think that what I do was somehow valuable to you, you wouldn't have contacted me and we'd both be doing something else right now. So your choice is this: Do you want to stick with someone who isn't doing the job, or do you want to work with someone who will get the job done, and will give you permission to fire him if he doesn't?"

Loyalty has a place. It's perfectly fine to give your Uncle Harry a chance to earn your business. But if Uncle Harry gives you his business card and tells you to call him when you've found the property you want to buy (or a property you may want to buy), he hasn't earned your business. In fact, he's told you he's unworthy of it. That's not an agent. That's a transaction coordinator, which many agents will charge you extra for so that they can go out prospecting and gladhanding for other business while the transaction coordinator does paperwork - the only real work their office does. But full service should be a lot more than a transaction coordinator doing paperwork in the office - and the office should pay for that coordinator out of what they make, not charge you extra for it. In this scenario, what expertise are you really getting? The ability to fill out all the paperwork on a checklist? It is important - but is it worth the thousands of dollars to you? Or is the ability to find you a bargain while discarding properties that aren't bargains what's really worth what a buyer's agent makes?

If you want a bargain on real estate, work with the buyer's agent who finds bargains you want to buy. The principle is the same one that says if you want the ditch Charlie digs, you pay Charlie to dig a ditch, not George. If you want the haircut Jane gives, you go to Jane's shop for her haircut - not down the street to Mary. And if John the mechanic isn't fixing your car correctly, you don't pay John and then ask Dave to do the work for free. You take your car away from John and take it down to Dave, and pay him for the work he does. It doesn't matter that John's mechanic shop has nifty uniforms, a funny advertising campaign, or anything else other than the mechanic who fixes your car so it runs right, which they don't. Dave fixes your car so that it runs right, you pay Dave, and you go back to Dave the next time it breaks down. If the funny advertising campaign is worth giving John some money, that's fine. But you're still going to have to pay Dave to fix your car, and he's going to want you to sign his service contract before he does any real work. The same thing applies to when you want to buy real estate. If Uncle Harry isn't doing the job you need him to do, you fire Uncle Harry and start working with someone else. Don't tell me you want me to find bargains for you but you're working with Uncle Harry. Get Uncle Harry to find you the bargains. If he's not doing that, your choice is really very simple: Suffer with Uncle Harry, or start working with someone who will do the job that he isn't.

When I'm looking to buy professional services, I don't look for the office with the lawyer with the neat ad campaign, computer programmers who act friendliest, or the doctor who talks about how to draw customers into their office. I look for the office who will demonstrate their expertise, keep me there by demonstrating their knowledge of the expertise I need, explain everything I need to know (preferably before I need to know it), advise me as to what my best choices are and the consequences of those choices. I want the office that finds other, better alternatives and offers them to me. That's sanity. That's what's valuable to me.

The same principle applies to real estate. If you want to do the searching yourself, that's fine. Here's your MLS gateway, call me if and when something pops up that you want me to get involved in. But if you want real expertise on the buyer's side of the transaction, that gateway is not what you want and you're going to have to agree to pay the agent who gives it to you. Because it is valuable, and if you didn't think it was valuable, you wouldn't be asking for it. I am not what most people think of as cheap - no good agent is. But I'm a lot less expensive than using a cheap agent. Or a bad one.

Caveat Emptor

Original article here

There is no such thing as the perfect time to buy. The perfect time to buy would mean that you have all kinds of leverage, and can make sellers give you pretty much the deal you want, but prices are nonetheless rising rapidly so that you will have a large amount of equity the first time you need or want to refinance, or if you need to relocate.

These two conditions never go together. If buyers have all the leverage, they are certainly not going to opt for increasing prices. Sellers can gripe and moan about it all they want, but when there is too much inventory prices are going to fall until that that excess is gone. Supply and Demand. In 2003 and 2004, there might have been 4000 residential properties on the market locally at any one time. When I originally wrote this, it was over 22,000 and I've seen it up to 25,000. That meant 18,000 additional sellers were competing for no more than the same number of buyers (fewer by my count). If they don't really want to sell, if they just want to sabotage other sellers by adding to apparent inventory, that's no skin off the buyers' noses. If sellers want to actually sell the property, they've got to compete in order to attract those potential buyers. It's not like buyers just go out there and buy the property whose owner's turn it is to sell. They buy the best property for them at the cheapest price. So sellers can either compete by having a cheaper price, or they can compete by having a better property. Most house bling does not recover the money you spend on it, even in a seller's market, but it might give you the wedge you need to attract a buyer in a buyer's market - provided that your property is no more expensive than the comparables. Most sellers are in denial about this. They've got something a little bit better than the comparables, they want to ask $50,000 more, and then they wonder why their property isn't selling.

If you're looking for a time when property prices are increasing by twenty percent per year, by all means wait. Those conditions are called "seller's markets," because people who are willing to sell can get buyers to do pretty much everything they want, including pay more than the last seller got. Most sellers want to hold when prices are going like that, and buyers are desperate to acquire. High demand, low supply.

Trying to time the market so that you buy at exactly the moment when it hits bottom is an exercise in futility. Trying to "Time the market," whether stocks, bonds, or real estate, is a recipe for disaster. It's great if it happens, but it's sheer luck, and anyone who tells you different is lying. By the time people realize that prices are really going up again, buyers will come out of the woodwork and we'll be in a seller's market again.

Buyer's markets, where sellers outnumber buyers, do not last long, in large part due to the fact that once everyone figures out that prices are no longer declining, now everybody suddenly wants to buy. Inventory has usually been shrinking for quite some time before that happens.

Buy while the ratio of sellers to buyers is in the thirties, while you can pick and choose your properties, and if one seller won't play ball, the one down the street who's a little more desperate will. If you need some special consideration, like a seller carryback of part of the purchase price, you can find sellers who will be willing to cooperate because that's the only way they will get the property sold. If you wait until the market heats up and there are only five sellers per buyer, they're a lot more likely to tell you to take a hike with special requests like that. If I want cash, why should I loan it to someone with poor credit money at a below market rate if it's likely that I'll find another buyer in a week?

The time of year may not be optimum. Other things being equal, Christmas season is always the best time of year to shop for a property, because nobody wants to move the Christmas tree. Most people have enough extra stuff going on at Christmas that they don't want to add another major item: buying or selling their home. Those sellers who have their property on the market need to sell. Spring is the best time for sellers, right when things start to warm up (so the very best seller season happens earlier in San Diego than I understand it does in Minneapolis)

Finally, there is one more factor: The Mortgage Loan Market Controls the Real Estate Market. When lenders are being picky about what circumstances they will loan money in, and incredibly picky about the loans they actually fund, the people who can actually qualify under those standards can drive a harder bargain than when the standards are 'fog a mirror slightly' and therefore everyone qualifies. This means that if you're one of those folks whom the lenders will fund, or who doesn't need a loan, you'll be able to pick up wonderful bargains when loan standards are tight.

Caveat Emptor

Original here

I refinanced my house and an existing lien was not discovered

Now the important question: Is it a valid lien, or has it really been paid, and just not released of record? If it has been paid, you don't owe money simply because the lien release on your property was not properly recorded. If you can prove it was paid off, either by yourself or a previous owner, you're out of the woods.

Since you are asking the question, however, I'm going to assume that it is a valid lien. Most are. You owe the money. It doesn't magically go away simply because the title company (or lawyer doing the title search) missed it.

Now, assuming you live in a title insurance state, it should make no difference to the state of your mortgage. You bought a lender's policy of title insurance as part of your transaction, and the title policy insures the lender from loss due to the extra lien.

You still owe the money, of course. Like any other bill, just because you neglected to pay it off or neglected to pay it on time does not mean you somehow don't owe the money. If it was in effect from before you bought the property, though, your owners policy of title insurance should kick in and pay it off. That's the way title insurance works - they tell you about known issues with your title, and then they insure (almost) everything else. They'll then go after the previous owner, of course. That's what subrogation is all about. They stepped in and paid to keep you from getting damaged, but they now assume the right to receive the money from the person who damaged you. If you live in an attorney title search state, my understanding is that you are going to have to sue the attorney involved, but suing attorneys is a tough proposition, and you can't recover the base lien, only increased damages resulting from that attorney's negligence. If the previous owner was really responsible for it, the title insurer is going to have to run them down and file a lawsuit, and quite often the previous owner has no assets that they can get at.

If the lien was your doing, as most are, you're going to have to start making an effort to pay that lien. How much of an effort depends upon whether you have a lender's policy of title insurance. If you do, it's really no huge deal, because the lender has access to the checkbook of a national megacorporation. If you don't, the lender can potentially force you to pay it in cash right now. They can also force you to refinance by calling your loan, or to take out a second mortgage to pay the lien off in many cases. It's possible they might just pay it and tack it on to your balance, usually boosting your payment in the process. Talk to a real estate lawyer in your state for details, but the lender is not generally going to leave an uncovered lien in place, when the pricing they gave you for that loan was predicated upon there not being such a lien. Since the lien predates their loan, it's almost certainly senior to it, by which I mean that if something happens and you have to sell the property to pay off the liens, it gets paid before your mortgage. The lender is not usually going to tolerate that.

Now suppose that you got a thirty year fixed rate loan at 3%, and suppose rates have gone up to seven and a half percent by the time you rediscover the lien. The lender can do better with that money from your loan, and so they are going to want to seize upon any excuse to make you pay it off. This, all by itself, is a really good reason to be careful with your liens.

If you intentionally hid the lien, the lender may even sue for fraud in many jurisdictions. If you intentionally hid it, for instance, it's quite likely that your policy of title insurance won't cover you or the lender, and the lender is going to be very unhappy about that.

Most people, however, don't intentionally hide a lien, they just forgot it was there, and when the title search comes up empty any worries in the back of their mind went away. If they even think about it, they mentally write it off. "Oh, I must have forgotten that I paid it." You still owe the money, and now that it's discovered, you're going to have to start paying on it, but if they've got lender's title insurance the lender shouldn't freak.

Missing liens is actually fairly rare, but once title insurers miss them, they usually will not be caught on subsequent title searches, because the title company will use the previous title search as a starting point (around here, they actually call them "starters", but I don't know how widespread the practice is) for their new title search. Sometimes they do catch them, and ask the previous title company for an indemnity (which basically says that the previous title company is still liable for having missed it).

Caveat Emptor

Original here

The overview is simple: The government has made it take slightly more effort to lie to consumers, while adding layers of delays that add an absolute minimum of a week - an average of three weeks - to the time it takes to do a loan. Meanwhile, lenders have changed the market in ways to hinder competition and make it tougher for the savvy consumer to find the real best deal.

In short, while a complete chump might be happy that the con artists have to work a little harder while ripping them off, the consumer who makes the effort of understanding what is going on has far less ability to ensure a positive result.

First the good news: the change for the better is the new government forms. It's been several years now since The new HUD 1 and Good Faith Estimate were approved, and they are more intuitive and easier for laypeople to understand than the old forms. There is also new verbiage on the forms that tells people that just because they applied for this loan in no way obligates them to actually complete it. That's also good

In exchange for that much good news, there is a litany of things that are worse. Let's start with the small stuff and build up to the most important.

First off, the Home Valuation Code Of Conduct (HVCC). Precisely how the Attorney General of one state used state funds to shake down Fannie Mae and Freddie Mac, provide cushy jobs for his political cronies and allies, and gain personal control over the way business is conducted in all fifty states should certainly be a subject for public scrutiny, but I'm mostly concerned with the impact upon the consumer. In exchange for allegedly freeing appraisers from "interference" by real estate agents and loan officers who want them to hit a specific number, consumers are now paying higher costs for appraisals, appraisers are getting less money for those same appraisals, an entire level of bureaucracy and political patronage has been created with control over the entire appraisal process. For our part, loan officers and real estate agents no longer have the ability to stop using a particular appraiser, no matter how terrible we know them to be - it's whomever the appraisal management company picks (i.e. the low bidder). As a loan officer, I am not allowed to so much as communicate with the appraiser except through an intermediary. And if they've chosen a really horrible comparable that unduly influences value in either direction, most of the appraisal management companies make it difficult or impossible to process that information into modifying the appraisal. I personally had an appraiser kill what should have been a perfectly good loan by choosing two trashed lender-owned properties as the prime comparables to a well maintained family home that was in a better location than either - and I couldn't choose another appraisal, another appraisal management company, or anything else. I had to tell the client I was real sorry about the money he wasted on the appraisal, but that was the limit of what I could do. Yeah, I could offer to pay for appraisals - by jacking my margin on loans enough to pay for the ones that don't work out. Lots of companies do that, with an added margin for themselves, of course - he who takes the risk always gets a reward, and when they set the terms they are going to set ones that result in a higher profit to them. But that's not the way I choose to do business. HVCC may eventually be repealed due to the problems with it being so blatant that they cannot be ignored. But it is a comparatively small issue in terms of real difference to consumers.

Yes, the others are more important than wasting several hundred dollars on a loan that now can't be done because the appraisal job was given to a bozo, despite whatever the loan officer may have wished. Oh, and it also delays the loan because I have to go through one Appraisal Management Company, and it takes as long as whomever they choose takes. Read on.

The elimination of stated income loans is not without its benefits. It was horribly abused, and those abuses are now a thing of the past. However, if you're a small business person or someone with a large amount in legitimate deductions, it means you may have to forego a lot of legitimate deductions on your income taxes in order to qualify for a loan, making it much more expensive to those consumers the stated income program was designed for. Especially if you bought the home you can really afford as opposed to the one your taxes say you can and you've got an adjustable loan. This elimination can, has and will continue to cost a noteworthy number of individuals who really could afford it their homes. It will continue to cost individuals who leave employment and go into business for themselves. It would have been better targeted by limiting it to people who are in the economic classes it was intended to serve. The cost of doing it the wrong but easy way isn't huge on a per capita scale, but it's highly concentrated in those consumers who are our best sources of economic growth.

The next issue hits everyone who applies for a loan. It lies with MDIA, an act put into place by Congress in 2009. It is allegedly to help the consumer by forcing the mortgage provider - broker or banker - to provide accurate information on their Good Faith Estimate and Truth In Lending forms. I say allegedly because that's not how it works in practice. I can't speak for their intent, but I can tell you what happens in practice. First, the mortgage provider tells the consumer whatever lie it takes to get the consumer to sign up, same as it has always been. Then, a week before final closing but too late for the consumer to actually get another loan that will fund in time for their purchase, they have to tell the consumer something resembling the truth. Even if it's only a refinance, the consumer has sunk the money into the loan for the appraisal and there is all the time and effort they spent getting the loan to that point, meaning that they are still unlikely to go look for another loan. Real difference to the consumer: not much. Difference to the unethical loan officer: They have to do one extra Good Faith estimate and Truth in Lending in order to get the money that results from telling the lie. Forms that their computers are perfectly capable of spitting out. In practice, the amount of disincentive for lenders to lie about their loan to get people to sign up is zero.

(oh, I'm sorry, I meant "forget to tell the consumer about all the fees they'll be paying". Not really. These loan officers know about every fee that's going to get paid. If they don't, I sure wouldn't do business with them)

Furthermore, this delays the loan. I just closed a loan where everything I put down on California's version of the Good Faith Estimate, the Mortgage Loan Disclosure Statement was exactly the same from day 1 to the day we were ready to close - and I moved heaven and earth and gave up $1000 plus just so we could close it and get on with our lives - only to find that the lender I had placed the loan with calculated the APR by a different way - not compliant with Regulation Z which governs such - simply to cover their backsides and force redisclosure. This forced a re-disclosure and a minimum waiting period of seven days just to get this loan about which absolutely nothing had changed from day one closed. Extensions of rate locks cost money - this one cost two tenths of a point, which the consumer ended up paying because the government wanted to "protect" them from the "Nasty Rapacious Loan Officer" who told them the truth in the first place. But the penalties on the lenders are enough that they want to force this re-disclosure, delaying the loan, even when the consumer has been told the exact truth in the first place. After all, it doesn't cost that lender any money to force the redisclosure and waiting period.

The complexity of underwriting standards has skyrocketed. Can't force anyone to make a loan, or dictate conditions under which it is made. Nonetheless, it seems every week there are more baroque little curlicues to the loan process trying to reassure nervous investors. Every one of these means trouble for some people, and at this point it's well-qualified people. All the government can and should do is what it has: provide an alternative in the form of FHA loans. They're intended for first time buyers, but you don't have to be a first time buyer to take advantage. If someone can't qualify conventional but can qualify FHA, they will pay the extra cost. Unfortunately, the lenders are adding their own little curlicues to FHA loans in order to short circuit this natural process - and it's not like FHA loans aren't baroque enough already.

This segues into the elimination of everything that isn't straight A paper vanilla loans or government insured loans. Actually, conforming A paper loans are essentially government insured now that the government owns Fannie and Freddie. But subprime is gone, Alt A is gone, and A minus is essentially gone. Fannie and Freddie have eliminated all but the first tier of their expanded approval programs for people who almost but don't quite fit their ideal models of who qualifies. I personally haven't had an expanded approval loan since but I understand they're not funding in the real world. The impression I get is very strongly "We don't want to do these any more, but we have to leave the possibility open as a political fig leaf. Good luck getting us to actually fund one."

This has implications for home ownership and home retention. Bad things happen to good people. Identity theft, illness, job loss, business failure. All of these now have a much higher probability of costing you your ability to buy a property, and of costing you the ability to retain that property for years after you work your way through the main problem. I really like hybrid ARMs and have done them for myself for a long time, but the probability of having something happen which completely sabotages any ability to refinance has become unacceptably high, in my opinion. You can save a lot of dough by using hybrid ARMs, but what happens if you can't refinance at all before the fixed period ends? Net result: consumers who would have been comfortable and saved money with hybrid ARMs are now forced to reconsider and choose fixed rate loans at higher rates of interest. Net result: higher costs to consumers and more income to lenders and investors.

All this increased complexity adds to the time it takes to do loans. When I started this website I could reliably get a purchase money loan funded in about two and a half weeks, and a refinance done in under 30 days (Right of Rescission basically adds a week to the time it takes to get refinances done). Until and unless things change, the thirty day escrow for purchases is history and the 45 day escrow is becoming increasingly difficult. Add a week to that time for refinances. I know loan officers who won't accept less than a sixty day escrow for purchases any more. This extra time costs consumers money, especially if they are buying or selling a property. If you're just refinancing, your living situation really isn't going to change - but if you need to move, the extended escrow period makes things more unsettled and more costly. If you don't believe me, you haven't bought or sold property recently.

All of these pale in comparison to something that has drawn precisely zero scrutiny from outside the mortgage industry: lenders are now charging brokers for loans that are locked and not delivered. It's not a figure in dollars charged immediately - it's a differential in the form of higher costs to get the same rate that the brokers and all of their future clients have to pay. The practical upshot to this is that those brokers who were working in favor of consumers can no longer lock the rate and cost upon application for the loan, which means they can no longer stand behind what they tell you when you sign up for the loan with a Loan Quote Guarantee. Lenders rationalize this by saying the failure to deliver on the lock costs them money, and it does - but they don't charge their own "in house" loan officers this differential.

The effect is to limit competition and make brokers unable to guarantee their quotes. Good luck getting that sort of guarantee from a traditional lender. It also makes it impossible for consumers to get a backup loan in case they have been lied to. Because I can't lock my loan until we're actually sure it's going to close, I certainly can't guarantee to beat the other guy when it comes to the final push - and if the rate cost tradeoff declines, a quote that's pure nonsense today may become realistic. On the flip side, a quote that's conservative today may become impossible if that rate/cost tradeoff goes up. Guess what? Each one of these events happens about fifty percent of the time. So another practical upshot is that there's no way to really know what's going to be delivered at closing unless we can lock the loan. Under these circumstances, people tend to take flight to the big comfortable names with lots of advertising, not the small broker doing the right thing with no overhead who really can deliver a better loan. Cost to consumers: High, as in multiple thousands of dollars. If lenders could and would really compete with brokers on price, there would have been no economic niche for brokers in the first place.

One by one, changes in the lending environment has demolished the usefulness of pretty much all of the concrete "do this, not that. Require this from your loan provider" type help that I have been trying to disseminate since day one on this website. The softer, contextual stuff still stands well, but the concrete step-by-step instructions, not so much. The practical upshot is that while the situation for the complete babes in the woods applying for a loan has improved slightly, the ability of the well-informed consumer to influence the lending process for a positive result has been severely eroded. Now more than ever, it comes down to the individual loan officer and their intentions. I'm not happy about it, but that's the business as it is today. I can adapt or I can get out of the business, and it's not like me getting out of the business would change things for the better.

Caveat Emptor

Original article here

People who talk about learning skills tend to discuss a model for learning called the conscious competence learning model.

It starts with unconscious incompetence. You not only don't know how to do something, you don't realize that it is a skill that requires learning. "Anyone can do that", people at this stage of learning will think, despite the fact that they never have. They have, in fact, no basis for comparison. A very few things are as simple as tripping over your own feet, but most aren't.

The next stage is the conscious incompetent. You still don't know how to do whatever it is, but at least you know that you don't know how. Maybe you've tried and fallen flat upon your face, maybe it's something that you instinctively know is beyond your training or ability. Back when I worked for the FAA and people would find out what I did for a living, it's was amusing to see how many people would immediately volunteer that they couldn't have done my job. For some reason, I don't get that now, despite the fact that the skills of being a good real estate agent are at least as difficult to acquire.

The next stage up the ladder is the conscious competent. Some preparation, supervision, a few botched tries, and then you do it right without anyone having to step in. But you've got to think - really pay attention, take your time and be careful about what you're doing.

The final stage is unconscious competence, where the skill becomes second nature. You're good at whatever it is. Most people over the age of two are at this stage as far as the skill of walking is concerned. They do it without considering how to move the muscles that make the legs and hips move. They walk whatever distance they need to without even paying attention. And here's an important point: Sometimes by not paying attention, people step on something or trip over something and get seriously hurt. They walk in front of a semi, or trip over the coffee table and fall through a window or just step on an oily patch that causes their feet to go out from under them and hit the back of their skull on the pavement.

It is my contention that nobody is up to unconscious competence when it comes to real estate.

In fact, if you think you've achieved unconscious competence at most of the core skills of real estate, you're almost certainly stuck on the first level - somebody who doesn't know what they don't know.

First off, real estate isn't one skill. It's at least half a dozen. The average client doesn't care about how good we are at attracting other clients. They care if we interact with them incorrectly, but I have yet to hear of a prospective client saying, "I want to sign up with someone who's great at prospecting for leads." They'll say things that amount to the same thing, like "I want to work with a top producer," or "I want to work with (insert heavily advertised brand here)" but there's a real difference of intent on the part of the consumer. They really don't care about lead prospecting competence per se. Yet this is probably the most discussed skill set on real estate websites. I don't understand why other agents think this is fascinating to clients, but by how often they talk about it, they evidently do. Maybe because it's one of the big focal points for every office - if you don't attract enough business, you're not going to be in the business. Nonetheless, clients don't really care about this one. You could be the worst prospector in the business, but somehow get enough clients to stay in business, and as long as you're good at everything else, the clients are going to be happy.

Then there are the interpersonal skills that most people have in fact developed by the time they're adults. Hello, how are you? Nice day, and so on from there until we get to the pinnacle of those skills, handling people so well that they never realize they've been handled. People care about this, and they know they care. Don't believe me? Whatever you do for a living, try calling your next prospect something nasty. You can't do real estate without these skills, but not only are they not the central job function for real estate licensees, but clients actually do not want somebody who is obviously too good at this. Why? They like the basic skills, but they don't like being played by sales persons, something that's happened to basically everyone by the time they're ready to buy real estate or get a loan. Nonetheless, many people choose agents and loan officers based upon feeling "a connection." *Buzz*. Wrong answer, thank you for playing. If a prospective agent isn't competent at the interpersonal dance, that's one thing. But 95% of all agents are quite good at it, and it doesn't mean a darned thing about their competence at real estate. Anybody with any competence at interpersonal skills can talk a good game in the office. They could be ready to crack that license prep course any day - not actually know a thing about real estate yet - and still manage to generate "a connection."

Then there's the paperwork and legal CYA stuff. I could name names of nationwide real estate firms that take months to cover these skills with new licensees, and brag about their training based upon that. The obvious snark that occurs to me every time I see one of their advertisements is, "How is being able to avoid legal judgments when you've hosed your client a virtue in the client's eyes?" In other words, it blows my mind that they actually brag about it to clients - and it also blows my mind that some people will actually choose them based upon advertising that essentially says, "We're good at the paperwork that allows us to not get sued for hosing our clients".

To be fair, paperwork is a real and necessary part of the career skills, but I'd like to see more emphasis upon actually doing a good job for the client, not disclosing everything in small print, hidden among 500 other sheets of paper at final document signing. There is stuff here that you're going to see on every transaction, or almost every transaction, but pretty much every real estate transaction is going to have something going on that is different from some hypothetical "typical" transaction, and if you aren't thinking about what you're doing, it's very likely you'll miss something important. Even if you are thinking carefully, you might miss something. People successfully sue agents every day, and the defendants are not all incompetent. Paperwork isn't a skill that gets clients a better bargain very often, and perfect paperwork doesn't mean the client didn't buy a vampire property or money pit, that they got a good bargain even if they didn't buy a vampire, that they sold for a good price in a timely fashion, or anything else except that the paperwork is perfect. The paperwork will usually tell them if they are careful enough and understand enough to read between the lines, but "careful enough" can be "reading documents for forty-six hours straight at final signing," and even then, it's pointless unless they've got the willpower to say "no" to the transaction at the last moment like that. Nonetheless, bad paperwork is what the attorneys of former clients find easiest to pin on real estate agents, and almost every judgment against an agent has "bad paperwork" behind it as the evidence. Paperwork is a necessary skill for agents, but it it's only evidence of a good or bad job - it isn't the good job or bad job itself.

Negotiation is a critical skill for agents, and many do actually study it. But for every agent I encounter who understands principles of negotiation, another is completely clueless and a third thinks negotiation is where you tell the other side everything about how the transaction is going to be. You should see some of the contracts my buyer clients were told to sign - take it or leave it - in the middle of the strongest buyer's market of the last generation. And these folks wonder why the property didn't sell. Actually, I'll bet that if you work with buyers, you wouldn't be surprised. I just randomly pulled up twenty listings in the zip code my office is in - and all but two had violations of RESPA right in the listing. Bare, baldfaced violations of RESPA - steering is illegal, no matter the form it takes. It's not only setting you up for a lawsuit, it's setting your client up for a lawsuit. If DRE wanted to put at least half the agents and brokerages in California out of business over steering, I think it would be pretty trivial. But I digress - I'm trying to talk about negotiation.

Everything about the transaction is negotiable, and refusing to negotiate anything can be grounds for losing an excellent offer. Price is not an independent variable, and it's not the most important of a series of completely independent points. It may be the central issue of a negotiation, but it influences everything else about the negotiation, and is in turn influenced by all those other factors. What does each side need, what do they want, what would they settle for, and what are they willing to give up in order to get it? If the answer to this last question is "nothing," then they must not want it very badly! There are many factors other than money, but they all inter-relate, and the person who can figure out something the other side wants that isn't money can use that to make both sides happier. Negotiation isn't just faxing offers back and forth, and in the context of real estate, it's a skill that takes a significant amount of practice as well as study to maintain. Furthermore, more than any other skill involved in real estate, negotiation never gets to be so strong a skill that you can do a good job without thinking about it. For one thing, on the other side of that negotiation is another agent who does the same thing. I always presume the other side is better at it than I am to start with. Evidence quite often proves this presumption to be nonsense, but you don't hose your client in negotiations by paying attention and being careful. Nor is there any metric for negotiation skills except how good the deal you get one particular client is, and since every property is unique, often the client has no real idea whether you should be nominated for negotiator of the year or pilloried for incompetence. I haven't heard of anybody being sued for poor or non-existent negotiation skills. I have heard of buyer's agents getting beat up by their brokers for doing too good of a job - lowering the commission.

The next skill is property evaluation. This is more important to buyer's agents than listing agents, but listing agents can benefit by knowing it as well. It breaks into several skill facets, each of which is a skill that requires instruction and practice. The most important facet of this is the ability to spot defects that are going to cost the client money - actual structural problems. Ask yourself: Is the fact that the agent tells you they're not an inspector going to make you feel better about buying a property where the roof caves in three weeks later? Is that going to absolve the agent of blame in your mind? Don't expect your agent to note everything that a contractor or inspector or engineer will - but they should tell you about everything they see, and they should see most of it, and it should come as part of a full service package, so you don't have to spend $300 getting an inspector out, or $600 for an engineer, not to mention put a deposit into escrow where you may not get it back for quite some time if the seller wants to be obstinate. This is a critical job skill - but you would be amazed at the number of highly agents whose advertising tells the world about how much real estate they sell who might as well be wearing a blindfold. Telling clients about defects makes it harder to really churn those numbers!

Furthermore, without a good agent who will tell you this stuff, you might have to do this multiple times. Instead, with a good agent you know about the problem before you consider putting an offer in - and instead of a costly drama that eats your life, you walk away unscathed and find another property that actually suits you. On the day I originally wrote this, I had persuaded a client to cross four properties off their list, all of which would have sent him through that cycle. Decorator's eye is another facet of this - helping the client stage a property - or helping buyers see the potential of a property despite poor staging. Poor staging wouldn't make nearly the difference it does if most agents weren't lacking in this truly important skill.

Rehabber's eye is related, yet a distinct sub-skill - helping the client see the property with a few changes, usually not very expensive ones. Location evaluation: How does the location of the property fit with the client's agenda? Schools, traffic, shopping, environmental noise and other factors. Sometimes, the client doesn't know their own agenda, as I have discovered upon many occasions. All of these are part of the core job function, all are skills that must be developed and practiced if you want them. They are also critical to how happy a client is going to be with an agent's work - particularly if you're working as a buyer's agent, as I usually am. But it seems that this whole group of critical skills gets neglected in favor of "Which property has one feature that makes Mrs. Client swoon with delight?" This approach is conceptually similar to "throw enough mud at the wall and eventually some will stick." Out of sheer frustration if nothing else. But I have yet to see a single brokerage train their clients for any of this entire group of skills. Indeed, most of the major chains seem to be doing their best to pretend these are not part of an agent's function. Here's the thing: I can get people to buy and sell properties without these skills, and never get sued successfully over them. But then it's completely hit or miss as to whether the client will really be happy with the property - and who do you think is going to get the blame if they're not? I had some clients insist upon buying property on the corner of two moderately busy streets last year - and I made certain to remind them of the traffic and noise throughout the transaction - giving them encouragement to change their mind if they weren't certain they were going to be happy with it. But I'll bet you a nickel they call me when it's time to sell it because these opportunities to change their mind also generated a real buy-in to the situation for them.

Marketing skill is more critical for listing agents, but buyer's agents need to know marketing as well. How do you get the attention of someone who will want to buy this property? How do you persuade them it's worth making an offer on? What are the available venues, and what actually works? Theory says that there is one buyer out there who will pay more for the property than anyone else - how do you get their attention or that of someone close to them? Get them to come look, get them to see value, get them to make an offer you're happy to accept, get them to carry through on the purchase? On the buyer's side, you've got to be able to counter the fecal matter - and I can count on the fingers of one hand all the properties I've been in the last year where I didn't find some obvious fecal matter in the way it was represented, or the things that the listing agent said in order to get it sold. (FYI: This fecal matter has an ugly habit of biting the disseminators later on.)

Did you think I was leaving market knowledge out? Here it is. How does the property compare to everything else around it? What's the general market for real estate like in the area? What else has sold lately, for how much, and what was it really like? It's too late now to get a viewing of all the comparables that sold within the last few months - the lock box is gone, the new owners have moved in, they're done with all that transactional nonsense, and the vast majority sure as heck aren't going to let random strangers poke around their new house. How many agents get off their backside, get into their car, go out and look, take notes, and remember? Most of the agents I've done business with never leave the office except for an actual showing generated by clients driving around, or surfing the internet, or even reading the "for sale" ads.

Showing clients only those properties they have asked to see is so backwards I have difficulty articulating precisely how messed up it is. A good agent knows the market, knows the comparables for sale, and knows how a given property compares. They might not have been in every single one, but they've been in enough for a good comparison. Patronizing an agent who hasn't done this, who doesn't make a habit of this, is like having half an agent - at most. How in the nine billion names of god are you going to help a client price a listing properly if you haven't looked at the competition? How in the name of ultimate evil are you going to know a property is or isn't worth making an offer on, and for how much? Yet people will do put up with this nonsense because they don't know any better. This is probably the agent skill that needs the most practice of all, and decays the most quickly if not practiced. There's this one neighborhood about three miles from my office that I haven't been into for almost three months, and I'm terrified I'm going to get a call for it before I can remedy the situation. There's nothing wrong with clients suggesting properties, and I firmly believe that no matter how messed up the property is, they should be given the opportunity to see any property that catches their eye - but doing that and only that takes zero advantage of the one thing good agents have that bad agents and 99.999% of the general public don't - precisely this expertise. It is this expertise that makes more difference than any other skill set in results for clients - whether selling or buying. You can't recognize either a bargain or the opposite without the context to put it in. You can't price a property right without knowing the competing properties and their relative strengths and weaknesses. But all too many people, both agents and general public, discount this difficult to acquire skill, thinking, "Anybody can do that!" Question: Which of the learning categories above does this place them into?

I don't know how many people I've met that seem proud to be stuck in unconscious incompetence. But just because you don't recognize the skill doesn't mean it doesn't exist, it doesn't mean that its lack won't bite you, and it most assuredly does not mean that its presence in others won't hurt you. For real estate transactions, to the tune of thousands of dollars at a minimum. Knowledge springs, not from the mental impenetrability of "Anyone can do that!", but rather from the admission that perhaps you might have something to learn.

Caveat Emptor

Original article here

I enjoy your blog very much and figured you would be a good person to ask this prepayment penalty question to.

Is there a prepayment penalty if you dont pay down the whole amount? For
instance, say I owe 620k and want to refinance this. Can I get a loan for
say 610k from another lender and leave 10k with the orignal lender?

Does that avoid the prepay penalty?

No.

Have to admire the ingenuity, but it won't work. Here's why:

First, the penalty is triggered by paying a certain amount extra. There are two main trigger points for a prepayment penalty, usually known as "first dollar" and "twenty percent." "First dollar" prepayment penalties are uncommon, but they do exist. What such a penalty means is that if you pay one extra dollar of principal during the time the penalty is in effect, you will get hit for the penalty - usually six months interest on the prepaid amount. Not so bad if you pay an extra dollar and get hit with a three cent penalty, but you have to pay a substantial amount to get any noticeable good out of it. You pay $1000 extra, and that's $30 they're going to hit you with on a 6% loan. Pay off $100,000 at 6%, and they're going to have their hands out for $3000 extra.

The other trigger point, "twenty percent" lets you pay down the balance by up to twenty percent for any given year without triggering the penalty. Note that this includes not only any extra you pay, but normal amortization as well. If you have a $100,000 balance, and would normally pay $3000 down through regular amortizationduring the year, this leaves you with "only" $17,000 of extra that you can pay before the penalty starts hitting you. Most often for this type of trigger, the prepayment penalty will only be assessed on any amount over 20% of the balance, but I have seen these charge the full penalty once triggered. So paying off $20,001 of a $100,000 balance at 6% might, depending upon your loan contract, cause a $600.03 penalty to be assessed - but most often it will only be that three cents. In this case, paying off the loan in full would only cause the penalty to be assessed on $80,000 - $2400 instead of $3000. It's also something to be cognizant of that this 20% paydown applies to the balance as of the start of the loan year, which runs from contract anniversary to anniversary. Say you have such a penalty in effect for three years. The first year you only pay it down to $80,000, escaping the penalty. The second year, you can only pay it down to $64,000 - by 20% of the beginning amount for the year - before triggering the penalty. If you do so, in year three you can only pay it down as far as $51,200 without triggering that penalty. This type of trigger is used when the lender is mostly worried about a complete refinance or selling the property. (A "soft" prepay is one where the penalty is not due if you actually sell the property, but most loans with prepayment penalties have "hard" penalties that are assessed at a certain trigger level, no matter the reason.)

No matter whether your penalty trigger is "first dollar" or "twenty percent" though, you're not going to refinance without paying it off completely. Here's why: In order for the new loan to be first in line, the old loan has to be paid off completely. The rates and prices on home loans that we all see advertisements and such for are predicated upon them being first trust deeds. They can only do this by paying off the previous loan in full and having a Reconveyance of the Deed of Trust recorded. Not paying the old loan off completely means no Reconveyance, which in turn means no new loan because their Deed of Trust will not be first in line. You'd have to content yourself with the higher prices for a loan priced as a second trust deed.

There are only four ways to avoid a prepayment penalty that I'm aware of. 1) Don't accept one in the first place, 2) Don't sell or refinance until it expires if you do accept one, 3) Convince a court the lender has done you sufficient dirt for the court to order part of the contract voided (this takes a lot of dirt), or 4) Swap your old penalty period for a brand new one by refinancing with the same lender, if they will allow it (They don't have to).

Caveat Emptor

Original article here

One of the things I keep telling folks about the real estate market, whatever area you live in, is that it is controlled by the loan market. If you want to understand where real estate in general is headed, look at the loan market and the financial markets that generate them.

When I wrote this, the loan markets were in terminal panic mode. The lenders were looking for any restrictions they could slap on around the edges to mollify investors, and investors were shying away from any loan that had any element of risk. All non-governmentally guaranteed loans for more than 95% of value had disappeared, and the ones above 90% of value were very difficult to find and even more difficult to fund. This meant that VA loans and FHA loans were all that was left above 95% loan to value ratio, and stated income loans were dead, no matter how much sense they made for your situation, as nobody would fund them. Fannie and Freddie drastically curtailed their A minus programs (all but the first level of their expanded approval eliminated, and they don't want to actually fund even those). Outside of government loans, you've pretty much got to be A paper full documentation to get a loan at all.

This eliminates pretty much every type of loan that was a major player in the market when things were hot. It also severely restricts the numbers of new buyer in a position to buy. Since 100% Loan to Value ratio financing had been the almost universal financing vehicle for borrowers for the previous several years, this constricts the ability of prospective buyers to get the loans they need. Comparatively few people have money they could use for a down payment if they wanted to. Not everybody qualifies VA or FHA. VA requires military service, and FHA has policy limits on what they will fund.

Furthermore, all of the other loan programs to get 100% loan financing have gone away, and all of the supplemental programs to extend buyers' ability to qualify have rather sharp income limits, and those income limits are not going up at all. They actually effect San Diego less than most areas, but even here, they constrict the ability of buyers to qualify. Both the mortgage credit certificateand all of the municipal first time buyers programs have income limits that mean people can't make over a certain amount of income - and even if they have no other bills they can't qualify for the loan on property over a certain loan amount, because even if they have no other bills, their debt to income ratio will be too high from just the payment and taxes and insurance on the property. You can't cheat on this - all of these programs require full documentation of income. Above about $420,000, even if they conforming limit goes up, even if the prospective buyers make the maximum amount per year for the program and have no other bills, the people these programs are aimed at won't qualify because the debt to income ratio will be too high.

The moral of this story is simple: If you want to sell your property above a given price, you're not competing for first time buyers. You are competing for people who have sold (or are about to sell) their property for a profit and are now ready to move up. If the prospective buyers don't qualify for the necessary loan based upon debt to income ratio, they can't buy.

Any time you raise the price you want to sell by a certain amount, there are people that no longer qualify to buy your property. You have priced them out, and no matter how much they might want to buy your property, the fact remains that they cannot.

As for buyers making the median family income in San Diego of $81,800, their limit on loans is about $290,000. So unless they have a significant down payment, a family making $6000 per month is looking at a condominium. Just a cold hard fact.

There will always be buyers around the edges who are exceptions. People who have saved or inherited a substantial down payment in defiance of demographic trends. But those are the exceptions, and for every one of them, you have a dozen of more unqualified buyers engaged in wishful thinking. In the last year or so, I have spend a lot of time looking for loans unsuccessfully trying to get people into sustainable situations and save their property from foreclosure. At this point, until the lenders and investors calm down from their institutionalized panic, those loan programs aren't going to exist. Even having lots of equity may not help you unless you can afford a hard money loan.

Before you ask me what relevance this has to buying and selling, I'm going to answer: Every time a lending program goes away, there go some buyers who otherwise could have qualified. Right now, there is no stated income. Doesn't bother me much, as 95% or more of my clients have always been full doc, but for those who are used to the opposite ratio, it's the apocalypse. Ditto for sellers and listing agents who don't understand what it takes to qualify, and who price their properties as if the loan market for several years ago was still going gangbusters. When the property sits for months because the people who might buy can't qualify for that big of a loan, that's a problem.

With all this said, the people who do have the cash or the ability to qualify for a loan are in the driver's seat now. You may be getting tired of hearing this from me, but veterans can qualify for more loan than someone without military service for the same income due to the lack of mortgage insurance requirements. People with a large down payment are in an even stronger situation, and people who have both things going for them have an incredible amount of negotiating leverage. When the loan market will approve anyone who can fog a mirror, your competition is everyone who can fog a mirror. When the loan market wants to see guarantees and cold hard cash going into the property in the form of a down payment, your pool of available buyers is much smaller - and prices are lower because of it.

Caveat Emptor

Original article here

(This was originally published September 29,2005)

Here's another advertisement that I got in the mail:

"Pick a Pay, Any Pay!' The Revolutionary Option ARM!"

"Start rates as low as 1%!"

Loan amount $100,000 Payment $321.64

$200,000 $643.28

$300,000 $964.92

$400,000 $1286.56

Could this help save you money?

Let's see, given the real rate on these, there is negative amortization of about $500 to start with per month on the $300,000 loan, compounded over the three years the pre-payment penalty is in effect. Cost me $19,000 to "save" this money - even if the underlying rate doesn't rise. Not counting what it costs to do the loan. Or I refinance out of it and pay a pre-payment penalty of about $9200.

Doesn't matter the friendly sounding name you give it. An option ARM is a Pick-a-pay is a negative amortization loan.

What this guy (in this case) is hoping is that you'll be so enticed by this "low payment" that you won't ask questions. These are easy loans to sell to people who don't understand them, and impossible to those who do unless you're the person it's really designed for. Indeed, many prospective clients do not want the problems with this loan explained to them. It's like they've chosen to be insulated from reality for a time.

But this is no surgical anaesthetic. Most folks are going to want to be homeowners for the rest of their lives, and unless your income has increased commensurate with your loan balance (and prospective interest rate increases) I guarantee you that the pain will go on for quite a long time after the time of "affordable low payments". I'd rather not shoot myself in the foot in the first place.

More from the ad:

You could also lower your monthly payments. Free yourself from high interest rate credit cards and debts with a loan that could reduce your monthly payments by hundreds of dollars and leave you with enough cash to buy a car, remodel, or pay property taxes. And don't forget that mortgage interest is usually tax deductible. So you could save more at tax time.

This is all true - and only a part of the story. Remember that the easiest way to lie is to tell the truth - just not all of it. What they're selling you is the seductive "cash now - pay later". This was how you probably got into the situation they're talking about. What most people do is then take the money out and spend it, and then when the payments get to be too much, refinance again. What are you going to do when the overall payments get larger (again) next time. What are you going to do when there's no more equity? What are you going to do when you can't afford the payments?

The consolidation refinance can be a real financial lifesaver, if you do it right, have a plan, stick to it, and pay everything off, or at least pay your mortgage down below where it was before you go acquiring more debt. Fiscal responsibility is not what they're selling here.

You've earned a 30-day break from payments!

By rolling it into your mortgage, where you pay points and fees on it and the loan provider gets a bigger commission because of it. There is no such thing as a free lunch! You'll be better off if you stop looking for it. The bank is never going to give you one day that is free from interest, much less thirty. And because you don't make a payment now, you will be paying more later. Probably much more. You Never really skip a payment

You're probably going to see a lot of recurring themes when I do these quasi-fiskings. That's because the lenders and real estate agents and everybody else keeps advertising the same misleading nonsense over and over and over again, they just say it in slightly different ways. As far as I am concerned, anybody who sends out one of these ridiculous things deserves to have their name engraved on my personal blacklist of people I will never do business with. I hope for your sake that you feel the same way.

Caveat Emptor

Original here

You see it all the time at open houses and elsewhere. People who desperately need buyer's agents, but think of Buyer's Agents in the same way they think of automobile sales folk, and that's the complete opposite of the way it is.

They don't want to deal with an agent, because an agent will use high pressure tactics, convince them that this property is the one they want even if there's better stuff out there cheaper, and trick them into signing on the dotted line. Or so they think.

Actually, the person they fear is already part of the transaction. They're called the Listing Agent, and they're the one you're going to deal with regardless of whether you want an agent or not. It is their job to get that property sold. They have a fiduciary responsibility to the owner of that property to get it sold for the best possible price in the shortest amount of time. They only responsibility they have to the buyer is that they're not supposed to lie, mislead, or conceal the truth. Any of those are tough to prove even for egregious violations. If they can sell the property for $100,000 more than neighboring properties in better shape are selling for, they have done nothing else except their job. They have no responsibility to tell you there's a better deal around the corner. To a listing agent, the only importance of a better buy three blocks over is to hope you don't discover it. Despite all of this, many people will insist upon making their offers through the listing agent.

Lest you think I am kidding or in any way exaggerating, consider this: Within five miles of my office are at least 100 Planned Unit Developments (PUDs) built within the last three years. These are legally condominiums, but they have detached walls. Most often, the developer puts up a 1700 to 2000 square foot two story dwelling, separated by maybe six feet from the next dwelling over. In many of these, the first thing most of the inhabitants do every morning is greet their neighbors in the next unit over, then get out of bed. Not that I'm against condos - I'm not - but the townhome I bought in 1991 has more privacy than most of these, and it's got a shared wall. The inhabitants of PUDs usually - not always - have a small quasi-private back yard, and the units may or may not have shared walls. The garage is always within the walls of the unit, because they are packed so tight there is no room for a driveway or outside parking. The developer slapped on false granite counters and travertine floors at a cost of maybe $300 extra, and with their in-house agents who dealt swiftly and efficiently with those who come to look, sold them for $100,000 to $150,000 more than comparable dwellings sitting on 8000 square foot lots and without a homeowner's association (and association dues) to deal with. Those PUDs are not going to be new forever - and as a matter of fact there are a much larger than representative percentage of the new owners trying without much success to sell them. Whether they decided they didn't like their neighbors whom they practically share a master bedroom with, they want a place with a yard where they can build a pool or even just a horseshoe pit, or that they want to paint the place a slightly different shade of off-white (and can't), they are finding out the difficulties, and trying to sell. But they're asking the same kind of prices they bought them for, and without the massive marketing campaign the developer used, it's not working. When you're trying to sell 20 units on what used to be two lots totaling half an acre, you can afford the kind of marketing campaign that pulls in the suckers. At $520,000 each for twenty units that cost you $150,000 each to build, if you spend $100,000 on advertising, you'll make it back in spades. Not so much if you spent that $520,000 buying one of those units and now the market has declined and you need $570,000 to break even - and I'm finding my prospects single family homes on their own 8000 square foot lots for $420,000, where they can spend a lot less than $150,000 putting in travertine if they've got to have it.

A Buyer's Agent is not the person who's out to sell you their property no matter what. That's the Listing Agent's job. A Buyer's Agent is there to represent the buyer's interests, the same as the Listing Agent represents the seller's. Buyer's agents aren't car lot sales folk. They're like the folks who make a good living representing people who don't want to deal with car lot sales folk.

Buyer's Agents don't make their living selling one specific property. They make their living helping people to find and buy the property that is the best bargain for them. It is a Buyer's Agent's job to point out all of the little and not so little stuff I talked about two paragraphs ago, as well as a lot of other stuff I haven't talked about here. Buyer's Agents make their living getting buyers a better bargain - just like Listing Agents make their living getting sellers more money for their property. Real estate is a lot more costly than automobiles, and a lot more games get played. The Buyer's Agent is the one with the responsibility to say "Slow down, let's stop and check out everything else that's available, and consider the state that the market is really in - and where it's likely to go," not to capitalize upon the emotion of the moment and get the prospect sucker's signature upon dotted line before they walk off the lot. So long as they stick to a real budget, that Buyer's Agent gets paid about the same no matter what you buy - and the happier you are when it's all over, the more likely it is that they will get paid again when you send them your friends, or when you come back again when you're ready to move up or buy an investment property.

This is not to say that Buyer's Agent's won't play games; this is why I use and recommend non-exclusive buyer's agency agreements to stop most of them. These agreements give the buyer's agent everything they really need - assurance that if they find the property you want, they will be the one getting paid the buyer's agent commission - while not committing you to work only with them. If they waste your time, don't get the job done, if they act more like a Listing Agent, or if you just decide they're not putting your interests first, you stop working with them and that's the end of it. Unlike the exclusive agency agreement which locks you in to dealing with that agent, and four months after the last time you see them you might still be obligated to pay them a commission on a property somebody else showed you, the non-exclusive agreement lets you go your own way, and so you have nothing to lose by signing it, unless you're the sort who will stiff someone who's done work for you. Let's face it, the Buyer's Agent finds you a property you think is worthwhile, you are doing yourself no favors to ditch them in favor of your brother-in-law who didn't or couldn't do the same, or the discounter who doesn't do anything, but generously allows you to keep half the commission which they did precisely zero good for you to earn. Who do you think will get you the better deal: The agent who went around with you to ten or fifteen properties (and looked at forty others that weren't worth your time) and knows the market that property is competing against, or the agent who only leaves the office to cash commission checks? Who's going to negotiate harder? Who's going to have more negotiating power? Which agent is more likely to get your the better total bargain? There are exceptions, of course, and sometimes the long shot beats the triple crown winner, too. But that's not where smart money bets when the payoff is structured on strictly one to one odds, as it is here.

Now buyer's agents do get paid, but it's out of the commission that the seller has agreed to pay no matter who sells the property, or for what price. Buyer's Agents will make more difference to the sales price - not to mention the quality of the property you end up with - than any reduction in price you might get by agreeing not to use one. They're out there in the market all the time. They know the market you're in, and they know the tricks in ways that you, the buyer, are not going to equal, unless you spend the time it takes to learn everything they know. And unless you're a buyer's agent yourself, you pretty much can't. You've got your own living to make. What are the chances they could do better than you at your profession? The odds are not good; Even if they have the book learning, they don't have your experience. Why would you think the situation is any different when the roles get reversed?

Caveat Emptor

Original here

That question brought someone to the site. The answer is "Yes, they can". As a matter of fact, just because they have you sign those documents does not in any way obligate that lender to actually fund your loan.

There are two sections of conditions on every loan commitment. The loan commitment is what the underwriter writes up when the loan is approved. The first section is called "Prior to Docs", meaning before the final loan documents the customer signs at closing are generated. These should be all the stuff that's substantive in nature, that governs whether or not you qualify. Unfortunately, that is often not the case. The second section is called "prior to funding," or "funding conditions." This should be limited to simple procedural stuff like a final updated payoff demand, final verification of employment (they call and make sure you still work there), etcetera. However, more and more, conditions that more properly belong in "prior to docs" section are being moved to "prior to funding."

Why do they do this? Well, once you sign those documents you are more heavily committed to them. Once you sign, and the Right of Rescission (if any) expires, you are stuck with that lender. You no longer have the right to call it off. If you go elsewhere, to another lender, because they are taking too long, they can fund your loan and force you to live by the terms of the documents you signed. Bad business all around, and you're going to be dealing with two sets of high powered lawyers that the contracts you signed basically obligate you to pay for - but they work for the two different lenders!

One fact that many people don't understand is that it's a rare loan application which is rejected completely. I don't remember when I've ever had a loan application outright rejected. Of course, being a good loan officer, I'm going to be as careful as possible that the people will qualify before I submit their loan package, but this is far from universal. Many loan officers routinely tell people about loans and programs that they have no prayer of qualifying for, but there sure are some great rates attached, for all the good they will do you. Then the loan gets rejected but they sit on the rejection while they work the loan they had in mind for you all along, and come back and say, "This is the best I could do" at closing time, and an extremely high percentage of people will sign on the dotted line because they think they have no choice.

What happens much more frequently is that the loan gets approved, and the underwriter writes a loan commitment, but with conditions that cannot be met in this particular instance. The borrowers need to prove more income than they make is probably the classic example, but these "killer conditions" occur in every area of loan underwriting. More often than not, the loan officer is not really surprised by these, and most often, they won't ever tell you about them if they can avoid it. Why? Because that gives you a "heads up" that you're not going to get the loan you thought you were, and at a time when it's still very possible for you do go loan shopping elsewhere.

A good loan officer - both competent and ethical - will not tell you about a loan they don't think you're going to qualify for. My ambition is always to have the list of conditions, both "prior to docs" and "prior to funding", to be as short and unsurprising as I can possibly make it. This saves work and it saves time. Remember, every time that underwriter touches the file they can add more conditions, and they can also discover something that causes them to essentially reject the loan, by adding conditions the consumers in question cannot meet. If I can submit a file and the underwriter writes a commitment with only the standard and unavoidable prior to funding conditions, I am much happier because now I can request documents, have them signed, and get this loan done. You get this kind of commitment by sending all of the documentation they need in every loan all at once, in the beginning, but only that documentation. It's not necessarily a sign of incompetence if the underwriter puts some other conditions on it - probably somewhere close to half of my commitments have some condition the underwriter took it into their heads to require in this instance. Like any good loan officer, I avoid arguments with an underwriter if I can, so when they give me a condition I didn't anticipate, I figure out what I need to satisfy it and whether I can get it. But you learn when extra documentation will be required.

Since this was originally written, underwriting has gotten completely paranoid. I have had clients in the lender's ideal situation - high credit scores, low debt ratio, steady income, plenty of equity - given the underwriter runaround. Actually, this is basically every client. It has to do with investor paranoia, as the lenders are doing everything they can - not merely everything they reasonably should to persuade the investors these loans are not going to lose money and are therefore worth paying a higher price for. But in my experience the additional conditions seem to be falling almost entirely on the "prior to documents" (before you sign) side, rather than "prior to funding"

Many loans, particularly sub-prime, are done completely in the reverse fashion. The loan officer submits a bare application, without supporting documentation, and waits for the conditions, and boy do they get a blortload of conditions. Not too long ago I helped an experienced real estate agent in my office with his first loan. He insisted on doing it "the easy way," by which he thought he meant, "The lazy way," but he really meant, "The hard, stupid way." Despite my warning, he submitted a bare application to the lender and got seven pages of conditions, which were added to as time went by and he submitted documentation piecemeal. Took him two months and four times the work of just taking another day and submitting a complete loan package in the first place. If he had done that, the loan probably would have been finished in two and a half weeks. Some of the conditions were for stuff I had never encountered before. What was going on, of course, was that the underwriter had gotten it into his head that this was probably a dangerous loan to approve, and he wanted to be extra careful on the approval.

So what can the average person do to safeguard themselves against this happening? Well, you can't - not completely. The underwriter can always add conditions, and so can the funder. Even if the loan gets funded, they can pull the money back right up until the moment that trust deed gets recorded with the county. That's just the way it is. What you can do is ask for copies of the loan commitment, and of the outstanding conditions, those that have yet to be met. Refusal on the part of a loan officer to provide this is always a bad sign. Ditto the inability. I definitely wouldn't sign the loan papers without a copy of the outstanding conditions in my possession, and it may be smart to ask for copies of the conditions at several points in your loan. Yes, they can be faked, pretty easily, but then they are ammunition in your lawsuit if something goes wrong, and most of the bad loan officers are too lazy to fake them anyway. Before you even apply, you can ask questions about necessary income, what the program guidelines for debt to income and loan to value ratio are, etcetera. Much of the stuff in my article Questions You Should Ask Prospective Loan Providers is aimed at defusing that kind of situation. Remember, at sign up you have all the power, but at closing, the lender has all the power. They have the loan, and nobody else does. Many times, the loan they deliver at closing will have nothing in common with the loan that got you to sign up. I used to advise people to sign up for a back up loan, but even I can't do them anymore because of the high cost failing to deliver a locked loan carries.

Loan officers have people sign loan documents every day that there is no hope of actually funding a loan on. It doesn't make sense to me, but they do it, mostly because they are afraid if they break down and tell you they can't fund this loan, you will go elsewhere and they won't get paid. Signing loan documents more strongly commits borrowers to this loan, and as long as they keep trying, there's always the possibility that they will get paid. I have talked with people that were strung along for three months before they finally gave up and realized that this loan was not going to happen.

Caveat Emptor

Original here

One of the things people keep asking about is first time buyer programs. They exist, but lenders are not the first place to ask. Why? Because many, if not most lenders, actually charge a quarter of a point or so for first time buyers, in addition to their regular rates. They do this because so many of them fall out, and they want some money for their trouble. Also, interfacing with local first time buyer programs is a bit of a hassle, and it often takes much longer to close the loan, if it does close. Yes, you need to tell them if you are using a first time buyer program, but if you start at the lender you may get hit with the charge for your loan, and then find out at the last minute that that particular lender does not participate on the first time buyer program for that city.

The place to ask about first time buyer programs is the government of the city that you intend to buy in, usually the housing department, but sometimes the planning department. If you intend to buy outside of city limits, call the county housing department. Yes, you do need to know ahead of time where you're intending to buy. I know how many people hate to plan, hate to "limit themselves" and hate to do preparatory work, especially multiple sets with multiple cities if they're not certain where they will buy, but it's necessary if you want their assistance money.

Most first time buyer programs are funded with money that the municipality gets from the federal government. You'd think they would be similar, that funding would be consistent, and that participating lender lists would be mostly compatible. You could not be more wrong.

Once each city gets the money, they are still subject to federal oversight, but that is broad and there's a lot of latitude. One of the things that all of them have in common is that they charge a fee for a lender to participate every year. Unless that lender gets a lot of business through that program, it's not cost effective to automatically renew every year. I only routinely pay the fees for the much broader Mortgage Credit Certificate program every year - I wait until someone wants a given city's program before I pay the fees associated with that program. So the list of approved lenders is going to concentrate heavily on major direct lenders with offices in that city. This has the effect of limiting the competition, although brokers who are willing to sign up still have all of the advantages of brokers, because for the vast majority of these programs, it only matters that the originating office participate, not that the funding office does. Once I'm signed up with most programs, it does not matter what funding lender I use because originating office is what's important, not the actual funders of the loan.

Each and every first time buyer program will be different. Any similarities between any two programs are basically coincidence. Income limits, qualifying properties, amount of funding, how long it lasts into the fiscal year (or quarter), how much money they get from the federal government relative to the population and cost of living, and most importantly, whether they have any funds at the time you want them and qualify.

Even the form that the first time buyer program takes is wildly variable. Most common is a second (or third) mortgage with nominal payments and a nominal rate. For instance, one east county city requires a 3% interest only payment. Also very popular is a "silent" second (or third) mortgage with no payments, but it needs to be paid back in full if you sell, and in many cases, if you refinance. Some first time buyer programs work off of a "shared equity" basis, with no payments and no interest charged, but they own a fixed share of the property and are entitled to payment in full at sale, and in many cases, of the base loan amount plus appreciation if you refinance. This lessens the financial benefits of home ownership, because normally the appreciation belongs entirely to the homeowner. Nonetheless, without the program, you wouldn't have had any of the benefits of ownership, economic or otherwise. Still other cities have programs geared towards maintaining a pool of limited income housing in that area, and the price you sell for when you sell will be restricted, negating most of the financial benefits of ownership. Some programs are even tiered based upon income, and those making a lower amount will get more favorable terms that those who still qualify, but make more than people in the first group, and there may be more funding available for the lower tiers.

It all depends upon the locality where you buy, and if you apply and qualify for a first time buyer program in City A but end up buying outside of that City limits, you are out of luck. For this reason, you need to work with a buyer's agent who knows the programs and their boundaries and is careful about them. Just because it has the appropriate ZIP Code or telephone prefix does not necessarily mean anything, and I find properties with the wrong ZIP Code in MLS quite often. For instance, properties that are actually in northern Pacific Beach here in San Diego will quite often have the more upscale La Jolla Zip in MLS. Before making an offer, you can always call to make certain the property is within the boundaries covered by the program, of course. You want to double check, because you will pay a fee, usually several hundred dollars, when you apply to the first time buyer program, and I don't know of any that refunds the money if you don't qualify, if you are outside the area, or if you just don't get the funds because they are out of money right then.

Please note that one other feature all first time buyer programs have in common is that they require owner occupancy of a single occupancy dwelling. These are not intended to help investors grow their real estate empire. These programs are intended for people who would not otherwise be able to afford the property and intend to live in it. In some cases, moving out triggers a requirement for immediate repayment in full (and just when it got more expensive to refinance because it's now investment property, too!). In others, so long as you live in it for a given number of years, you can keep it going providing you don't break other rules. Every program has it's own little twists on the owner occupancy requirement. None of them permit you to buy residences suitable for more than one family, either. Duplexes, apartment buildings, and other multi-unit housing are disallowed from every program I've worked with.

First time buyer programs are not grants. I've dealt with them all over southern California, and I don't know of any that are outright grants. In many cases, that would be more cost effective, not only to the buyer but to the city as well, than the hoops that have to get jumped through. So I suspect that outright grants are prohibited by the enabling federal legislation, although I've never read the regulations.

Some first time buyer programs do have mechanisms for forgiveness of the loans after a certain period of time. The requirements and length of time vary. I've seen those that have the forgiveness feature be as short as five years and as long as fifteen.

Prospects for subordination if you refinance are also variable depending upon where you buy. Some require payment in full if you refinance at all, while others will allow themselves to be subordinated to new First Trust Deeds providing certain requirements are met. Chief among these are usually requirements that essentially prohibit cash out refinancing unless you pay off the first time buyer program.

One final caveat to these programs is that most of them will not pre-approve you. In other words, they won't look at your application before you've got a fully negotiated purchase contract. I know of only one program that will pre-approve applicants, and none that will commit funds before you have a fully negotiated purchase contract. If they run out of money in the meantime, that's just too bad. - you're out the application fee. For this reason, you need to stay on top of not only the program requirements and boundaries, but also the funding status as well. If they don't have any money when you actually have a contract to buy, you are wasting the time and money to apply.

Now I don't mean to say these programs are not worthwhile. They can and do make the difference between being able to afford the property and being forced to continue to ride the rest escalator. I should also note that they are basically a band-aid to treat the gaping economic wound caused by artificial restrictions to the housing supply. But if the conditions are right for the band-aid to help you, it certainly is nice and there is no reason why you shouldn't take advantage of it.

Caveat Emptor

Original here

I want to state that I am in no way shape or form an FHA loan guru. Between my general knowledge of loans and this information from someone who is an FHA guru, I think I can make some sense on the subject. Besides, one of the best ways to understand something better is trying to explain it to someone else.

FHA will guarantee loans up to 96.5% of the purchase value, not 100%. This means that you do need a minimum of 3.5% down from some source. The FHA will allow seller paid closing costs only of up to 6%, and the really cute thing is that they will also allow the down payment component to be a gift from family members or government agencies (provided they are not otherwise involved in the transaction). FHA loans can also be interfaced with some types of locally based first time buyer programs, although whether there is money in the budget at the time you apply for those programs is subject to funding, which usually goes quickly.

The first thing you need to understand about FHA loans is that they are intended to enable people to transition from renting to ownership of a primary residence. They are not intended to help anyone grow a real estate empire. For this reason, they will not work with investment property except in the case of non-profit organizations. Individuals looking to buy property via FHA loan must plan for it to be owner occupied. Second homes are only allowed where you already own a home elsewhere and can show an employment related need. Vacation homes are not allowed.

Refinancing is possible for existing FHA loans, up to a maximum of 95% (see Mortgagee Letter 2005-43) loan to value ratio, provided it was purchased via FHA owner occupied loan. The only exception allowing FHA refinance of non FHA loans is the FHA Secure plan. There is no prepayment penalty on FHA loans, and they can be refinanced into conventional loans anytime you can qualify for conventional financing. Most folks do refinance FHA loans into a conventional conforming loans as soon as they can, because FHA rates aren't as good as conforming and conforming loans don't carry financing insurance. It's something to be decided on a case by case basis, on the basis of what is best for a given homeowner.

I did say conforming loans. FHA had loan limits which has precluded them being a big player in most areas for at least a decade. With the decrease in housing prices that has hit many areas and new legislation raising the conforming and FHA loan limits, they are now a major player for first time buyers and people getting back into the market. Especially since traditional lenders are seemingly more fearful every day. Truthfully, I anticipate FHA loans as being what saves the bacon of traditional lenders and provides the upwards impetus to the market that will cause traditional lenders' fears to ease and relax their restrictions.

With loan limits preventing them from lending upon most single family residences these past few years, you'd think FHA would be friendlier to condominiums. Unfortunately, government bureaucracy being what it is, condos have to be approved by the FHA before they will fund loans upon them. Since relatively few developers care to do that, that means that most developments don't have blanket approval from the FHA. Some people think that if theirs is one of the few with FHA approval, this gives them a lock on FHA buyers and they attempt to extort a huge premium in the form of purchase price. I have seen people who intend FHA loans advised to get a list of FHA approved projects and work only from that list. This is nonsense.

Just because the FHA hasn't issued blanket approval to a condominium development doesn't mean that you can't get spot approval. The requirements, in addition to the usual ones, are no ongoing class action suits open or pending, and 60% or more owner occupancy for the complex. This last tends to be the most difficult requirement, as it's a little unusual that a particular complex has 60% owner occupancy, but there are many condominiums out there that can qualify even though the complex does not have pre-existing approval.

Like all government programs, FHA loans require full documentation of sufficient income to afford the loan. No stated income or lesser documentation loans will be funded or ever have been by this program. This is another reason they were unpopular in the Era of Make Believe Loans, as mortgage products for those with eyes bigger than their wallets proliferated, and agents and loan officers became accustomed to qualifying people for properties and loans far beyond their means. Now that that's all over and we're all back to solid fundamentals as far as loan qualification, you can decide to stay within the budget for a loan you can prove you can afford, you can put a significantly larger down payment on the property to qualify for conventional financing, or you can do without buying any property at all. But FHA does not do stated income loans and never has.

Matter of fact, the FHA doesn't do "interest only" financing, either. All FHA loans are fully amortized. However, the FHA does accept some hybrid ARMs as well as fixed rate financing. But no interest only, no stated income, no negative amortization. You must qualify for an FHA loan based upon the fully amortized payment and full documentation of income only, which eliminates most of the ways that people were being qualified for loans beyond their means during the Era of Make Believe Loans, and is one more reason why the FHA was not a major provider of loans in for several years.

Allowable debt to income ratios are 31% front end and 43% back end, according to the written guidelines. However, both can be individually waived upwards, higher even than conventional loan qualifying ratios of 36 and 45% respectively in the case of strong credit , high reserves, and a stable job, with high reserves being probably the most important factor. For instance, owner of a stable business of long standing. Nobody fires owners. Large amounts of money in retirement accounts is one way of getting the default debt to income ratio increased. The range of 45-49% (back end) is supposed to be reasonably possible to get the FHA to approve. Beyond that, exceptions are fewer and significantly harder to get. In my professional opinion, making it difficult to go higher is a good thing.

There is no requirement for reserves with an FHA loan at all. With that said, however, having reserves can be a major point in your favor, particularly above 43% back end ratio. People with hundreds of thousands of dollars in retirement accounts that they could fall back upon if they had to is something the FHA will consider while traditional lenders would not. They'll even allow non-monetary reserves, the most memorable example given to me being a collector of old motorcycles which could be sold. Jewelry, automobiles, and other non-liquid assets may be considered. Of course, it's a very good idea to source and season every dollar you're using to justify the transaction, but the FHA has even been known to accept "mattress money" for down payments (not generally reserves), which is unheard of in other loans.

Here's the really cool part about an FHA loan: It's not FICO driven. You technically don't even have to have a credit score in order to be approved. With that said, however, even when underwriting was at its loosest a sub-600 credit score made it difficult to get approved, and these days we're looking at 640 to 680 as a reasonable minimum. You can also use alternative credit , of which utility bills are probably the best example. Especially in some cultures, credit can be a thing that people aren't accustomed to having or using, so these capabilities are very helpful. You don't even have to be a citizen, but you do have to have the right to work in the United States. This is reasonable: If you don't have the right to work, how are you supposed to pay it back?

Prior bankruptcy is allowable. Chapter 7 with two years of seasoning and re-established credit, chapter 13 with one year payment history and court approval.

Even prior foreclosure is not an automatic disqualification from an FHA loan. They will, however, require documentation of extenuating circumstances such as major illness. Job transfer is explicitly disallowed as an acceptable extenuating circumstance, so people who walk away from properties thinking they're going to get an FHA loan are going to be disappointed. What the FHA really seems to be looking for is debilitating illness, either one which you personally went through, or one where you had to care for an immediate family member.

For how easy they are to work with for individuals, however, loan providers find themselves with many additional requirements, which is yet another reason FHA loans had been less popular while there were other choices. As of right now, in addition to everything else, in order to originate FHA loans, originators have got to go though an annual audit with an accountant who's specially certified FHA auditor. This audit costs a minimum of about $5000 just for the auditor, never mind the cost of the originator's own time or that of anyone else they may have to pay. The audit requirement is in the process being relaxed for originators (finally). The FHA does not permit an agent to hang their license with one broker for real estate and another for loans, either, and your FHA loan officer can not be your real estate agent. If your broker does both, however, it may be permitted. The extensive paperwork means fewer providers - especially discount providers - are interested due to the increased costs, which drives things exactly opposite to what you'd expect the government to want - it drives prices of FHA loans up, by restricting the supply of those willing to do them. It is hoped by many that FHA modernization will change some aspects of this, but that has been stalled in Congress for a very long time. It's pointless to speculate as to what will and will not be included in FHA modernization until Congress sends an actual bill to the president.

One thing not likely to change is the FHA's blacklist. It's not called that, but that's what it is. Once a real estate agent or loan provider is on their list, they are on it for life, and the FHA scrutinizes all transactions for anybody affiliated with it being on their "naughty" list. If someone should default on an FHA loan, the insurer is going to look for a reason not to pay the guarantee, which insures that every FHA foreclosure gets scrutinized for fraud and a number of other offenses. If the agent or loan officer was involved in such an offense, onto The List they go, and they are forever barred from transactions involving an FHA loan. For this reason, it's probably a good idea for consumers to ask about this in their first meeting with a prospective loan officer or real estate agent - on the phone would be better. Just say that you're going to be needing an FHA loan, so if they're on the FHA's "naughty" list, they might as well tell you now, because they're going to be wasting their time. If they try and talk you out of an FHA loan, well, that should tell you everything you need to know. FHA loans are equal or superior to anything that isn't conforming A paper, and if you haven't got the qualifications for that, FHA beats Alt A, and beats subprime like a drum (OK, so the VA is a better deal than FHA as well).

The FHA does not normally permit secondary financing, either in the form of second trust deeds or seller carrybacks. The one exception to this is in the FHA Secure program, which will have to be another article.

One final thing: FHA loans aren't free. There is an upfront cost of 1.75 points to fund the loan. This is over and above all other loan related fees. This pays for an insurance policy that insures the lender against loss, much like private mortgage insurance on conventional loans. In addition, there's an annualized cost of 0.55% on top of principal, interest, taxes, insurance, etcetera - and this is included in debt to income ratio calculations. This will continue until the loan to value ratio is 78% or less, and if the loan period is over 15 years, cannot be removed for five years. If the loan period is 15 years or less and the loan to value ratio is initially less than 90%, there will be no continuing (i.e. the annual component) mortgage insurance charged, but the only way to elude the 1.75 point initial charge is by having a loan to value ratio of 80% or less. Since in any of these cases, it's overwhelmingly likely there will be better choices available to the consumer, essentially all FHA loans are going to have this financing insurance. The continuing cost is one of the main reasons people refinance to non-FHA mortgages, incidentally.

With lenders fearful and paranoid about the state of the market, FHA loans are an excellent way to qualify someone for financing that's at least close to 100%. Given the state of the housing market, particularly the starter market, and the legislation increasing FHA limits, the FHA loan is a very powerful force for market stabilization, leading to market recovery. It's a good alternative for consumers who cannot currently qualify for conventional loan financing.

When I originally wrote this, there were down payment assistance programs in effect to enable what was essentially 100% financing. Those have been essentially dead since April 2008, when Congress did away with the provisions that allowed it except in the case of government agencies. Figure you're going to have to come up with your down payment out of your own funds somehow.

Finally, a caveat. Many sellers don't want to work with FHA or require higher offers in order to do so. They aren't as bad as they used to be, but FHA requirements for financing are still tougher than conventional financing rules - especially if you've got a condo that needs so-called "spot approval". This costs sellers money, and means their transaction isn't as certain as a conventional loan. If you're looking for a bargain or even just a better than average deal on purchase price, it's a good idea to avoid an FHA loan for that reason. Furthermore, many agents still have their heads in the old days when FHA financing was a nightmare for the seller. Especially if there are competing offers, expect seller preference to work against you if you're making an offer that includes FHA financing, and be prepared to need to offer significantly more than the competition if you want them to choose your offer over theirs. When I'm listing a property and the offers are otherwise equivalent, I would still prefer the buyers who are intending any other sort of financing over FHA loan buyers - and I explain why, in detail, to seller clients who are evaluating multiple offers.

Caveat Emptor

Original article here

(The original article was from September 2005)

From an email:

Anyway, my wife and I are about to purchase a place here in the X area and we've been hearing that "a tough loan" line due to the fact that I'm only 10 months into my new small business although I've been profitable the entire time. We're stuck doing No Doc/Stated Income setups - I think you called these "liars' loans" - and the rates are a bit painful.

My wife's scores... at 720 are the lowest we have and mine are (higher).

Well, the good news is that your credit scores place you in the highest band of credit scores. When this was originally written, there was no category beginning higher than 720. Now there is, but it's a pretty nominal difference in most cases.

The difficulty is that you're running afoul of one of the background rules of the whole loan process. Fannie Mae/Freddie Mac rules limit A paper loans to those with two years in the same exact line of work. With some limitations, a good loan officer can usually get it approved for two years with the same employer, if they've been progressing normally within the company. However, changing from a W-2 employee to self employed is a change that cannot be approved, at least from the point of view of A paper. A minus and Alt A rules are mostly similar. So you're looking at subprime loans. Let's examine A paper documentation levels to see if they're a possibility.

Full Documentation: Requires documenting two years income same line of work. You can't; you've only been self-employed for ten months.

Stated Income: Requires documenting that you've had the same source of income for two years. Nope. Yes, these and NINA loans were often called "Liar's loans" in the business because the lender agrees not to verify your amount of income. That's because loan officers eager to make a commission on a loan where the client really doesn't qualify on the basis of debt to income ratio commonly used these to qualify such clients. The qualification standards are there for your protection as well as the lender's. Just because you could use these to qualify doesn't mean it was smart. Most of the reason for the huge house of cards we had was due to unstable and unsustainable loans. Loan officers use these to qualify clients for negative amortization loans. Yeah, the temptation to make a commission is there, but am I really serving the client's best interest by securing them a loan they can't really afford where even the payment they can't afford has them owing more money each month? I submit that the answer to this question is usually no. Stated Income loans are designed for self-employed folks and people on commission who make the money, they just have write offs and such so that they can't really document it. Using stated income to say you make money that you don't is a dangerous game, as literally millions of people found out the hard way. It's likely to result in foreclosure. I am sorry it's completely unavailable as of this update because if it is used properly there are people it is both beneficial and necessary for, but it wasn't used properly in the vast majority of cases.

NINA: Requires a good credit score. This might be your ticket. On the other hand, you don't state how much of a down payment you have, percentage-wise. A paper NINA requires some equity in the property; I've never seen an actual A paper NINA approved with less than about ten percent equity. On the other hand, these were very easy loans to actually do when we had them. It was trying to qualify you for something better that was hard. Once again, however, they're completely unavailable at this update.

On the other hand, if we move down into subprime, the rules aren't set by Fannie and Freddie. When I first wrote this, there were subprime lenders with one year same line of work programs, and even a few with six month programs. On one hand, they're subprime loans, carrying a higher rate/cost tradeoff just by virtue of that, and subprime loans carry prepayment penalties by default. On the other hand, because you're documenting your income, you get a break for that. You probably would have ended up with a rate a quarter to half a percent higher, albeit with a prepayment penalty.

One of the great universal things of the loan business is this: The looser the underwriting standards, the higher the rate, and the tighter the underwriting standards, the lower the rate. If a given lenders underwriting standards are looser, it's rates will be generally higher.

Now, given that you've only been self-employed for ten months, you're not going to have much of a paper trail. There are three possible ways that banks will accept to document income. W-2? Even if you have them, they're no longer applicable. Income tax forms? Given that it's September, counting back ten months leaves you starting the business in November of last year. Even if you had enough monthly income to qualify for that month and a half or two months, the tax forms effectively spread it across all of last year, and that's unlikely to show enough income. The third method of income documentation, unique to subprime, is bank statements. This, you might be able to do. Most subprime lenders have 24 and/or 12 month bank statement programs, and a large number have six month programs as well. The longer you can document for, the better the rate, but better six months than nothing.

(I should note that at this update, I haven't done a subprime loan in the last 5 years, and even finding real subprime lenders has become extremely difficult, but they haven't been regulated out of existence like stated income and NINA so they are likely to return eventually)

Will this get you a better rate, at a better cost (two concerns that always go together), than an A paper NINA? If so, is the better rate worth the prepayment penalty to you? The answer to that was on a case by case basis when we had both. Now the NINA is nonexistent and the subprime is harder to find than an honest politician. There is no way to be certain without pricing it around by the full details of your case, but there's a good chance, and you can get 100 percent financing this way.

I will warn you that bank statement programs (often called by the misnomer "EZ doc" or "lite doc") are THE most difficult loans to actually get approved. There are more problems with these than any other loan type. On the other hand, as I've covered in Levels of Mortgage Documentation, or, Why You Should Demand to Do More Paperwork, if it gets you a better loan, the effort is likely to be worth it. Furthermore, there is a question of whether you qualify for the loan by the bank's standards. Some lenders discount the amount of money coming into the account, some do not.

So which is the better alternative for you? When we had both, I couldn't tell you without actually pricing it for your situation. I don't know for certain that either can be done for your situation without information like how much income your bank statements show, and how big your loan needs to be, and how much of a down payment you're making. Get a couple of good loan officers working on it in your area, and find out.

And yes, this was a always tough loan situation. Both A paper NINA and subprime bank statement programs have their limitations. Failing that, you fall all the way back to subprime NINA, where your credit would have formerly justified 100 percent financing, but it's as gone now as every other such program. Even when it was available however, the rates for subprime NINA were rough on the pocketbook.

Caveat Emptor

Original here

I have mentioned this form several times in the past as the only form in the entire real estate loan process which is actually required to be accurate. Department of Housing and Urban development form 1, the so-called HUD 1 form, is required to be filed and correct for every real estate transaction. Whoever your provider is, this is the one and only form they cannot play games with. This article is goes over the form line by line, referencing previous entries.

The top section has to do with identifying information on your transaction. Your name, the name of the other party to the transaction, escrow numbers, name and address of lender, date of settlement.

The meat starts with line 100, the Summary of Borrower's Transaction, and line 100 the section on Gross amount due from borrower.

101 Contract Sales Price: Should be the same as on your purchase contract.

102. Personal property: Say you agree to pay $500 extra if they leave the sofa. Here's where that goes.

103. Settlement charges to borrower (line 1400) adds the costs of the transaction to the total.

106 and 107 are repayments for any taxes the seller may already have paid as of the date of settlement, but are not their responsibility as the time period covered includes some time after the effective date of sale.

120. Adds all the lines up to this together. The rest are simply blank lines that may or may not be a factor in your particular transaction. If they are a factor, it should be because you specifically agreed to pay them!

The 200 section is about stuff that is paid for, or on behalf of the borrower, or you have simply already paid.

201. Deposit or earnest money: The deposit you made, either with escrow (purchase) or the bank (on a refinance) to persuade them that this was a good transaction.

202. Principal amount of new loan(s): Check and make sure this matches your new Note. In some states, they may be able to combine the amounts of two loans here, but they shouldn't.

203. Existing loans taken subject to: If you're assuming a loan or something similar, it goes here.

204. Second mortgage loan: Compare against your new second mortgage amount.

205 and 206 are blank lines for things that may not be a factor in every transaction.

210 and 211 are for city and county taxes that have not yet been paid by the seller, but the cost has been incurred. Let's say today is September 1, and we're in California, where the property taxes run July 1 to June 30. On September 1, the seller owes two months of property taxes, but those taxes haven't been paid, and won't be due until November 1. So there will be a credit here from the seller to the buyer for two months of property taxes, which the seller is responsible for until the effective date of sale, but the buyer will have to pay on November 1. 212 to 219 are blank lines unless something special is relevant to your transaction.

220 is total paid by/for borrower: This is a total of everything paid by you or on your behalf.

300 Section tells if you are due money at settlement or have to come up with some. 301 is transferred from line 120, 302 from line 220. If 302 is larger, you get cash back. If 301 is larger, you have to provide the check in order to close.

The second column is a summary of the seller's transaction, if there is a seller and it's not just a refinance.

Section 400 is about what's due to the seller, starting with 401 Contract Sales Price, then 402 which is a mirror or 102, then 403, Impound Credit, which is rarely used, as it is pretty much applicable to loans being assumed.

406 and 407 are mirrors for 106 and 107, as are 408 to 418 mirrors of the 108 to 118 section. 420, Gross amount due to seller, is a summation of all of these.

The 500 section has to do with stuff the seller is paying other people.

501 is excess deposit, 502 is settlement charges to seller, 503 is loans that are being assumed.

504 and 505 are mortgage payoffs being made, 507 through 509 are blank spaces for things not applicable to every transaction.

510 and 511 are mirrors of 210 and 211, as 512 through 519 mirror 212 through 219, blank lines not applicable to every transaction.

Section 600 is analogous to but not mirroring section 300. Line 601 is line 420 brought down. Line 602 is line 520 brought down. The difference is line 603 cash to seller (This can be line 603 cash from seller in the case of a so-called "short sale")

All of this is good and necessary information, but The Really Good Stuff™ is all on page 2. The lines at the right list who is paying it (buyer or seller)

Section 700: division of commission

Line 701 is compensation to the listing broker, line 702 is to the selling broker (i.e. the buyer's broker, the people who "sold" the property), and line 703 total commission paid at settlement. I've never seen this paid by buyer, it's always been paid by seller.

Section 800 is items payable in connection with the loan itself. This doesn't mean that these are all the loan-related charges - far from it.

Line 801 and 802 are dollar amounts of points. If these aren't zero, divide them by the loan amount to make certain they are the numbers agreed upon.

Lines 800 through 1317 are linked on a 1:1 basis with the appropriate lines on the Good Faith Estimate (Mortgage Loan Disclosure Statement in California, but the explanation in that article refers you to the Good Faith Estimate). In an ideal world, the total of these should be exactly what was indicated on the Good Faith Estimate/Mortgage Loan Disclosure. There are some few items that are not under the loan officer's control (again, see the article on the Good Faith Estimate for which are and are not). A good rule is that if it isn't on the Good Faith Estimate/Mortgage Loan Disclosure in one form or another, it shouldn't be here. Compare it to the Good Faith Estimate/Mortgage Loan Disclosure to find discrepancies. Other than things like prepaid interest, which the loan officer does not control but should have a pretty accurate estimate of, the most difference there should be between the two documents is one big fee gets broken down into little fees. But if you're told, for example, that the $795 amalgamation of lenders fees was broken up into A, B, and C, make sure that A+B+C=$795, and do not allow additional fees to be lumped in. Grab a piece of scrap paper and take notes. Make certain these numbers jibe. It is easy to hide thousands of dollars in unsuspecting fees to clients in this page if you, the client, are not careful.

Line 1400 is a summation of these lines.

Once again, look hard at the numbers on these two pieces of paper. It is the only honest accounting many people get of the transaction, and the fact that it comes at the end of the transaction makes hiding all kinds of things easy. You, the client, are tired of the whole process and want it to be over, a fact which many loan officers and loan providers rely upon. Put your guard up for a few more minutes, long enough to be certain what you sign for here matches what you signed up for back at the start of the process.

Caveat Emptor

Original here

mortgage real estate home education

(NOTE: AT this update, laws exist enacted in the latter part of the 2009-10 congressional session that essentially make it impossible to legally call zero cost and low cost loans what they are by requiring loan providers to count yield spread as a cost to the consumer. It isn't a cost to the consumer - it's a cost to the bank, offsetting charges the consumer would otherwise have paid. If you can't use yield spread for that purpose without counting it as a cost to the consumer, you can't do a low (or zero!) cost loan. One of the things that should be on everyone's wish list - except maybe banks who don't like paying it but would economically have to - is repealing Dodd-Frank)

Rates move up and down constantly. This is one of the strongest reasons both Intelligent consumers and intelligent loan officers love zero cost loans. Every time rates drop, I call or send an e-mail to those clients who signed up for low cost loans since the last time rates dropped this low, and voila, I'm saving them money for basically nothing. They got a low cost loan to start with, and on the refinance they're getting the same rate as someone who paid multiple points at the same time they got their current loan - for nothing extra.

A streamline refinance is a refinance where there is no cash out by Fannie and Freddie's definition. The rate must be lower, the payment must be lower, and the equity situation must qualify for at least the same program the borrowers had last time. If you roll the expenses into the balance cannot be higher than what was approved last time. Most streamline refinances are with the same lender, but there are a very few lenders who will or have in the past allowed streamline refinancing of another lender's loan.

Here's how and why it works. There is always a tradeoff between rate and cost. Rates had increased notably in the month prior to originally writing this, but that's good fodder for an example. I'm going to assume a $400,000 current loan. Closing costs on that loan were $2815 including appraisal, escrow, and title insurance. Usually, appraisals are not required for streamline refinances, but right now, lenders are in panic mode, so they are. Those who have the gold make the rules for lending it out. The A paper rates for the day I originally wrote this were a thirty year fixed rate loan at 5.875% for two points, 6.25 for one point (actually about 3 tenths), or 6.375 for zero points. Here's a table listing new rate, new balance, monthly interest cost, and how long it takes to recover the cost for the loan via lowered cost of interest in months as opposed to the 6.75% loan that I can do for no cost to the borrower at all.

Now once you've paid those costs, they're sunk into the loan. Furthermore, your rate is locked into concrete. Just because better rates come along does not mean the lender is automatically going to lower your rate, any more than they can raise it if rates go up. That Note is a binding contract on both sides. So if you want to refinance before you've broken even, any money you haven't recovered yet is just gone. The alternative is not to refinance at all, and keep your old loan, horrible though it may be by the standards of a later time. And if you do want to refinance again, it doesn't matter what your current rate is - you're going through the entire qualification process anew, and you have to pay closing costs again as well as, if you want them, discount points to buy the rate down.

Let's say it's a year from today, and rates drop to where they were a month previous. 5.25 for two points, 5.5 for one, 5.75 for zero points, and 6 percent even for zero cost. Let me stress for the hard of understanding who may be reading this that this is a purely hypothetical supposition. Depending upon the loan you chose today, here's your situation in twelve months:

At our hypothetical rates one year from now, the person who chose 5.875% initially cannot be helped without spending some money. In fact, I can move anyone who chose a loan costing one point or less down to a rate almost as good as what they spent $11,000 to get for absolutely zero cost. So their balances stay exactly the same, and here's the new situation

Notice that the person who chose that zero cost loan in the first place has a monthly cost of interest that's $8 to $17 lower than anyone else - and he owes thousands of dollars less on his loan! The people who spent money buying the rate down will literally never catch up to him! Even though the interest for the guy who keeps the initial 5.875% interest rate is a little lower, with thousands of dollars difference on the balance, you're still talking fifteen years or so for him to break even with the people who initially spent less to buy the rate down, straight line computation, never mind time value of money!

This isn't magic, and it isn't totally hypothetical. This is almost predictable. A few years ago the median age of mortgages was down to sixteen months. I can't seem to find it in the current Statistical Abstract, but I've heard it's all the way up to 28 months - still less time than it takes to break even for the costs of the expensive loan above, and pretty much the same as the break even for the loans where you spent some money to get the loan. Why in the name of whatever divinity you worship would you want to spend money that most people are never going to get back?

Considering this information, there's another loan that actually makes even more sense for most folks - a hybrid ARM. This is a thirty year loan with an interest rate that is initially fixed by the loan contract for a certain number of years, after which it will become an adjustable rate mortgage. For a long time, I've been doing 5/1 ARMs for myself. Even when the rates on thirty year fixed rate loans were ten percent, I've always been able to get a 5/1 ARM around six percent or less. For a couple of years, the rates on 5/1 ARMs were essentially the same as for thirty year fixed rate loans - meaning there was no real reason not to buy thirty years of insurance that your rate wouldn't change. Why not, when it's been cheaper than 5 years worth of the same insurance? But ARMs are now diverging significantly below the rate/cost tradeoff of thirty year fixed rate loans, so now we're getting back to the normal situation, where people willing to relax just a little bit on a mental requirement for a thirty year fixed rate loan can reap substantial rewards. A month before I originally wrote this, a 5/1 ARM at zero cost was at 5.75%. Despite 30 year fixed rates skyrocketing, the 5/1 when I originally wrote this was around 6.125. So for the same zero cost of a 6.75% thirty year fixed rate loan, you can get a five years of fixed rate at 6.125% then - and move you down below 5% at this update. On a $400,000 loan, this saved you $2500 per year when I originally wrote this - more than a full month of interest on the thirty year fixed rate loan. At the update, you save more than $5000 per year more. Furthermore, we've already covered the fact that the vast majority of people aren't going to keep their loan long enough for a 5/1 ARM to turn adjustable anyway. If you're among those 95% of all real estate borrowers who aren't going to keep the loan five years, there isn't any practical difference between a thirty year fixed rate loan and a 5/1 ARM except that you pay five eighths of a percent less interest - slightly over $200 per month saved in this instance. You can pay the same as a thirty year fixed rate loan and apply the interest savings to principal - which means you'll owe $14,000 less at the end of five years, assuming you keep it that long, and that rates don't drop so you can refinance at a lower rate, again for free. Another alternative is that you can invest the difference, in which case you'll have over $15,000 extra in an investment account, assuming an average 10% return per year. Who cares if you then need to spend $3000 of it refinancing if the rates never get this low in that period? Okay, I care, but since I'm still $11,000 or so ahead after I spend it, if I need to spend it, that is one heck of a good investment!

Some people prefer other ARMs. I see people encouraging the 10/1 and 7/1 for people who think the 5/1 isn't long enough. And if you're one of those folks who is going to lie awake every night for five years because you don't have a thirty year fixed rate loan, the difference between a 5/1 ARM and a thirty year fixed rate loan makes a difference of about $6 interest per night. Split two ways, for you and your significant other, that's $3 each for a good night's sleep. A good night's sleep is worth $3 to me, it's worth $3 for my wife, and I presume your sleep worth $3 per night to you, also. There's nothing explicitly wrong with choosing a 7/1 or a 10/1 as opposed to a 5/1, either. It's mostly a mental comfort issue. Most folks don't keep their loans 5 years anyway, so if I'm one of that huge majority of homeowners, why would I want to buy seven or ten years worth of insurance that my rate won't change? The only answer that makes any sense other than mental comfort is if the rate/cost tradeoff for those loans is cheaper, and that is only rarely the case. At the rates when I originally wrote this, you were giving away three eighths of a percent for the same zero cost loan on a 10/1 basis - 60% of your savings, although the 7/1 was almost exactly the same cost as the 5/1, so that's a good choice. Most folks won't use the two extra years, but if it's essentially free, why not take it in case you do? For the 3/1 ARM, on the other hand, was actually slightly more expensive at the zero cost level we're considering today, and even if it was cheaper, you're getting down closer to average holding period, so perhaps a third of the people who got it might want to hold it longer than the fixed period. Furthermore, I don't think I've ever seen a zero cost 3/1 more than an eighth of a percent lower rate than a 5/1 at the same cost. Let's say you could get one at 6% today for that loan, instead of 6.25. You save $41 extra per month - $241 over the thirty year fixed - but you've only got a maximum of 36 months of savings. $241 times 36 is only $8676, as opposed to $200 times 60 months, which is $12,000, not to mention more ability for compounding to have an effect in the case of the 5/1 ARM, and that the idea is refinancing to a favorable rate before the end of the fixed period. For all of these reasons, I can't really see choosing a 3/1 for any set of circumstances I can remember seeing any time in the last fifteen years or so.

To summarize, rate/cost tradeoffs between loans go up and down constantly - the rates for A paper change every business day, at a minimum. Nobody can predict exactly when they will rise or drop again, but that they will vary over a given range is pretty much axiomatic. Furthermore, there is always a tradeoff between rate and cost for any given loan type at any time, and if you choose a loan with low rates for that time but comparatively high costs, it will be years before you have recovered your initial investment via cost of interest. Since by that point it is very probable that rates will have fallen below today's rates at least temporarily, and you will have wanted to refinance, this is only rarely a good investment. A better way to cut your cost of interest is to choose a hybrid ARM with a fixed period likely to cover the period of time you will keep a given loan in effect.

Caveat Emptor

Original article here

I'm clueless about how home loans work. Is there any way to figure out how much I can afford to spend per month on a home. If I were to get a home for $(figure) how much would that be per month? How do I know how much the interest will be? Any sites that explain it all in laymans terms? Thanks

It's actually pretty easy. You are allowed a certain percentage of your gross monthly salary for debt service and housing. According to Fannie Mae and Freddie Mac, who control A paper, it's essentially 45%. When I originally wrote this, some sub-prime lenders would go to 60 percent, but 1) that is essentially gone and 2) Don't you think it's a good idea to stay within the limits considered acceptable by the people with the best rates and most favorable terms? This ratio is called the debt to income ratio and is far and away the most important measure of qualification.

Lest it not be obvious to you, the less debt you have currently, the more you can afford to take on for a housing payment. One of the real problems, and reasons for abuse of a stated income loan, is couples who make $4000 per month each, but have $1200 or $1500 or $2100 in monthly payments for the two cars, credit cards, student loans, etcetera. Their coworkers all have $3000 mortgage payments, and $3000 buys a lot more house than the $1800 which is all they can afford. Actually, it's a pretty critical difference right now, since $1800 is the payment on about $275,000, while $3000 is the payment for about $450,000 or a little more. The reason why people pay more for property is always that the higher priced property is desirable enough to be worth the difference to them.

Take 45 percent of your gross monthly income, call it X. From X, subtract your current debt service. This is car payments, credit card payments, furniture payments, student loans, and any other actual debt you have. It does not include things like utility bills, however.

The number that is left over, call it Y, is what you can afford for housing by traditional measures. It needs to cover principal and interest of the loan, property taxes, home owner's insurance, and association dues (if any), PUD fees (if any), and Mello-Roos (if any).

Assuming that there are none of the last three, you're left with PITI, the acronym you're going to hear about what this covers: Principal and Interest (on the loan), Taxes (property taxes) and Insurance (home owner's insurance).

When I originally wrote this, there were A paper thirty year fixed rate loans in the low sixes with 1 total point or less. Rates are lower right now, but they vary over time. Any loan calculator (except auto loans) can handle that calculation.

There are complicating factors if you're not putting 20% down. If you're not putting twenty percent down payment, every lender out there will require Private mortgage insurance (PMI) in some form or another. Banking regulations require it. If it's something the loan market will support in your situation, splitting your loan into a first and a second is almost certainly superior to paying PMI. At this update, second mortgage lenders are requiring a minimum 10% down payment or 15% equity on a refinance. To do this, you're only going to put 80% of your loan on the first mortgage. Adding the remaining amount back in at 9.00% (doing this saves you about two and a quarter percent in charges on the whole amount), for which you're going to need to do a separate calculation. If you are in a situation where you're splitting your loans, put the two payments together and that's the principal and interest (PI) part of the PITI acronym. This assumes you've got decent credit, by the way.

I have no way of knowing your property taxes. Every state in the union has their own way of doing it. California's is actually one of the lower property tax rates, considered on an assessment per unit of value basis. There are also zones where bond issues have passed, Mello Roos assessment districts to pay for the costs of bringing utilities to the development, and so on and so forth. Your county assessor will have the details. One of the things a good agent can often do here in California is deduce the presence of assessment districts based upon the taxes paid by a particular property, but it's subject to error, and your county assessor's office will have the information, and it won't b subject to guesswork.

I have no real way of knowing what home owner's insurance might be. I usually estimate $100 to $110 per month for a good policy covering detached housing, but that's a guess, and it could be much more, or somewhat less, depending upon many factors. Most of the actual quotes and bills my clients get seem to be lower, but better to guess a little high when making a budget for a major purchase like that. The only way of moving from guess to certainty is to ask insurance agents how much to insure a specific property with a given level of coverage. Don't shop insurance based solely upon price - be careful about the level of coverage - I strongly urge the HO-3 standard policy for stand alone residences, and the HO-6 for condominiums and townhomes where the association has a master policy. The HO-15 Rider is also worth considering as a policy addition. These are actually nationally standardized policies, thanks to the NAIC. Lenders have requirements for what policies have to cover depending upon state, as well. Also consider level of coverage - a policy that isn't big enough won't pay the entire bill for repairs even if it is within coverage maximum. Finally, how solid is the company? Seems like every time there's an area disaster, you hear about insurance companies going bankrupt because they can't pay claims. This is not something you want happening to you. Make certain they've got a high rating from major rating services.

I should also mention that no basic policy includes flood or earthquake insurance. If you're in an earthquake area like most of California, get yourself an earthquake rider or separate policy, whatever is needed in your state. Flood insurance isn't something you worry about around here, but buy it if you're on a flood map.

Now, if the sum of these numbers (PITI) is less than $Y, that portion of your monthly income available for payments and left over after monthly debt service, you've got an excellent chance of qualifying for that loan. If not, you're going to have to go sub-prime, where the allowed debt to income ratio is higher, but the rates will also be higher and the terms less generous, for instance in the presence of a pre-payment penalty. It is actually likely that instead of playing games to stretch your ability to qualify, you would be better off shopping for a less expensive property in the first place. But that's a hard thing to get most buyers to accept. They've fallen in love with the brand new house and they don't want to hear that they can't really afford it. The universe knows that these good deeds do not go unpunished. But informing the client is still the right thing to do, as is deciding to find another property, one that you really can afford.

Caveat Emptor

Original here

The same as in every other area of life: Get out in front and stop it from becoming a problem.

I do not understand why many people approach real estate transactions like a casual outing. Go window shopping, decide on an impulse purchase, expect to sign a few papers and you're done. That might be appropriate for a toaster oven or microwave, possibly even for a refrigerator. In all of these cases, you're dealing with huge companies and products that are basically commodities. All the important stuff like price, size, and functionality is right out in the open, and you're spending $50 for the toaster oven, $100 for a microwave, maybe $2500 or so for a top of the line refrigerator with lots of bells and whistles. Furthermore, the huge companies that make and sell these need to sell millions of these to other people. It's not only not worth it, but actively counterproductive to their bottom line if they don't deal with complaints both quickly and generously.

Contrast this with the situation in real estate. First off, you're not dealing with a major company whose deep pockets are going to bail you out. You're dealing, at most, with a franchise operation that's paying big bucks to license a name, and consumers have no claim against the franchising organization. Here is a list of California license actions in the most recent month they have published right now. Not one heavily advertised household name among them, although every one of those household names was affiliated with someone on the list - usually each of them with several someones on the list. The big names might have some neat bells and whistles in the way of agent tools and client interface, but that's a distraction, especially in these days of expanding MLS capabilities, where any agent can set up a client gateway and get a link to the public portions of MLS on their website.

More importantly, the amounts at stake are, instead of fractions of someone's monthly salary, multiples of their yearly gross income. What this means is that the amounts at stake are many times larger, and therefore the potential reward. I don't know anyone who will cheat over a penny, and not many over a few dollars. But when the amounts at stake inflate to hundreds of thousands of dollars, that's a different level of temptation, and the list of people that can be trusted shrinks drastically. A smart agent working for you should be someone you can trust, if for no other reason than you can sue for breach of fiduciary duty and expect to win more than they could ever make for that breach. Unfortunately, as has been made clear to everyone who's paying attention, not all agents are smart.

Most important of all, a large fraction of the important issues aren't out in the open. Indeed, the amounts at stake are sufficient for the other side to do their best to bury them. Spotting these issues, particularly before a client has wasted time and money on the property, is one of the prime characteristics of good real estate agents. Whether or not you spot them is not the determining factor as to whether these issues are present, nor does keeping quiet make them go away. Even when called upon the facts, however, many sellers and their agents will still try to brazen it out in the best tradition of the communist party, by denying the issue. Several years ago, when buyers outnumbered sellers 4 to 1, many of them got away with it. Getting away with it is a lot less likely in a buyer's market. Furthermore, deceits of this nature are fertile ground for lawsuits, but despite the fact that it is far better - for both buyer and seller - to deal with all of the issues in a straightforward manner, there will always be those who think they can vanish with the money if only they can get that money wired into their account. They can't, but if they've already spent the money it's pretty hard to get it back. Better just to deal with the issue in the first place, even if it's by choosing not to pursue that property.

When a good agent takes a listing, they have all the issues from appropriate pricing on down the line dealt with before the property actually hits MLS. The seller has to have restrictive showings? Reflect it in the asking price and tell everybody when and why in the property profile. There's an issue with the property? Make it clear in the property profile - showings where the prospective buyer aren't willing to deal with the issue do nobody any good. Even if you can hide it temporarily, you can't hide it forever, and the effects when the deception are discovered are going to hurt more than if you were honest in the first place.

When a good agent considers a property for their client's purchase, they consider it complete with shortcomings. If there's an issue with traffic, noise, structure, schools, or anything else, I want my client to be aware of it, and I want to have a plan to deal with it in negotiations, before my client says they want to put an offer in. Yes, this makes it more difficult to persuade a client to put an offer in, but if your agent hasn't explained that there is no such thing as a perfect purchase situation long before you get to the stage of making offers, something is wrong. I haven't seen a property yet that was an exception to this. They've all got problems and issues. The question is whether these problems and issues are ones that the client is comfortable dealing with. Even if there are no other problems, the issue then becomes, "Is your client happy paying the extra money not to have them?"

Any time the problem gets in front of an agent, they are playing catch-up, much like a Cessna pilot trying to handle a high-performance military jet. It's controlling them more than they are controlling it, and the same applies to real estate. Pilots have a saying to the effect of "he got to the crash site fifteen minutes after the airplane." Real estate is no different, except the time lag is usually measured in months instead of minutes, and only gets caught up when a lawsuit is filed. I've seen agents - usually "team leaders" trying to pack in more business than they can really handle - so far behind the power curve on actually solving real problems for their clients that the client would have been better off with a fresh licensee on their first transaction, who at least aren't so busy delegating that they can keep track of what they need to know and what they need to deal with before it bites their client. Those subsidiary functions that busy high producing agents "delegate" to lower paid "team members" (which is 95% industry code for "poorly trained low-paid employees who have no idea how that piece of paper relates to everything else about the transaction but enable the agent they work for to rake in more commission checks")? You'd be surprised how often the details that bite agent and client both are buried in them, and any time an agent puts their focus on production, the quality is going to suffer. A better agent may not live so high on the hog, but their clients come out of the transaction much happier.

Caveat Emptor

Original article here

Liquidation auctions were a big thing for a while there. They were just advertising one on all the stations around here. The other agents in my office asked if I was going, and I told them, "There will be no bargains there." Two of them went anyway, one going so far as to take a client.

To be fair, this only applies 100% to one specific auction house, which I'm not going to name - but the tactics and terms are pretty standard. Here's the claims they make: "Huge selection" (which means, in this case, 222 properties of all sorts, 147 of them in the county, 75 out of the county, as opposed to 20,600 active residential properties in San Diego County MLS on the day in question), "Easy financing" (they rent some space to one specific lender). In fact, they do their best to restrict choice of lenders - giving some minor preferred terms if you do business with their tame lender, which isn't known in the business for being a good lender to do business with. This violates RESPA (federal law), by the way. "Perfect for families." If you believe this, I own not only beachfront property in Florida but also a bridge in Brooklyn and an albino pachyderm, and I want to sell them all to you for a low discount package price - contact me for private details. You've got to be some kind of idiot to believe that it's a good idea to bring kids - a genetic and conditioned emotional distraction - to a real estate auction. Their commercials have sound bite interviews with people right after they win an auction - excited that they "won" an emotional battle for a house! Of their very own! Not later, once they've discovered how rotten the situation is that they have gotten themselves into.

Reading the fine print, it didn't take much to figure out what's really going on here: They want to get buyers together in an emotional auction environment where it's psychologically very easy to overbid for a property, get them committed to buying the property, and cut them off from all of the due diligence they're allowed to do on every other property out there. Lock the buyers into what they do in the heat of the most emotional moment these artisans can create - while the sellers are free to reject the deal on a whim. They allow the prospective buyers no "cooling off" period at all. This is legal for purchases, but isn't a good situation to be getting yourself into as a buyer, particularly not in the current environment for most of the country.

Here's the skinny: First off, prospective buyers need a $5000 cashiers check made out to yourself, which you will endorse over to them, and the balance of 5% of the purchase price in the form of a personal check or something similar. What this means is that no matter what, the lender is getting $5000 of that buyer's money. Period, end of sentence. Furthermore, they have to put 5% of purchase price into escrow. This is way above the "traditional" 2% which is far too high for most transactions nowadays. Putting it into escrow means that, at a minimum, somebody else is holding onto it until and unless all parties agree to release it or a court tells them to. Given that you have to use their special "purchase contract" which wasn't available ahead of time, what do you expect that the terms of that contract are as regards to things like liquidated damages and money owed to the lenders for the "privilege" of sitting in escrow on a property where there's no real due diligence done? Their brochure said the purchase contract was available on their website, but I couldn't find it, and I not only checked their site map, but clicked on everything that I thought could conceivably be associated with it - which was basically everything. The contract itself wasn't there, but I don't have any reason to distrust their claim that it renders you liable for damages if you don't carry through on purchase. In other words, you find out a reason why you don't want the property, you still pay for the fact that you had the high bid. Not to mention their purchase contract is completely mandatory, and you can't negotiate anything about it, and you don't even find out what those terms are until after you've agreed to the price. Since contract terms can move the price by thousands or tens of thousands of dollars in regular negotiations, it shouldn't stretch your imagination to figure there's a reason they're waiting to spring all of this upon you - most likely a contract people wouldn't have signed at the peak of the seller's market in 2003. Furthermore, you're required to sign a "winning bidder confirmation" immediately upon making the high bid. What that says also wasn't subject to prior investigation - which is a polite way of saying they want it to be a deep dark secret until you "win" the auction for a given piece of property. Use your imagination for a moment, and ask yourself, "Why would they want to keep it secret until then? What might such a document say?" I'll bet you millions to milliamps the reality would be worse. These folks are professionals.

Did I mention that you're agreeing that you've already done your due diligence? Yes, but I didn't go into what it really means. They supposedly have three open houses for inspection, but how many people are really going to drag an inspector, an appraiser, a termite inspector, etcetera out to the property just because they might be thinking about bidding on the property? That's sinking anywhere from $800 on up into the property just on speculation of winning the bidding. If a prospective buyer does this due diligence ahead of time, it psychologically prepares them to be willing to go higher on the bid (they've already spent money). If they don't do this due diligence ahead of time, they're putting that 5% of the purchase price - however many thousands of dollars - at risk, and it's a very high probability risk at that. Suppose you bid $400,000 and it's accepted. You need to put $20,000 into escrow immediately! If a prospective buyer thinks they might bid on two properties, that's twice as much. Furthermore, although the purchase contract wasn't available, I'm quite willing to take the word of their brochure that there are no financing or appraisal contingencies allowed in that contract, even for their preferred lender. Their verbiage is adamant on the point of "as is, where is, including all faults." They're very explicit about no liability by sellers, which is basically standard for lender owned property, but they're not going to accept any requests for repairs either, which isn't. In fact, in some circumstances, it's illegal. Not to mention that you normally have seventeen calendar days to do your due diligence after there's a fully negotiated purchase contract, even with lender owned properties, before your deposit is likely to be in jeopardy.

They use a "property previously valued to" come-on, which is disclosed in the fine print to be the highest of 1) an appraisal 2) asking price, 3) assessed value or 4 ) broker's price opinion. You shouldn't need to be a Rhodes Scholar to figure out that this means the asking price - the exceptions just make for something even more cockeyed. It's been on the market for months, and it didn't sell for that price. If it had, they wouldn't be auctioning them off in these circumstances.

There's also an undisclosed reserve price. What this means is that if the auction doesn't get high enough to go over the reserve price, you don't get the property even if you have the high bid. Furthermore, reading through the fine print, you find that the auction has planted other bidders in the crowd, who can and will bid the price up. If claims they won't go over the reserve price, but since neither the identity of the plant nor the reserve price is disclosed, it's somewhat difficult to verify this. The job given these plants is plain and simple: Get the bidding going, and get it emotional, so people will keep bidding for a long time. Since the auctioneer knows both the plant and the reserve price, they can collude quite easily to a common purpose. As a matter of fact, the fine print says the owners don't even have to accept the reserve price. What does this mean? If, after all the psychological games they can play with you, you don't bid enough to make them happy, you still don't get the property! In fact, they've got 15 days to turn you down. You, on the other hand, are required to close escrow within thirty days, which means you had better get working immediately, even though they reserve the right to pull the rug out from under you.

If all of this isn't enough, they reserve the right to alter terms and conditions as they go, specifically including, "Advancing the bidding," which is a euphemism for jacking up the price for no apparent reason. In addition to that, there's a 5% surcharge on all winning bids in order to arrive at the final sales price. So someone knows their limit is $300,000 and advances the bidding to $297,000 before winning - only to discover that this translates to a "real" price of $312,000 - a price they already know they can't afford! Result? Minimum of $5000 in their pocket (your endorsed cashier's check), and they offer the property for sale again right away.

Have I mentioned the psychology of an auction yet? Particularly one with inexperienced bidders? Most of whom have no idea of the risks they are taking, let alone the fact that they should be compensated for them, or how much? I've heard too many inexperienced people saying that "Everybody knows" that foreclosures and auctions are great deals. I'd like to meet this Everybody, because he's spewing rank fertilizer in the form of unsubstantiated rumors that are far from universal even if they are sometimes valid when you've got a sharp agent on your side in a high transparency situation where both sides have to come to the table as equals. That's not the case here.

I looked through their book of available properties. There was precisely one that I had been in. It was a 3 bedroom 1.75 bath property on a lot that was mostly level because the developer had terraced it fifty years ago, with a deep crack in the foundation the entire width of the house - you could even see the evidence on the outside, for crying out loud. Nice paint, great view, some other nice touches - but flat roof I couldn't see, no yard, no close parks, no place for kids or pets, all the fixtures and surfaces other than the carpet were original, it sat on a busy connector street, and I couldn't tell you whether that house was going to be there tomorrow without a soil engineer's report on how well the leveling of the lot was standing up, how well the soil had been compacted, etcetera. I suspect problems, because the foundation wouldn't likely have cracked if there hadn't been soil compaction issues. I remember thinking, "Maybe $300,000, if the soil report comes back solid. Otherwise, you couldn't pay me to take this property." They were telling people it was valued at $429,000. Seriously, I would rather have a 1970s vintage townhome less than a mile away listing for $279,000 - and this includes HOA dues and dealing with a homeowner's association in the first place. More usable yard, a couple of small communal parks and a communal pool, and less environmental noise - not to mention that even if that condominium had structural issues I didn't spot, dealing with them would have been a communal issue as well. This seemed about average for what was being offered. The less desirable areas seemed to be heavily over-represented in their offerings. This is about as coincidental as falling down when you trip. All the usual war zones that people don't want, even when they think they're getting a deal.

The point of all of this is to get people foolish enough to bid on these properties locked into deals, where the sellers are not locked in at all. Get them emotional, so they bid up the price, and if they can't do that well enough, the seller has the option of taking their marbles and going back to what they were doing. So you can imagine that I wasn't very surprised when my two co-workers called me about halfway through the proceedings to say, "You were right. We're leaving. There are no bargains here."

Caveat Emptor

Original article here

i was sold a bad home mortgage who do you talk to

If you've just applied, not yet signed the actual loan papers, go talk to another loan provider. It's not like you're committed to the company, and it's not like it never happens. Even the most ethical loan provider loses loans between application and funding. It happens. Go make certain that you are getting the best loan for you. In order to do this, you need to actually discuss your situation with several loan officers - and I mean really discuss it. Ask the hard questions. I've got a list of questions for loan officers.

If you've signed the final papers but are in the rescission period, contact the escrow company and rescind in writing. Walk it in, don't rely upon a fax or registered letter. Mind you, if it's the last day and after closing time, a faxed rescission before midnight will prevent it from taking place - if the escrow company actually gets it. Faxes go astray. This is one reason why you want to contact the escrow company, who is paid to be a neutral third party. I've heard stories of people who supposedly contacted the loan provider and it somehow "got lost" and the loan got funded. Bad situation to be in, and the legal presumption is not in your favor. Now you've got to prove that you sent the rescission in time, and that they should have known not to fund your loan. This is hard.

The most common time to realize you've "been had" before the loan funds is right when you get the final loan documents to sign. That's always the moment of truth, and there are few legal protections in advance of that moment. Many people think that the federal Good Faith Estimate or California Morgage Loan Disclosure Statement mean more than they do, when the fact is that there are very few regulations upon the accuracy of either document, and unethical loan providers are adept at not running afoul of them. In particular, the government wants people to believe that the 2010 Good Faith Estimate fixes all the problems, when the reality is that the same people who made a habit of lying on the older versions have the loopholes in the new form down pat.

If your loan is already funded, you can contact your state's Department of Real Estate and your lawyer, but odds are extremely poor of those folks being able to do anything that changes the situation. There basically have to have been major rules broken to invalidate the contract, and those unethical providers who pull this garbage are adept at not breaking those few rules which really will land them in trouble. I've had a fair number brought to me to see if I could tell them how to fix it, and the form response is, "If your lawyer and the Department of Real Estate can't help you, all I can do is take the situation today as a starting point and see if selling or refinancing from this point forward put you in a better situation." In other words, the only way to reliably fix the problem is another (hopefully better) loan, or if that won't help, selling the property. The lender is not going to amend the contract because you've got a bad deal. The seller is not going to say, "Oh, I'm so sorry that you had a bad experience!" and restore you to where you were before you bought. This is why you need to make certain that what you're getting is a good deal before you are stuck with it. I'm trying to produce the knowledge that makes this possible here, but you still need to sit down and really talk the matter over with several professionals, and make the effort to find out if a proposed deal is real or nonsense. I am sorry to report that there is no easy way to do this, but you might want to start with these four articles mine. (I used to recommend back up loans too, but changes in the loan business have made them prohibitively expensive to the point where even I can't do them anymore)

If you go in alert with your eyes open and do your homework, you can avert the vast majority of problems before they affect you. If you are one of those who won't do this, then you will be placing yourself in one of three categories: Those with an unreasonable amount of pure dumb luck, those poor schmoes who've been had but know better now, or those poor schmoes who've been had and don't realize it.

Caveat Emptor

Original here

I got a search result for how to get out of mortgage pre-payment penalties, although I've never really dealt with the issue.

Prepayment penalties on real estate loans are something some people, often with less than stellar credit, accept, either in order to either get their mortgage rate lowered or because they don't know any better, or because they didn't ask, were lied to, didn't stick to their guns, didn't protect themselves from unethical loan providers, or any of a dozen other reasons people end up with them. Standard prepayment penalties are six months interest on the outstanding balance, but many companies with "twenty percent" allowances only require eighty percent of that.

Prepayment penalties come in two major varieties, "hard" and "soft", with the vast majority being hard prepayment penalties. Hard means that if the prepayment happens for any reason, you will pay the prepayment penalty. Soft means that if the reason you pay early is because you actually sold the property, there will be no prepayment penalty due.

Prepayment penalties can be further sorted into "first dollar" and "twenty percent". Either can be in the contract for either a soft or hard prepay, but first dollar prepays are uncommon for soft prepayment penalties. If you have a "first dollar" prepayment penalty and you pay one extra dollar above your regular payment, you will be assessed the penalty. These are most common with Negative Amortization loans, and are somewhere between ten and twenty percent of all prepayment penalties, judging from my experience with the problems people bring to me. A so-called "twenty percent" penalty allows you to pay up to twenty percent of the loan balance in any given year without triggering a penalty.

Common terms for prepayment penalties are one, two, three, and five years, although I have seen ten. Since the median time between refinancing is less than two years, and ninety-five percent of everyone has refinanced or sold within five years, it's very much like a hidden fee to the bank in most cases, one that will not appear on your loan costs summary of the HUD 1, and yet since most people who accept them end up paying them, I would certainly advocate disclosure of a dollar value being mandatory if there is a prepayment penalty associated with a loan. This is not to say that they are never beneficial or never necessary, but in a large majority of all cases they are simply the result of a loan provider who wants to make more money, who hides the prepayment penalty until it is too late to avoid. They want to raise your cost of going elsewhere so that you will keep the loan at least a minimum amount of time. No matter whether they are a broker or an actual lender, this means they make more money when they do or sell your loan. A lot more money. A two year prepayment penalty is worth two to four points (point = percent of loan amount), more or less, on the secondary market. Longer penalties are more.

Now, the answer to the question. I know of precisely four ways to get out of paying a prepayment penalty, and three of them are trivially easy to describe.

The first is not accepting a prepayment penalty in the first place. No matter how bad your credit is, you do have this option. Your interest rate will be higher, or they will charge you more for the loan, but you won't have a prepayment penalty. In general, my experience has been that the higher loan rate is worth not having a prepayment penalty. If your loan amount is $300,000 and your rate is 6 percent, your prepayment penalty will be about $9000. Nor is it, in general, tax deductible if you have to pay it. In this case, if you had to accept a rate one full percent higher to avoid a three year prepayment penalty, you'd be breaking even.

The second is equally trivial. Wait to sell or refinance until the prepayment penalty has expired. Let's say your loan amount is that same $300,000 at that same six percent, and that you have a year and a half to go. In order to be worth refinancing, you would have to save two full percent on your new rate, and that's not counting anything you pay, costwise, to get the new loan.

The third way involves something not under the personal control of the borrower, in that it requires legal intervention for perceived legal wrongs done you, the borrower. It has happened in the past that courts have ordered prepayment penalties waived in such cases. It has also happened that companies have agreed to waive a prepayment penalty as part of a settlement. Both events, however, are rare and require you to have gone through something bad enough to merit this. The one case I'm personally familiar with involved the lender playing games with payments that were being made on time to the point where they actually marked the people as being in default. I got them to a lawyer specialist and did exactly what that lawyer told me to, when he told me to, and nothing else. They went through something worse than purgatory at the hands of this lender and ended up paying thousands of dollars in attorney's fees, which they didn't recover, but at least they kept their home. Getting out of a prepayment penalty this way is a cure that's worse than the disease.

The fourth and final way to avoid a prepayment penalty is to refinance with the same company. Most (although not all) lenders will agree to swap the old prepayment penalty for a new one if you do your refinance with them. This does not mean that if you've got eighteen months left on a three year prepayment penalty, you've got eighteen months left on the penalty under the new loan. This means you've got a whole new three year prepayment penalty. It's like putting a problem off for another day, allowing it to fester. Far superior in most cases to just wait until the penalty is gone, because in the vast majority of all these cases your balance under the replacement loan will be significantly higher, and thus, the amount at risk due to a prepayment penalty will be more.

There you have them. The four ways to avoid paying a prepayment penalty. None of them is exactly wonderful, I know. But consider that the borrower agrees to the penalty when they accept the loan. It's part of the terms, and they do have alternative loans without prepayment penalties. It's just that most people jump to conclusions that this is a loan they want as soon as they hear the payment, and, if they're more cautious than average, the interest rate. Which is why you should be one of those who asks every potential loan provider about them, before you are stuck with one. I highly recommend asking the question, "And what is it without the prepayment penalty?" An ounce of prevention is worth many pounds of cure.

Now I get all sorts of questions about other ways to avoid pre-payment penalties. These range from good, such as "What if my spouse dies?" to understandable, such as "What if my employer transfers me?" to the ridiculous: "What if my cat has kittens?" What they have in common is that in none of those cases will the prepayment penalty be waived. Bottom line: Accepting a pre-payment penalty is a risk you decided to accept, and without the pre-payment penalty, you would not have gotten as good a rate, and your payments would have been higher. That is a concrete, certain benefit that you got. The price for it was accepting the pre-payment penalty, so don't be surprised or hurt or even gripe if the lender wants the money you agreed to pay in the event you did something that is under your control. You can always contact the lender and ask if they'll waive it under the circumstances, but the answer is going to be "no", and for the same reason that your auto insurance company won't pay the repair bill if you crash after your policy expires. You decided to assume the risk of pre-payment yourself, and you've been putting money in your pocket because of it. When that bill comes due, don't expect someone else to pay it for you when you have been putting money in your pocket because you said you would pay it if it happened. As I said above, an ounce of prevention is worth many pounds of cure.

Caveat Emptor

Original here

Yes, I've always kind of liked Paul Simon. But this post was inspired by something I ran across from a title company. And just to make certain you realize what I'm saying, it's fifty ways to lose your money if you don't have title insurance.

You don't want problems from prior ownerships to interfere with your rights to your property. And you don't want to pay the potentially ruinous cost of defending your property rights in court.

A title insurance policy is your best protection against potential title defects, which can remain hidden despite the most thorough search of public records and the most careful escrow or closing.

For a one-time premium, a title company agrees to reimburse you for loss due to defects existing prior to the issue date of your policy, up to the policy amount. And, should it be needed, the policy also provides for the cost of legal defense of your title. The standard coverage policy protects you against such potential defects as:

I'm going to star (*) the ones I've got personal experience dealing with so you can tell how common some of these problems are.

*Forged deeds, mortgages, satisfactions or releases. *Deed by person who is insane or mentally incompetent.

Deed by minor (may be disavowed). (DM: I don't have after the fact experience with this only because the preventative systems on this are so strong)

*Deed from corporation, unauthorized under corporate bylaws or given under falsified corporate resolution.

*Deed from partnership, unauthorized under partnership agreement.

*Deed from purported trustee, unauthorized under trust agreement.

Deed to or from a "corporation" before incorporation, or after loss of corporate charter.

*Deed from a legal non-entity (styled, for example, as a church, charity or club).

*Deed by person in a foreign country, vulnerable to challenge as incompetent, unauthorized or defective under foreign laws.

*Claims resulting from use of "alias" or fictitious namestyle by a predecessor in title.

*Deed challenged as being given under fraud, undue influence or duress.

*Deed following non-judicial foreclosure, where required procedure was not followed.

*Deed affecting land in judicial proceedings (bankruptcy, receivership, probate, conservatorship, dissolution of marriage), unauthorized by court.

*Deed following judicial proceedings, subject to appeal or further court order.

Deed following judicial proceedings, where all necessary parties were not joined.

Lack of jurisdiction over persons or property in judicial proceedings.

*Deed signed by mistake (grantor did not know what was signed).

*Deed executed under falsified power of attorney.

*Deed executed under expired power or attorney (death, disability or insanity of principal).

Deed apparently valid, but actually delivered after death of grantor or grantee, or without consent of grantor.

*Deed affecting property purported to be separate property of grantor, which is in fact community or jointly-owned property.

Undisclosed divorce of one who conveys as sole heir of a deceased former spouse.

*Deed affecting property of deceased person, not joining all heirs.

Deed following administration of estate of missing person, who later re-appears.

Conveyance by heir or survivor of a joint estate, who murdered the decedent.

Conveyances and proceedings affecting rights of service-member protected by the Soldiers and Sailors Civil Relief Act.

Conveyance void as in violation of public policy (payment of gambling debt, payment for contract to commit crime, or conveyance made in restraint of trade).

*Deed to land including "wetlands" subject to public trust (vesting title in government to protect public interest in navigation, commerce, fishing and recreation).

Deed from government entity, vulnerable to challenge as unauthorized or unlawful.

*Ineffective release of prior satisfied mortgage due to acquisition of note by bona fide purchaser (without notice of satisfaction).

*Ineffective release of prior satisfied mortgage due to bankruptcy of creditor prior to recording of release (avoiding powers in bankruptcy).

*Ineffective release of prior mortgage of lien, as fraudulently obtained by predecessor in title.

*Disputed release of prior mortgage or lien, as given under mistake or misunderstanding.

Ineffective subordination agreement, causing junior interest to be reinstated to priority.

*Deed recorded, but not properly indexed so as to be locatable in the land records.

*Undisclosed but recorded federal or state tax lien.

*Undisclosed but recorded judgment or spousal/child support lien.

*Undisclosed but recorded prior mortgage.

*Undisclosed but recorded notice of pending lawsuit affecting land.

Undisclosed but recorded environmental lien.

*Undisclosed but recorded option, or right of first refusal, to purchase property.

*Undisclosed but recorded covenants or restrictions, with (or without) rights of reverter.

*Undisclosed but recorded easements (for access, utilities, drainage, airspace, views) benefiting neighboring land.

*Undisclosed but recorded boundary, party wall or setback agreements.

*Errors in tax records (mailing tax bill to wrong party resulting in tax sale, or crediting payment to wrong property).

Erroneous release of tax or assessment liens, which are later reinstated to the tax rolls.

*Erroneous reports furnished by tax officials (not binding local government).

Special assessments which become liens upon passage of a law or ordinance, but before recorded notice or commencement of improvements for which assessment is made.

Adverse claim of vendor's lien.

Adverse claim of equitable lien.

Ambiguous covenants or restrictions in ancient documents.

Misinterpretation of wills, deeds and other instruments.

Discovery of will of supposed intestate individual, after probate.

Discovery of later will after probate of first will.

*Erroneous or inadequate legal descriptions.

*Deed to land without a right of access to a public street or road.

Deed to land with legal access subject to undisclosed but recorded conditions or restrictions.

Right of access wiped out by foreclosure on neighboring land.

Patent defects in recorded instruments (for example, failure to attach notarial acknowledgment or a legal description).

Defective acknowledgment due to lack of authority of notary (acknowledgment taken before commission or after expiration of commission).

Forged notarization or witness acknowledgment.

*Deed not properly recorded (wrong county, missing pages or other contents, or without required payment).

Deed from grantor who is claimed to have acquired title through fraud upon creditors of a prior owner.

The ones below this require extended coverage from a title company

Deed to a purchaser from one who has previously sold or leased the same land to a third party under an unrecorded contract, where the third party is in possession of the premises.

Claimed prescriptive rights, not of record and not disclosed by survey.

*Physical location of easement (underground pipe or sewer line) which does not conform with easement of record.

*Deed to land with improvements encroaching upon land of another.

*Incorrect survey (misstating location, dimensions, area, easements or improvements upon land).

*"Mechanics' lien" claims (securing payment of contractors and material suppliers for improvements) which may attach without recorded notice.

Federal estate or state inheritance tax liens (may attach without recorded notice).

Pre-existing violation of subdivision mapping laws.

*Pre-existing violation of zoning ordinances.

*Pre-existing violation of conditions, covenants and restrictions affecting the land.

Post-policy forgery against the insured interest.

*Forced removal of residential improvements due to lack of an appropriate building permit (subject to deductible).

Post-policy construction of improvements by a neighbor onto insured land.

Damage to residential structures from use of the surface of insured land for extraction or development of minerals.

Many people talk themselves out of title insurance, claiming it won't happen to them. They think they've just saved hundreds to a couple of thousand dollars. And they have, if none of the above things (as well as others) happens. But the reason you carry insurance to insure yourself against losses that you cannot afford. If you lose that bet, you've potentially lost the entire property, and many times this is precisely what happens. Mr. Jones owned the property for many years before he died, and his estate sold to Mr. Smith who lived in it for fifteen years and then sold it to you. But Mr. Jones had a quickie marriage before he went off to World War II, forgotten but never legally dealt with. That woman's son finds the marriage certificate and checks to see if Mr. Jones left any property. Guess what he finds. Guess who may really own "your" property?

If I have a property, I'll pay a second time if I have to, in order to make certain there's a policy of title insurance covering me. This stuff happens.

Caveat Emptor

Original here

From an email:

I was wondering if you could tell me whether the following ways to save on interest are actually possible. If they are what are the penalties typically associated with these suggestions. I know you have mentioned a pre-payment penalty but what amount is reasonable?

1) Pay a certain amount over your monthly mortgage payment to pay your mortgage off sooner, pay more in principle, and to save on interest. Example: Your minimum monthly payment is $2000 so you pay $2200 a month instead.

2) Pay your mortgage twice a month so that more principle is paid off before interest catches up. Another nice thing about this is that most people are paid twice a month.

Prepayment penalties are something that is associated with the loan your loan officer chooses for you when you sign up. They become set in stone when the documents are signed, the loan is funded and the documents are recorded.

Sad to say, only a very small minority of clients ask about pre-payment penalties at sign up, and judging from my experience with people at a later time, most people either cannot spot it in the documents (there should be a section entitled something like "Pre-Payment" or "Borrower's Right to Pre-Pay". On the other hand, you need to read the whole Note that you're signing enough to understand what every piece says).

As I've said in Mortgage Markets and Providers and Yield Spread Explained, pre-payment penalties are a function of the market you're shopping in. Not necessarily the best market you can shop in, but most loan officers are going to be looking to make money, not necessarily to get you the loan that's really the best possible loan. Pre-payment penalties add to what they get paid, and it's invisible to the client while you're getting the loan unless you go looking for it. In all markets, there is a trade-off between what you pay in up-front costs to get a given rate on a given type of loan, and what rate you get. Adding a pre-payment penalty (or not removing one) adds to the loan provider's commission, sometimes multiple points, and out of this they give you back a half point or so to make their loan look more competitive. A Good Question to ask and catch many loan officers off-guard is "and what is it without any pre-payment penalty?"

Pre-payment penalties are a thing to avoid if you reasonably can. On the other hand, circumstances can force you to accept one. No loan officer works for free, and if about all you've got is the money for the down payment, accepting a two year pre-payment penalty (meaning it is in effect for two years) can get the loan officer paid while you still get a affordable rate at a cost that is within your means.

Here in California, the maximum pre-payment penalty is six months interest, and that is the industry standard for when there is a pre-payment penalty. A few lenders will pro-rate it, but for the vast majority, they will charge the same penalty on the day before it expires as on day one. This is pure profit, and they're generally not going to turn down pure profit any more than most people will turn down a bonus. So if your interest rate is 6 percent, you're going to pay a 3 percent pre-payment penalty if you sell or refinance before the pre-payment penalty expires. For Negative Amortization loans, the pre-payment penalty is based on the real rate, not one percent, of course.

On some loans, the pre-payment penalty is triggered by paying any extra money. One extra dollar and GOTCHA! But probably eighty percent or so give you the option of paying it down a certain amount extra each year, usually 20 percent of the principal at year's beginning, without triggering the pre-payment penalty. This amount INCLUDES the normal pay down of principal via the monthly payments, so if you have a $200,000 balance at the start of the year, a lump payment of $40,000 is going to trigger the penalty because the regular payments will then push the pay down over 20%.

Now as to the alternate payment schemes you mention, the first method, paying extra, is very possible and recommended with most mortgages. Anything extra you pay should be applied directly to principal. Especially in the early years of the mortgage, this has a multiplier effect, as now that you don't owe that money any more, your interest charges in the future will be less so less of your payment goes to interest and more to principal. On a $300,000 30 year mortgage at 6%, your monthly payment is $1798.65. Of this, $1500 is interest - which you're paying just to break even - and 298.56 is principal, which actually goes to pay off your loan. Let's say you pay $200 per month extra. If you're one of those extremely rare people who actually pay off your mortgage, you'll be done in 278 months - 82 months early. Almost 7 years. The interest you pay drops from $347,514 to $256,000 - you saved $91,514 in interest charges by paying $200 per month early.

If, as is far more likely, you refinance after 2 years, instead of owing $292,404, you'll only owe $287,284, a savings of $5120, which means you owe $5120 less on your refinance, and might get better terms because of it. Or you have $5120 more in your pocket if you sell. So it's only a 7.5% rate of return - it is guaranteed. If this mortgage outlasts 95% of all loans and makes it to five years - sixty months - you'll only own $265,114 instead of $279,163, a difference of $14,049. This is money in your pocket or money you don't owe on the refinance, which you're not paying fees on, and which might get you a better deal. Or it's $14,049 more from the sale of your property to buy another one. It's a 17 percent overall return on every penny in you added in five years, including the last payment you made. That's better than you'll do with CDs with the first month's money.

Suppose you only make one extra payment, once. Let's say you make an extra payment at the end of the month when you buy or refinance instead keeping the money in your checking account until the end of the next month. Making that one payment saves you more than five months at the end of your mortgage if you keep it the full thirty years. Let's say you just pay $200 extra once, that first month that you actually make a payment. You owe $225 less after 24 months, $270 less after 5 years, and $1207 less in the last month of your loan (assuming you keep the loan the full thirty years).

Furthermore, the higher your interest rate, the more difference these payments make.

Your second question, about paying your mortgage twice a month, is trickier, and here's why: What most people who do this are doing is actually making payments every two weeks, not every half month, which means you're making an extra payment per year in pure principal. To separate the two phenomena, let's drag the calculator out. Cut the interest rate in half, cut the payment in half, and double the number of payments. Punch in n=720, i=3%, and let's see what happens. The payment comes out to $898.92. Double this to $1797.85. This is about 81 cents per month difference. If you pay half of the $1798.65 twice per month, you shave less than half a month off of your payment schedule.

On the other hand, make 13 payments in 12 months, and (to make things simple for a simple calculator) that's roughly equal to making payments of $1948.54 per month, which has you done in the 295th month - almost five and a half years early.

So you see, the twice a month schedule really does comparatively little for you - it's the fact that you are making an extra payment per year that really helps in this case.

So with some banks charging hundreds of dollars to sign you up for things like this (I know of lenders who charge $400 and up just to sign up), I'd suggest instead to instead spend the sign-up money on a direct pay-down of your mortgage (providing you don't have one of those "one extra dollar" prepayment penalties), and keep making those monthly payment with a little extra on the side instead.

This "service" banks provide for their customers is nothing more than a cash-cow fee to pad their own bottom line, all for something the vast majority of borrowers have the right to do for themselves for basically nothing.

And for the rest of you out there, I say the same thing I said to this person "Please ask if you have further questions you'd like answered."

Caveat Emptor

Original here

My lender told me that there is an application fee?

He said an application fee of $250 and then we'll need the appraisal fee and of course we'll need an inspection. Does all this sound legit, is there always an application fee?

If they are asking for upfront money, they are trying to hold your money hostage to commit you to the deal. Most of the companies that do that know that 1) Better rates are available to the public and you're likely to find something better if you try, 2) they're going to hit you with a bunch of extra stuff they didn't tell you about at the end.

Never pay for more than a credit report up front. You should want to choose the appraiser if you're going to pay them - that way you own the appraisal, not them. Just because Home Valuation Code of Conduct now prohibits this doesn't mean you shouldn't want to do something that is in your best interest (I do not believe HVCC could withstand a serious legal challenge). You should also choose the building inspector if you've got to have one - most refinances don't, but only a complete idiot wants to spend that much money to buy a property and doesn't pay a few hundred for the inspection first. If the lender orders them, they own them. They have to give you a copy, but you can't take it to another lender to use if this one hoses you.

Now, at closing, you can expect to pay some fees. How much depends upon a lot of factors. I tell people with entry level single family residences to expect about $3500 total in actual loan costs, plus whatever points are paid to buy the rate down, plus the expenses related to the purchase, which vary a lot. By the time you're done with title and escrow and appraisal and lender's fees, that's what it really is. I'd rather tell the truth and guarantee the total, but since most people don't realize how many games prospective lenders can play, quite often the person signs up with the person who talks a good game but won't guarantee the quote. Usually you can choose a higher rate to get some or all of your costs paid (I love doing zero cost loans myself, and they actually are a good thing for most clients), but there is ALWAYS a trade-off between rate of the loan and cost of the loan.

Nonetheless, the idea of money you pay before the loan is ready is to commit you to the lender. People understand checks that they write in their gut. That $1500 check for the deposit on the loan is more important to many people than the $450,000 loan that comes with it. As evidence, I have offered people loans that were more than $5000 cheaper on exactly the same loan type and rate, but people would not sign up for my loan because they didn't want to "lose" that $1500 deposit. I've shown people better loans at lower rates on exactly the same terms that saved $1500 per year in interest, and they wouldn't switch. Why? Because they are thinking about that money that came out of their checking account, that they scrimped and saved and set aside laboriously over a period of months, not the money in the loan, which is just as real, but they haven't had to save it, and they don't realize that it is real in the same way as that deposit check.

So lenders who want large deposits typically do so because they know that their loan will not stand the light of scrutiny, and competition from other lenders, so they want to tie you to them emotionally, with money you don't get back if you switch lenders. Money that you've physically got in your checking account, money that you understand on the gut level. Be very wary of this sort of lender. Seeing as there are many loan providers who will do your loan without requiring such a deposit, I would suggest you find one of them to do your loan instead.

Caveat Emptor

Original here

Most people, particularly first time buyers, want 100% financing or as close as they can get. Actually, most first time buyers don't have a down payment and couldn't put a significant down payment (5% or more) if they had to. And since 5% of $400,000 is $20,000, and 10% is $40,000, that's a significant chunk of change. Especially when you think in terms of lifespan to save: a family that makes San Diego area median income ($69,700 per year when this was written) and manages to save a full 10% of their gross salary - $580 per month - takes almost three years to save a $20,000 down payment, and 69 months to save $40,000! Never mind closing costs, which can be anywhere from another $4000 on up, depending upon how many points you want to buy the rate down. Considering the psychology of the average American, these time estimates are hopelessly optimistic.

For at least ten years, 100% financing had been available, and the means to qualify for it had been routine. Since the vast majority of all buyers need a loan, this availability has been priced into the market. Indeed, it was one of the early factors that led to a run-up in prices in many areas. Nor is there anything wrong with 100% financing, per se. When you look at fully amortized fixed rate loans done on a full documentation basis, the levels of default and lender loss are not significantly higher than the most hidebound "traditional" loan standards.

It was only when the standards became so relaxed that this was too much to ask for that everybody got into trouble. There is a reason why less sustainable loan types - interest only, short term hybrid ARMs, and negative amortization loans had always required a much larger down payment - greater risk of default! Lenders, under pressure from the government under CRA and with an eye on selling the loans to Wall Street figured there was no down side to loosening loan standards until even "fog a mirror" was asking a little bit much. The assumption was that prices had gone up by double digit percentages several years in a row, so "of course" they were going to keep going up forever - and ignored anyone who tried to tell them otherwise.

Well, we all know by now how that one turned out. Unfortunately, everybody in positions of responsibility at various lenders (and the regulators as well) went into full blown damage control mode - by which I mean playing CYA by slamming the barn door after all the horses have departed. For good measure, they've locked the doors to all the other buildings as well - even the ones that never held horses. Among these are full documentation 100% loans.

The best and cheapest way to get 100% financing was split the amount into two loans - a first for 80% of the value and a second for the remaining 20%. Unfortunately, as I have been reporting for some time now, second mortgage holders found out that they were the ones really holding the sack for all of this, and stopped approving anything over ninety percent of value. As I said then, this made things worse, especially for everyone trying to get out of unsustainable loans and those who lent to them. When someone buys with a loan they are going to need to refinance within a set period, and lenders suddenly pull all refinancing programs that could have refinanced them, that property is going to be a distress sale. People can sit in denial right up until the eviction notice, but that's what's going to happen. Multiply this millions of times over, and you have all of the problems that have plagued real estate since the bubble burst.

The second way to get 100% financing was with Private Mortgage Insurance. PMI rates had gotten very cheap when they were competing with another option for 100% financing. It was still more expensive than splitting the amount borrowed into two loans, but it was possible to get PMI even after second mortgage holders bailed out of the market. If the debt to income ratio was lower for A paper, it only made a marginal difference on qualification of approximately 10%. Even when PMI rates suddenly jumped, things were still manageable. The decline we had already had here in San Diego more than covered the additional cost.

But lenders have withdrawn all 100% financing programs except for the VA Loan.

So what happens when 100% financing suddenly isn't available? People who could have bought and were willing to buy suddenly cannot because they do not have the necessary cash. This constricts demand for housing, as there are fewer people able to qualify for the loans. Prices fall, when they would have been stable otherwise. Because of prices falling below what is owed, people are unable to refinance. Whether it's because they cannot refinance or there was just no way they could really afford the property in the first place, people who sell are unable to sell for enough to pay lenders in full, and those lenders, predictably enough, lose money they otherwise would not have. Poetic justice to a degree, but the lenders aren't the only ones paying. Just like when things were going crazy in the upwards direction, this is all a vicious cycle - except in the other direction

Furthermore, even if you are able to qualify, via one of the governmental or quasi-governmental programs, the added cost constricts what you can afford. If your family makes area median income ($69,700 in 2008), you can't afford a $300,000 property at 6%, even if you have no other debt. About $270,000 is the absolute limit.

Who are the big winners? Two sorts of folks, and for either one this is a real buying opportunity, the sort where if you buy now, you will be very happy in a few years. The first is people eligible for a VA loan. That's the only 100% financing program available right now, and since there is no PMI on VA loans, it can really make a difference as to what you can afford as well. Someone eligible for a VA loan making area median income can stretch nearly 20% further in terms of purchase price than someone without, and I don't know of any income limits on VA loans. Assuming the new limits come in, a family making $100,000 per year will qualify for $500,000 with no money down on a VA loan. When you can qualify and other people can't, that's negotiations leverage. The current owners can keep waiting and hoping for a prospective purchaser in the who makes $120,000 or more per year, but that's about two more standard deviations. Look up the normal probability distribution - at $100,000 per year you're already looking for about one family in 10,000 who might qualify, and most of those already have the property they want.

The other winners are people who have cash for a down payment. All this stuff about PMI doesn't constrict people who don't need PMI, or who at least have enough so that they don't need 100% financing. If you get up to 10% down payment, now you've got the possibility of a second mortgage, and once again, PMI goes away. So if you have a 10% down payment on a $400,000 property, not only are you only borrowing $360,000, but there's no PMI on that money, either. This saves you $480 per month on your first mortgage, $453 per month on PMI, and if it costs you about $293 for a second mortgage, you're still saving $640 per month, meaning you can qualify as if you were a purchaser who makes an extra $1420 or more per month - $17,000 per year!

Suppose you don't fall into one of these two categories? There are about four alternatives. First, you can accept purchasing a less expensive property, which is probably the smartest alternative for most folks. The best way to save for a down payment on the property you really want is to buy something less expensive now. People call this "settling" in a demeaning way as if there's something wrong with financial sanity - a sentiment I do not understand. Second, you can wait until you have saved the difference, fighting against leverage the whole time. Most folks never save enough to make the property more affordable. Third, you can find an owner with enough equity to carry back a large part of the transaction, a consideration for which they are going to demand a much higher price. For one thing, that money is their down payment for their next property. To say this is not a good way to get a bargain on your property purchase may be the understatement of the year. Finally, you can do completely without - in other words, stay a renter until the situation changes. Now every time I write one of these articles, I get some clueless watchers of immediate cash flow who have no understanding of leverage, real estate markets, or the fact that the crashing of the market is putting significant upwards pressure on rents, for two reasons. First, the people who have lost property have no choices except renting or homelessness for at least two years. Second, the leverage that was working in the landlord's favor these last ten years, encouraging them to keep rents relatively cheap, has disappeared with the housing bubble. Locally, I've seen the average rental price in the areas I work jump by $150 per month or so just in the last year, and this is just the leading edge of the adjustment. Paying attention to only the cash flow as it exists now is a way to make a bad decision - you need to look at the entire situation as it is going to be for the rest of your life.

Property values are going to come back. For one thing, I still expect 100% financing alternatives to become more available again. Since their absence had a negative effect on the markets, what's going to happen when they become available again? If you answered, "A one time shift back upwards in property values," give yourself a pat on the back. If you followed it with, "Which will have the further psychological effect of causing everyone who's been putting off purchasing to rush back into the market for fear of getting priced out again, putting further demand and causing another shift upwards in pricing," then you have some memory of how the general population chases last year's returns and the effects thereon. Fear and Greed, just like last time. Some people never learn. But if you buy before the great mass of humanity gets their fear and greed up, that will amount to a nice large chunk of change in your pocket, especially if you then want to move up. I expect San Diego to at least recover most of what we've lost very quickly once the average person gets it into their head that current price levels are unsustainably low, which they are.

Caveat Emptor

Original article here

I get the same junkmail and spam most of you folks do. They don't know who I am when they send it out. It's just that I know what's going on behind the scenes with this stuff.

So I thought I'd get out my calculator and deconstruct what's going on with the advertisements I've gotten in the mail.

The first one starts with "30 year fixed rate 5.125% (APR 5.42)" Well, computing that out, it converts to $10,100 of nonexcludable fees on a $300,000 loan (UPDATE: actually, I discovered later in light fine print that the APR is based on a loan amount of $359,650, the so called "maximum conforming" loan at the time, which means the imputed number of points are slightly higher). This works out to 2.71 points, assuming they get it done for the same $1700 or so of excludable fees everyone else has (Title, Escrow and appraisal charges are excluded from APR computation). I had that rate at 2.25 discount points at the time, so they're making about half a point extra if there's no prepayment penalty. So if there's no prepayment penalty that's not a bad loan, except that I called and found out there's a five year prepayment penalty on it. That's a good healthy (or unhealthy, depending upon your point of view) cha-ching of about two and a half or three points to the loan provider. Not to mention that the postcard was "old and the rates are higher now" according to the voice on the phone I talked to at the time, "so you should start the loan now before the rates go higher." The lowest rate they could do as we were talking? 5.375, which I could do for 0.75 discount points as I was talking to them - giving them as a loan provider almost two points in their pocket without the 2.5 to 3 points for a five year pre-payment penalty.

Then, after a faint dotted line designed to be overlooked, they tell you all about payments. $250,000 is $632.14 per month, $300,000 is $758.57 per month, etcetera. Going over to the calculator (even though I can tell you what's going on without it), I get a negative interest rate when I punch in thirty year amortization. I shouldn't need to explain to adults that something is wrong with that picture. Well, what's likely going on is that this is a forty year amortization, and indeed, when I punch in a forty year amortization I get an interest rate of 1%. So on top of being on a forty year amortization, the payments they are quoting are on a negative amortization loan. It is neither on the same rate nor term as the previously talked about loan. And that's the purpose of that thin dotted line that's designed to be missed. They want you to think payment B is connected to loan A, when in fact they are talking about a completely different loan. And indeed I can find that in small, very light print on the other side of the card, under some darker print about about $1000 "Best price guarantee." Voice on the phone explained that, "If you close and subsequently prove you qualify for a better rate with someone else, we'll pay you $1000." Well, first off, if they pay you $1000 to make three points on the loan, they are still $8000 plus to the good, and if I were the sort to be giving that sort of guarantee I'd have no problem wriggling out of it on any of several fronts such as "rates are lower now - why don't you refinance with us (so we can hose you again)". And if you refinance or sell within five years, you're out over $7600 in prepayment penalty. Since 95% of all clients sell or refinance within five years, if you've got to have the 5.125% rate, statistically you're better off paying somebody honest one point of origination as well as the lender discount points for no prepayment penalty. One point of origination works out to a little over $3000 on a $300,000 loan. This is less than the difference between the loan they advertised and the loan they theoretically had when I called the day after I got the card.

But the rate is voodoo magic to most people. Theoretically, you've got to be able to understand some mathematics to graduate high school, or at least be able to figure out how to get numbers out of a calculator. Nonetheless, what most people "buy" loans on is payment. This is well known factual information to everyone in the real estate industry. Very few people ever call saying, "Give me that rate." What most customers want is the payment. And when the advertising apparently links the cheap payment on a negative amortization loan to the "Thirty year fixed rate of 5.125%", most companies are doing what I call "lying by association". Most clients want to believe that the one goes with the other and that the listed item is a pretty good bargain, when in fact I have shown that not only do they have nothing to do within each other, but also that they are both the sort of loan I would wish my worst enemy in the loan business would get for some enemy of civilization like Chairman Mao. Then when Chairman Mao gets a lawyer (and enemies of civilization never have a problem getting competent lawyers), I get to watch the whole thing blow up on both of them from safe on the sidelines.

Oh, and this postcard also talks about "skip one or maybe 2 payments." As I cover in Prepaid Interest and Why You Never Really Skip a Mortgage Payment, you never really skip any payments, EVER. You can either pay them out of pocket or roll them into the costs of the loan. Anybody who represents otherwise is lying, with malice aforethought, unless they're going to whip out a checkbook and pay it out of their pocket. How likely do you think that is?

To avoid this trap: First, don't "buy" loans based upon payment. Second, get (or find) a calculator and use it, or even learn to do the calculations yourself. Third, ask the prospective loan provider the hard questions, and make sure that the question they answer is the one that you asked. Fourth, Shop Shop Shop around for a loan. And apply for a backup loan. Finally, always realize that with the kind of money loan providers make from loans, they will promise anything to get you to call, do anything to get you to apply for a loan, and even though they never have any intention of actually delivering what's on the Good Faith Estimate (or MLDS in California) there is little chance of you being able to get any kind of legal satisfaction from them.

Caveat Emptor

Original here

I am buying a house. I signed the contract but the seller said contingent to sell until she buys new house?

Is that normal?

People do it. It's smarter to avoid the stress and complications of dealing with both at once, but there's nothing wrong with a contingency sale, so long as you agreed to it in the contract. Note that once you have a fully negotiated contract, you can't just add a contingency to it. It has to be agreed to before there's a valid purchase contract, and if it isn't agreed to before then, the question becomes, "What concessions is the other side going to demand for this?" There will always be concessions, but by waiting to negotiate them after the contract is complete, you lay yourself open to a suit for specific performance. You agreed to that contract. Just because you forgot something important (or if you intentionally omitted it), does not mean you can just tack it on as an extra consideration, any more than the other side can unilaterally change the purchase price by $10,000.

Contingency does add a lot of complexity and not an inconsiderable amount of cost and uncertainty to the process, however. The buyer shouldn't lock their loan until they know when you can fund it, and if they don't know yet, this means the loan sits and sits, perhaps increasing in rate and cost. If you lock it, it definitely increases in rate and cost - the longer the lock, the more expensive it is. This is an exception to the rules for when to lock the loan. There's also the issue of whether your seller will qualify for the loan on the new residence, or the purchasers of your buyer's soon to be former residence can qualify for their loan. Not to mention the anxiety of whether you will qualify for your loan in time for the transaction to close so they can get their home, and I can go on.

There are better alternatives for this situation, and if your agent didn't give you a couple of ideas during the negotiating process, well, let's just say there are better ways to handle it, especially right now when you cannot afford to irritate or lose any buyers.

A contingency sale is most often for the convenience of the seller. Whereas this it doesn't make a lot of difference in a seller's market where as soon as you put the sign in the yard you get three offers, a buyer's market is something else again. By being unwilling to accommodate a particular buyer, you may not get another offer. I understand very well not wanting to move twice, but the person who is willing to work a little harder or go through some extra inconvenience usually gets it returned in the form of cash when the transaction is over. How much is dependent upon the competition of the moment. It can make your property a lot more attractive, and mean a significant difference on the sale price, if you're willing to cooperate with the prospective buyer on not making them wait while you find a new property to buy. In a market like today's, where buyers have all the power, it can make the difference between selling for a good price and not selling at all. Any time you find yourself unwilling to do something that one prospective buyer wants, you run a high risk that you won't get another, or won't get another as good.

Some buyers want contingent sales as well to allow them to sell their current property. This is even harder to accommodate than on the seller side, because there's no way to tell when they are going to actually sell it. If they're not marketing it right, they won't get any offers. Even if they do get an offer, what happens if the one they choose can't actually consummate the deal? Or if the only offer they get isn't nearly good enough to allow them to close the deal they have going with you?

Just as being willing to work with a buyer without demanding a contingency will often mean selling more quickly and for a better price, a willingness to grant a buyer their contingency can also make money. You can ask for a larger deposit, a higher sales price, or for the right to continue to market the property - so you've got this offer, or a better one if that comes along, as they are not likely to be able to perform when you drop that Notice to Perform on them because you now have a better offer. If they could have performed, they would have already performed. If they really need that contingency, they've got to deal with the same market you're dealing with!

When there is a strong buyer's market, if you are willing to do what it takes, you are competing more strongly for the available buyers. Similarly, if you as a buyer have fewer needs that you ask the seller to cooperate with, chances are excellent that you will get a better price. Remember that there is a reason why he who has the gold makes the rules - because he's going to be shelling a good amount of it out in order to get his way on other things. If you want the best price as a buyer or seller, be willing to forego contingencies. However, being willing to work with someone in a contingency situation can mean thousands to tens of thousands in your pocket.

Caveat Emptor

Original here

I am seeking to sell my properties to my tenants. I want to create a mortgage and then sell the mortgages. Properties are undervalued in this area as they have been historically fixer-uppers. Ours are in very good condition due to major renovations. This would interfere with a regular mortgage, but temporarily holding one might eliminate this problem. Is there a way to do this or is this not possible?

The first question one would ask is why you would want to do this. The answer, easily enough, is that this way you aren't chained to lender requirements as far as the appraisal goes, so you can sell the property for more. When you've got a property above the neighborhood in quality, it's very hard to get an appraisal for as much as you might be able to get at top dollar. Why? Because there's nothing else in the area as good. This phenomenon has a name: Misplaced improvements. Over on my other site, I've spotlighted several of these. They are not good investments, but they are an excellent way for buyers to get a significantly better home for not much more in the way of purchase price. If you've got a beautiful 5 bedroom home with 3000 square feet and all the amenities, and nothing else in the neighborhood is over 1500 square feet, and kind of run down at that, they are still your comparables (comps). If I understand the rules correctly, the appraisal can only be a maximum of 25% over the comps. So if everything else in the neighborhood is selling for a maximum of $400,000, this one can't appraise for more than $500,000, even if it might be worth $800,000 in a neighborhood of like properties. Best property in a neighborhood: Bad investment (relative to other properties), but a good way to find a great home for your family to live in at a bargain price.

Furthermore, you're offering something useful to buyers, and so have good prospects of getting a higher price than you would otherwise. This is a potential benefit to buyers, that they can get approved for this loan where they couldn't get approved for loans they couldn't be approved for otherwise. There's a good reason for this: They can't afford it.

So this person wants to get around that, and has an idea as to how. Forget lender standards, he'll just make the loan himself. Well, he is permitted to do this. Willing buyer and a willing seller agree upon the price, and since a regulated lender isn't involved to force the evaluation into a LCM, or "lesser of cost or market" format, the appraisal becomes irrelevant. Buyer and seller agree upon a price, and part of the transaction is that the seller carries the note.

The first issue is the "due on sale" clause of most mortgages. So if you sell the property in this manner, any mortgages you have become due when you sell the property. No problem if you own it free and clear, or if you've got the cash to pay it off somewhere. A large problem if you don't. It is possible that some lenders may allow the loan to be assumed, and to put the loan you are actually holding behind their mortgage as a second trust deed. You then have justification for charging a higher rate of interest on the portion you actually hold. Cool, from the seller's point of view. Not so hot from the buyer's point of view. Remember, they've got to actually make those payments. Some lenders may also agree to modify their trust deeds so that you're still holding them, but they become "pass-through" type investments. Expect the lender to require a modification that raises the interest rate in this instance.

Let's ask the next question: Why would the tenant want to pay more than the area is worth? Well, I wouldn't, but it does happen. There are "Rent to Own" appliance stores everywhere, and PT Barnum underestimated by several orders of magnitude. Many people think that for some unguessable reason that they are not qualified to buy a property, or that they are less qualified than they are, and many loan officers and real estate sharks prey upon this sort of buyer. It is for this reason among many others that I counsel everybody to shop their loan around and find a good buyer's agent, who should inform you as to the issues involved and represent your interests, so that if you end up doing it, you walk in forewarned and forearmed, and have someone with a fiduciary responsibility to you and only to you that you can and should sue if they don't. Because buying under these conditions is not likely to be in the buyer's best interests in the kind of situation envisioned by this seller. The buyer ends up owing more than the property is worth according to a lender, making it difficult to refinance, even if general values have increased. I would certainly want some major concessions in price or interest rate in order to consummate the loan. Note that it isn't wrong of the seller to do this as long as you do not misrepresent the situation; everyone wants the best possible bargain and both sides are entitled to pursue that best possible bargain, and sometimes, one side does a much better job than the other.

Let's assume that all of the above has been done. Willing buyer, willing seller, price agreed, exchange made and transaction done. We are going forward to the seller wanting to sell the note. Can they expect to be able to sell?

The answer is that yes, the holders of the notes can sell, but in my estimation they would be better off not doing so, other factors being equal. You see, all of the other lenders out there selling their notes have a track record. Even lenders just starting out can document their underwriting standards. Furthermore, CMOs and MBSs are normally sold in lots of $50 million or more - in other words, pretty good risk diversification, as that is at least 100 different loans from 100 different borrowers in 100 different areas at a whack, and the chance of that lender taking a net loss is far less than if there are only ten or twelve. Furthermore, as most lenders can document their risk management practices, and the ones who have been at it for a while have a track record of thus and such a foreclosure rate, and thus and such a loss write-off rate, they get a price for their notes that is commensurate with the value. In most cases, pretty darned good, netting three or four percent over value after paying the security brokerages who act as go-betweens. Do this six or ten times per year, you make some pretty decent money even after paying for everything it takes to do those loans.

In the case under consideration, however, those security brokerages are going to charge about the same amount as they charge on much larger issues. After all, they have to do basically the same work, so they want the same pay. Furthermore, you're going to have some real trouble convincing prospective buyers that your risk management underwriting is acceptable, as you are missing at least one of the most basic protections for lenders that there is: the assurance that if everything goes south, they will be able to market the properties for something approximating their investment. This goes back to that missing appraisal. Lenders are going to require that you perform an appraisal in order to sell the loan to them, and since the appraisal will come back with the same value that you were trying to ignore in the first place, and the price they will offer for the loan will reflect that, and they will offer far less for those notes than you have at risk. All of them are in the same area, and all of them have the same issues. A lot less diversification of risk than what they normally see, and with other issues as opposed to loans underwritten by regulated lenders, as well.

If you can sell enough properties in one area, the comparables will start to reflect these values, for which neighboring properties will certainly thank you, but the real point is that after a few of these sales, both in the MLS and publicly recorded in a short period of time, your appraiser can start to get value, at which point regular lenders start being willing to sign off on them, if you've got a good appraiser who can justify choosing the comparables that they did. If you're selling out a sixteen unit condominium conversion, most of them should be "model matches," but if they are all single family residences of varying floor plan and not particularly close to one another, there are likely to be persistently difficult issues with appraisals.

The upshot is that in most cases, when you go to sell the note, you are going to take the same "loss" (of value), if not more, than you otherwise would have "suffered" by simply putting the property up for sale at prices that the neighborhood comparables would support, and letting the lender's chips fall where they may. Don't get me wrong; if you're in a position to hold the notes yourself it could be a great way to make some money, although you've got to watch out for foreclosure issues. But if you're planning to sell the notes, you're going to have to go through the same rigmarole that the regulated lenders do, and come out much the worse for the fact that you did not go through the same process that they would. As a final note, this has a lot in common with a couple of scams I've read about, and Wall Street is certainly a lot sharper than I am on that score. Just because you're being honest does not mean that the flinty-eyed people who invest other people's money for a living are going to believe you're honest, especially when what you're doing looks like a known scam to them. Oh, you'll be able to sell the notes, of that I have no doubt. But I sincerely doubt that you'll be able to sell them at face value or anything like it.

Caveat Emptor

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