July 2021 Archives


One of the things that has constricted the most with the current paranoid lending environment is the ability to use rental income to qualify for a mortgage. It seems that lenders are seizing upon any excuse to deny income from rental property. Since the denial of rental income usually means that debt to income ratio is too high to qualify for a new loan, this means that if all of the ts are not crossed or if any i is left undotted, you don't qualify for the loan you're applying for.

The lenders do not have an unreasonable concern. Due to bad advice telling people to walk away from upside-down real estate (Seriously, don't walk away from upside down real estate if you can avoid it), and the phenomenon of "buy and bail" the lenders are losing money. It is not unreasonable of them not to want to lose money, and if you're planning to stiff your current lender, that is quite rightly something they should expect you to disclose and they are within their rights to guard against. It is a reasonable position to take that someone who stiffs one lender is more likely to stiff a second. Indeed, the entire credit model currently used is based off this well-documented fact. If you're planning to stiff someone, even though you haven't yet, that's something a reasonable person would agree should be grounds for rejecting your loan.

However, loan standards have gone completely overboard. One phenomenon that was (barely) tolerable when it was just a requirement for government loans was the requirement for appraisals on all property a loan applicant might own. Even if there's a stable, fixed rate loan in place with a positive cash flow, for the last couple years FHA loans and VA loans have both required exterior appraisals on other property the loan applicant might own. Furthermore, the standard for acceptance is a minimum of 30% current equity! As you can imagine in the current market, even if someone bought six or seven years ago, this can be hard in a lot of cases. Someone with an 800 credit score and thirty year fixed rate loan on their investment property, and 28% equity cannot get credit for rental payments, no matter how positive the cash flow! Is that brain dead or what? These people have taken care of their credit rating their whole life, invested frugally, managed their money well, have no late payments, have a positive cash flow every month on the investment property, have eighty or a hundred thousand dollars net equity even in a severely trashed market (as in that's what they'd get if they sold their $400,000 property), and the situation is even completely sustainable because the loan they have now is never going to adjust. Nonetheless, because they are being tarred with a broad brush of general market trouble, these folks cannot afford to buy a new property in the area their employer moved them to, thousands of miles away. If you know of a set of circumstances more likely to encourage people to do something shady, I'd like to hear about it.

At a cost of $300 per rental property appraisal, that's a not inconsiderable additional cost, either, especially since it has to be paid before the new loan funds in most cases. However, due to limits built into government loan programs, this didn't strike all that often when it was just official government loans. Now that the feds have their fingers into Fannie Mae and Freddie Mac, however, it's been expanded to include the entire A paper loan market, as even non-conforming loans tend to copy the standards expressed by Fannie and Freddie in all particulars except loan amount. The only exceptions currently being made are in portfolio loans, with all of their disadvantages, chief of which is a higher interest rate. We should all send Chris Dodd, Barney Frank, and other unindicted co-conspirators (including Barack Obama) a note of heavily sarcastic thanks for preventing the overhaul of Fannie and Freddie long enough so the government could take them over after ruining them. Maybe if all the guilty parties would take the "campaign contributions" made to encourage them to do this and use it to ameliorate the fallout, it might amount to a tenth of a percent of the damage they did, and are continuing to do.

In short, getting credit for rental income on an investment property has now become incredibly difficult when you're applying for a loan. This has the effect of artificially constricting the real estate market, because the mortgage market controls the real estate market, and it also constrains the start of any recovery. People in good solid situations cannot qualify to buy investment property, and the loan standards are making it harder for them to qualify for buy a new primary residence if their employer has transferred them or they've had to move to get a new job. The alternative of selling the previous property has a lot of reasons against it right now (off the top of my head, adding to supply in an oversupplied market, turning temporary losses on paper into hard losses with permanent consequences, and having to give up extra equity in order to compete with other properties on the market). Lest you misunderstand the socioeconomic consequences of this, it isn't the rich folks with mansions in La Jolla, Rancho Santa Fe, or up on Mt. Helix who are getting toasted by this. The people getting hurt are the middle class folk in the corporate trenches who work hard, save their money, and have to go where their job is.

Once upon a time, this was a legitimate use for stated income loans (and "no ratio" or NINA loans as well). The lenders would (and will) only allow a 75% credit for rental income, despite vacancy ratios consistently in the 2-3 percent range in markets like San Diego and New York. It is very possible to be making money hand over fist, even showing such on your taxes, and still have the accounting lenders use in loan qualification show you as losing what was left of your shirt and undershorts every month. Unfortunately, once people figured out the illegitimate uses to which stated income could be put, it was only a matter of time until lenders stopped accepting stated income loans and regulators started regulating it out of existence. There are no longer any lenders offering stated income loans that I am aware of. Federally Regulated institutions cannot, and since people who needed them went to few remaining institutions like a shot, they got nervous about stated income being too large a proportion of their portfolio and stopped offering them.

If you need a loan but are unable to qualify because of these ridiculous requirements, what can you do? Well, most people can't really create thirty percent equity while at the same time coming up with a down payment. Even if they've got the cash for one, they don't have the cash for both. For those in such situations, there are some serious decisions that need to be made: whether to sell their former residence so they can buy now, rent for a while until they do have the required thirty percent equity, or pay higher rates for portfolio loans. A general knowledge of phenomena like leverage and the fact that Buyer's Markets Are A Great Time For Moving Up (but a lousy time for moving down) gives me general ideas of what's likely to be best, but every situation needs to be evaluated individually, and there is no such thing as a risk free move. Anything options you might have - including to do nothing - all have their downside risks.

If you can meet the basic qualification (30% equity on all investment properties), you can prevent something stupid from disqualifying you. All monies received on rental properties need to have a paper trail leading back to the renter - especially deposit checks. Do not accept cash if you can avoid it. If you can't avoid it, create a receipt and make a copy of everything, and have the tenant sign everything, including that receipt for money they are paying you. Include a clause about cooperating with any mortgage applications you may submit in your rental agreements. Lenders are requiring a canceled deposit check, and the only way to get that may be from the tenant. All leases should be for at least a one year period. I hate to say it, but it may be worth paying a management company to manage your property in order to have third party verification of the accounting, even though lenders are increasingly skeptical of any third party attestations. There have been too many attestations that did not tell "the truth, the whole truth, and nothing but the truth."

It isn't impossible to get credit for rental income, but due to the current environment, most lenders are making it far more difficult than it should be. Take action ahead of time, and be aware that having a rental property can severely impact your budget for buying a new primary residence, particularly if you don't have the required equity. Better to limit yourself in the first place to something you will be able to afford per current underwriting guidelines, because otherwise you are risking the deposit and any money you spend investigating that property. If the lender won't give you credit for rental income, a property that you thought you had good reason to believe within your reach can be completely beyond the realm of possibility.

Caveat Emptor

Original article here


A few years ago, underwriting standards were way too loose. Lenders were competing for loans, and the presumption was that with real estate having continued to gain in value, it was difficult to actually lose money on real estate. Needless to say, that presumption has now changed. Lenders are stuck on the horns of a dilemma. They have had massive losses on real estate loans, yet real estate loans offer a very large profit center. Furthermore, because The Mortgage Loan Market Controls the Real Estate Market, the more they constrict lending policy, the more money they lose on those people who have no choice but to sell. It's a tragedy of the commons type situation, though, as any given lender loosening their loan policy exposes themselves to the risk of a bad loan, while only reaping a fraction of the benefit on their existing loans.

Therefore, the individually rational decision for them is to be very careful that the loans they do make are going to be repaid. And boy are they. Underwriting standards have become completely paranoid. Things that were not an issue at any time in the last ten years are becoming "Loanbusters." There have been quite a few additions to that category of late.

To give an example, I spent three full days arguing about a rental property my client had 2000 miles away. Because the client had accepted a cash deposit as opposed to a check, they did not want to give my client credit for the monthly rental, despite the fact that the property had been rented for several months. With the rental income, my client was able to satisfy debt to income ratio requirements and the new loan was no risk at all. Without the rental income, debt to income ratio was too high. The client had everything else - bona fide transfer from employer, plenty of income documentation, time in line of work, etcetera, and remember that the property had been rented for several months - with canceled rental checks to boot. But because the basic underwriting standard is to demonstrate payment of a deposit via a canceled check in order to credit rental income, I had to argue the case - along with the reasons for the underwriting standards - up four levels in the process before I got to someone with the authority and understanding of the reasons for the underwriting standards to agree to an alternative standard my client could meet.

You can help yourself in advance of applying for a loan. Have a paper trail for all money - especially anything having to do with any rental property you might own. Document all of your income, especially on your taxes. Pretty much every single loan done right now is requiring IRS form 4506T. The only exceptions I'm aware of are portfolio lenders, and damned few of them. Be careful moving your money around, and be certain there is a paper trail sourcing all money that appears on any of your bank statements. Where did the money come from? Also be aware that just because you made $X this month does not mean lenders will necessarily accept your income as being $X per month. In general, income is averaged over the previous two years, so if you've had a big raise you were counting upon for loan qualification, you might not get full credit for it. In case of doubt or dispute, the numbers on your tax form - that you reported to the IRS and paid taxes on - becomes the ultimate fall back.

It has become more expensive to get a loan, and more problematical. Investment properties, in particular, are creating many problems. For several years, government loans required exterior appraisals on investment property (at a cost of about $300 each), even if they weren't involved in the current loan application. They want to see 30% equity on every property - difficult in the current market. Fortunately, people with investment property have always been comparatively rare on VA and FHA loans due to limits built into those programs. In the last two weeks, however, these standards have spread to conventional Fannie Mae and Freddie Mac loans, a much bigger problem. Once again, portfolio lenders may be the only alternative. Since portfolio lenders tend to have significantly higher rates, not having 30% equity on an investment property can mean you can't get a loan that makes it worthwhile to refinance, and it might mean you can't qualify to buy a property, even if the investment property is thousands of miles away from your current job. Is this brain damaged, or what? However, it's the way things are right now - and I guarantee your loan officer isn't any happier about it than you are.

Rates are great right now - so much so that it's easy for most people to find better loans than the one they've got. Actually qualifying for that loan is much more problematical, and by "qualifying" I mean meeting all of the underwriting and funding standards so that you actually get that loan. The best loan quote in the world isn't going to do any good if the loan can't be funded. My processor is telling me stories of other loan officers she works with that are losing sixty to seventy five percent of the loans they work with. If you don't think that's having an effect on the prices they have to charge and the margin they need on successful loans, you'd better think again. They can only work on so many loans at once!

The importance of this is much greater for purchases than it is for refinances. On a refinance, you still have your existing loan. If the new loan doesn't get funded, it's usually not such a big deal. You still have the property, you still have the existing loan, and you can try again. On a purchase, you've got a good faith deposit at risk on a ticking clock. One loan getting rejected can mean you lose the deposit, the property, and anything you've spent investigating it.

Given this, what advice do I have to give? Underwriting standards and flexibility vary from lender to lender. Because one lender is not willing to compromise on an issue doesn't mean that nobody is. However, for the average person applying with a direct lender, it's a matter of cut and try. If the loan fails, you have to start all over, and that includes paying for a new appraisal. A new inspection, too, if you have to find a new property because the seller got tired of waiting and sold to someone else. All of this is wasteful of money, not to mention your time and patience.

Brokers (and correspondents), however, have already had experience with what lenders are being hardcore and unreasonable about what issues, and which are acting in a matter closer to sane. Furthermore, if you're the one where they find out with a problem at a particular lender, they can resubmit the loan package elsewhere, and because the appraisal is done in their name, they don't need a new appraisal, and brokers can usually use exactly the same loan package except for one piece of paper.

You also want to choose a loan officer who has the time to argue your case with a particular lender, and motivation to do so. If you're one of fifty loans that month, the loan officer doesn't have the three days I spent arguing with underwriters so that you can get the great rate you have locked in - not to mention losing time on a purchase contract if you have to resubmit to a new lender. If your buyer's agent does loans themselves, it might be worth considering for this reason alone. I would like to think I would have argued just as hard anyway, but I wasn't just arguing about a loan that meant a standard loan commission to me. I was arguing over a loan that meant not only that, but an agency paycheck as well, and the house my new friends had their heart set on, the months of work we spent picking it out and negotiating the sale, and their deposit. I had all the motivation I could possibly want. My processor was floored that I argued it up as far as I did, and that it worked. Most of the loan officers she works with were letting arguments drop a lot earlier than that. Quite a few are basically just wringing their hands in despair. That seems to be consistent with the stories I'm hearing from consumers elsewhere.

Caveat Emptor

Original article here

Every so often I get e-mail asking why real estate transactions are so complex. Matter of fact, I have this discussion with most clients at some point. The answer is, "Because real estate transactions for a lot of money, and because there's a lot of money involved, con artists and other people will make a lot of money if they successfully con you out of even small proportions of it. Therefore, real estate acts as a magnet for the less than scrupulous."

Nor is outright fraud the only issue. If Sellers can persuade potential buyers that their property is 2% more valuable, that's $10,000 on a half million dollar property. If buyers can persuade sellers to sell that half million dollar property for 2% less, that's the same $10,000. Offer ordinary Americans - wealthy by the standards of the vast majority of the world - a chance to make $10,000, and they'll do anything from eating live worms to months of primitive living and Macchiavellian scheming to be the last one voted off the island.

Greed is a very powerful motivator. The lure of "easy" money has a very strong appeal. The lure of extra money has a very strong appeal. Because of that, there are a large number of scams and games out there. If you've been in either real estate or mortgage very long, chances are that you've had more than one tried on you or your clients. Perhaps one has even succeeded. Sometimes people get taken and don't realize it for years, if ever. Not too far from me, a couple months ago somebody got nearly $600,000 for a property that was really worth $480,000 to $490,000. The buyers are happy, too, according to the listing agent, never mind the fact that they paid $100,000 too much for the property. They'll eventually realize that their property isn't worth that much more than the neighbors', but they'll probably never make the connection back to "We paid too much". Unless the condition was completely misrepresented or something about what the seller says just isn't true, there's a good possibility of getting away with it. Even the sharp buyer's agents who spot the issue just want to keep their own clients out of trouble. There's no advantage to me or my clients in publicizing other people's lies for the benefit of third parties. Even on the listing side, the agent either thinks an offer is good or they don't, and the seller ends up accepting or sending the prospective buyer on their way. There's no advantage in warning others about one particular person trying to pull one particular scam.

With the amount of money to be made quickly, a lot of transactions have something fishy about them. I've seen figures and estimates varying all the way from two percent to nearly fifty percent of all real estate and mortgage transactions have something untoward happening. The percentages depend mostly upon where they set the threshold.

Against this backdrop, security measures have been instituted. Appraisal, inspection, disclosures, title insurance, escrow, notaries, etcetera, etcetera, etcetera. Every single one of them has reasons why they are advantageous and why they are required. Every time you do without one of the security measures that the industry has implemented which is applicable to your situation, you leave yourself open for the other side to do things which vary from minor games to completely illegal, from selling you a property that's worth less than the purchase price to selling you a property that is worthless for the purpose you intend. Yes, the security measures cost money - a lot of money in the aggregate. However, when the alternative is leaving the door open to transactions that are one hundred percent fraud, they have gotten incredibly cheap. Every time you try to cut out the professional who is supposed to protect you or work on your behalf, you leave the door open for losing more than that professional might possibly cost.

Take out the security measures, and not only do you open the door wider, but the people who are mildly concerned that they might end up imprisoned now will have no real downside to the activity. If there's no real chance of being caught and punished, what rational incentive is there not to do it? Do it, and make an extra $50,000. Don't do it, and the only difference is that you won't make that extra $50k. What's the incentive not to? There just aren't a lot of saints out there. Look at the way people behave in traffic, for a lot less gain, and pretty much every day I see someone getting a ticket that's going to cost them more than getting away with the offense 100 times would save (not to mention accidents and even fatalities for the stupid crap they do to save 0.7 seconds). For this reason, all sorts of folks hope that you can somehow be persuaded not to take advantage of all available protective measures. It means they stand a better chance of getting away with whatever they're trying to pull.

In fact, the level of complexity and detail assists in finding and convicting malefactors. The more information you have, the better you can pin down exactly who did what. By breaking up the charges and the payments to track exactly what went where and for what purpose, a paper trail is created detailing what happened. If the only record made is that A paid B $X for some land somewhere, that says nothing about whether B owned it in the first place, what B told A in order to sell it, what A thought the condition was, or even what exact land was sold. I can go on for quite a while, but the point is that every little finger in the pie should have a good reason why it's there. If you're not trying to pull anything, they're there to protect you. Even if you are trying to pull something, they're there to protect you from the other side of the transaction cheating better than you. Especially if you're honest in the first place, it's a better situation for everyone, because now the other side (and any lender involved!) has assurance you're not trying to pull an entire range of unscrupulous activities, meaning the end outcome for you does not suffer from these apprehensions on the other side, and is therefore likely to be better for you. In short, for buyers, sellers, and lenders, all of these protections increase the value of the property.

Like employment and tort law, real estate law and practice has evolved the way it has as a protection against unscrupulous practices, and short-circuiting any part of it increases the odds that you will find yourself very unhappy indeed.

Caveat Emptor

Original article here

The short answer is "Because it costs less". It costs more money to get a lower rate - simple fact. It takes time to recover the extra money you spend to get a lower rate via that lowered cost of interest, and most folks don't keep their loans long enough.

There is always a trade-off between rate and cost on a given loan type. If you want the thirty year fixed rate loan half a percent lower than everybody else is getting, you're going to pay for it in the form of discount points. The higher cost always goes with the lower rate. You might as well consider it a law of nature in the same league as gravity, because it is a law of economics. If you don't want to pay high costs, you end up with a higher rate. End of story. There are all kinds of games that can be played with loan quotes, but the fact of the matter is that of the tens or hundreds of thousands of rate sheets I've seen from over two hundred different lenders from A paper all the way down to hard money, every single one of them conforms to this fundamental truth. A 6.00 percent loan will cost more from the same lender at the same time than a 6.50 percent loan of the same type. Some lenders have different trade-offs than others because they are aiming at different target markets. I could tell you about lenders that rarely have a rate below par on their sheet, and lenders that rarely have a rate above par, par being the point at which there are no discount points to get the rate, but no yield spread either. Some lender's par may be lower than others, or higher. The par on a completely different loan type, or loan program, will be different. Par varies with time, the qualifications of the borrower, the type of loan they desire, the type of documentation they are providing, and other concerns as well.

The cost of a loan is sunk - spent at the beginning in order to get that loan. Once you have the loan, the money you spend to get it is gone, whether you paid it out of pocket or rolled it into your balance. If you sell or refinance before you have recovered it via lower interest costs, you don't get it back. Actually, if you roll it into your balance, the money isn't gone, because you still owe it and you're paying interest on it. If you sell the property, it will mean you get less money, and if you refinance again, your balance will still be higher than if you hadn't added that money to your balance. Paying it out of your pocket is no better, because you could be investing that money, likely at a higher rate of return than the rate on most loans.

Now here's a very old rate sheet I saved from a random lender. The rates are very different now. All of the lock periods I am quoting to were thirty days. I'm going to presume a $400,000 total loan, as if you're doing a cash out refinance to a specific loan to value ratio, but the principles are the same no matter the loan size.



Rate
5.25
5.375
5.5
5.625
5.75
5.875
6
6.125
6.25
6.375
6.5
6.625
6.75
6.875
7
discount
3.898
3.221
2.6
2.01
1.452
0.963
0.615
0.252
-0.063
-0.381
-0.661
-1.039
-1.27
-1.511
-1.577
pts $
$15,592.00
$12,884.00
$10,400.00
$8,040.00
$5,808.00
$3,852.00
$2,460.00
$1,008.00
-$252.00
-$1,524.00
-$2,644.00
-$4,156.00
-$5,080.00
-$6,044.00
-$6,308.00
total cost
$19,092.00
$16,384.00
$13,900.00
$11,540.00
$9,308.00
$7,352.00
$5,960.00
$4,508.00
$3,248.00
$1,976.00
$856.00
$0.00
$0.00
$0.00
$0.00
net $
$380,908.00
$383,616.00
$386,100.00
$388,460.00
$390,692.00
$392,648.00
$394,040.00
$395,492.00
$396,752.00
$398,024.00
$399,144.00
$400,000.00
$400,000.00
$400,000.00
$400,000.00

Alternatively, If you owe $400,000 and roll the costs into the balance, it becomes the following. Actually, the costs are mostly higher because points are computed based upon final loan amount, while I was too lazy to recompute from the previous example. Also, the maximum conforming loan is $417,000 currently (in most areas - San Diego, among others, is higher), so going over that would cause the rates to rise notably, but assuming you have a 7% interest rate now, this is how quickly you would recover the costs of the new loan:



Rate
5.25
5.375
5.5
5.625
5.75
5.875
6
6.125
6.25
6.375
6.5
6.625
6.75
6.875
7
total cost
$19,092.00
$16,384.00
$13,900.00
$11,540.00
$9,308.00
$7,352.00
$5,960.00
$4,508.00
$3,248.00
$1,976.00
$856.00
$0.00
$0.00
$0.00
$0.00
loan
$419,092.00*
$416,384.00
$413,900.00
$411,540.00
$409,308.00
$407,352.00
$405,960.00
$404,508.00
$403,248.00
$401,976.00
$400,856.00
$400,000.00
$400,000.00
$400,000.00
$400,000.00
int/month
$1,833.53
$1,865.05
$1,897.04
$1,929.09
$1,961.27
$1,994.33
$2,029.80
$2,064.68
$2,100.25
$2,135.50
$2,171.30
$2,208.33
$2,250.00
$2,291.67
$2,333.33
save/month
$374.81
$343.28
$311.29
$279.24
$247.07
$214.01
$178.53
$143.66
$108.08
$72.84
$37.03
$0.00
$0.00
$0.00
$0.00
breakeven
50.94
47.73
44.65
41.33
37.67
34.35
33.38
31.38
30.05
27.13
23.12
0.00
0.00
0.00
0.00

*over $417,000 kicks into non-conforming loan territory


People shop loans by payment. They shouldn't, but they do. Furthermore, a lot of people seem to get quite a stroke out of bragging that they have a low interest rate. But if you add $19,000 to your balance and only keep the loan long enough to recover $15,000 in interest, you've gotten a negative 20% return on your money - not including the time value of money. Furthermore, this money usually equates to the fact that you're going to have a higher balance and end up paying more money and higher interest on your next loan.

It may be counter-intuitive, but it is easier to qualify for a loan with a lower rate, because the payments are lower, and therefore the Debt to income ratio is better. So any time somebody tells you that you didn't qualify for the same loan at a lower rate, you know it's nonsense. If you qualify for the program at all, you qualify more easily with a lower payment. This begs the question of whether you qualify for the program at all - your credit score could be too low, or it might not allow a loan to value ratio or debt to income ratio or any of many other situations you find yourself in, but if you qualify for the program, you will qualify at the lower rate. It may be smarter to want the higher rate, but that can be effectively eliminated by debt to income ratio.

So that's why low and zero cost loans are not popular. Most people focus in on either payment or interest rate, and when they discover that the low or zero cost loan means a higher interest rate, they're not interested. Relating to the ease of qualification issue on purchases, most people also try to stretch their budget to buy a more expensive house than they should. This makes lower cost, higher rate loans even less likely - even if the people were interested, accepting a lower cost loan would mean they can't have the house they've got their hearts set upon. But if you don't keep the loan long enough to recover the additional costs, you're wasting money. On refinances, only a true zero cost loan can have you ahead immediately, but advertising or selling zero cost loans is like King Canute trying to command the tide to turn. Most people aren't interested.

There are other considerations. At this update, rates are so low they're unlikely to be bettered ever, and if you're in the property you're going to spend the rest of your life in (and never take cash out), it makes sense to spend some money to buy the rate down. If you're not intending to sell any time soon, it's likely to be a good idea to pay part of a point or even a full one, as you're likely to be keeping the loan longer, and the median time between refinancing is likely to rise. Nonetheless, there are limits on the size of any bet you want to make, and when you pay costs up front for a loan rate, you are making a bet with your lender that you're going to keep it long enough to more than recover those costs. For quite a few years now, the lenders have been winning the vast majority of those bets.

Caveat Emptor

Original article here

Before you even make an offer, you should be aware that you're going to spend a significant amount of money in the process of buying a property before the transaction is consummated. This will largely be money that you will not get back if something goes wrong with the purchase. There are methods of avoiding some of these, but they're a good way to get yourself in serious trouble by short-circuiting safeguards built into the system. You're talking about spending hundreds of thousands of dollars, either cash or in being responsible for a loan. The money I am talking about in this article is meant to prevent you from wasting a six figure number of dollars.

This doesn't include the "earnest money" or good faith deposit. The deposit is not, strictly speaking, money you are spending unless you do something that causes its forfeiture. It's relatively rare for someone who has an on-the-ball agent and who isn't trying to play games to forfeit their deposit. In the normal course of things, it will end up being used at the point of consummation rather than before, in order to pay loan costs, transaction costs, and possibly for some down payment money. It's mostly money you're putting up as evidence of your ability to consummate the transaction. The larger your deposit, of course, the more you have potentially at risk, but also the more serious you are showing the seller you are about the transaction. If I'm putting up a $10,000 deposit on a $250,000 condo, that's 4 percent of the purchase price. A buyer who's that serious will likely be able to get an offer with a lower purchase price accepted than someone without much of a deposit. Once upon a time, the default was 2%, but that's comparatively rare these days, as most deposits are smaller. However, no seller and no listing agent who are not completely insane will agree to a transaction without a good faith deposit.

The first thing you're really spending money on is the inspection. The lowest one I've ever seen was over $250, and they go up from there, with the average being about $350. The basic inspection is your best protection against undisclosed major or expensive faults in the property. I've heard of people using the seller's inspection or the previous buyer's inspection. This is a good way to save a few hundred while being out tens of thousands. The previous inspector could well have been instructed to ignore defects, and because you are not the one paying them, they have no responsibility to you. If you engage them and you pay them, you can sue them if they don't exercise all due diligence. It's okay to have your buyer's agent provide a recommendation or even select them - your agent is also responsible to you. But be careful about this if you're using a dual agent or going unrepresented. I would also never use an inspector recommended by the seller. They could have chosen their friend with malice aforethought. In any case, if you're not writing the check that pays them, they don't have responsibility to you. If they don't have any responsibility to you, what's their motivation to do a full inspection and report everything? Finally, you do want to pay them at time of inspection. Some inspectors will work through escrow, waiting until escrow closes to get paid, but they charge a lot more - and you're going to pay these higher fees whether or not the transaction actually closes. Better to just write the smaller check up front. You get what you pay for, but there's no reason to pay for all the inspector's deadbeat clients.

The second major thing you'll actually spend the money on is the appraisal. Like the inspector, an honest appraisal protects you. Around here, they start at about $350, and go up from there. Investment property appraisals are more expensive because there's extra work to be done, and so are higher dollar value properties. Never use someone else's appraisal or appraiser. I've written briefly on appraisal fraud before. The games that the unscrupulous can play are legion. Once again, it's okay to trust a buyer's agent or an independent loan officer you select to find an appraiser, but not a dual agent, and not a loan affiliate of the listing agent. The buyer's agent has an unalloyed responsibility to you, and the loan provider has one to the lender, who also doesn't want the appraisal to be for more than the property is really worth. These days, with lenders complying with Home Valuation Code of Conduct, it's rare that anyone beside the lender (or their designated AMC) will have an opportunity to select an appraiser, however it's very possible that HVCC may go away. However, Once again, if you're not paying the appraiser, they have no responsibility to you, so you want to be the one writing that check. Furthermore, many loan providers are willing to pay that appraiser, but you may take it for a law of nature that you're not going to save money that way - these loan providers will charge enough more to more than cover the cost of the appraisal, and they'll get it from you whether or not the transaction closes. Better to just plan to pay it yourself via a check in the first place.

One of the things a good buyer's agent learns are suspect are seller's appraisals. That seller wants to get the highest price possible, and the appraiser they pay has a responsibility to them. Furthermore, in such circumstances, some appraisers don't have any compunctions as to how high they'll go. Not too long ago, I visited an empty mosquito infested armpit of a property that hadn't been updated in sixty years. Okay, it did front one of our coastal lagoons, but even so my best estimate of the current value was about $640,000 (lower at the update)- and somebody had managed to borrow about twice that according to public records. Stuff like that doesn't happen without appraiser complicity. So unless you want to take a risk of trusting someone like that, don't trust a seller's appraisal.

None of this includes specialist inspections that are real smart to get if your initial inspection finds something of concern. Of course, if the initial inspection finds something of concern, the smartest thing may be to walk away from the property. It depends upon too many factors to write about with any coherence, and there are no guaranteed answers. Pretty much every real estate transaction is an exercise in controlled risks for the buyer, which is one more reason you want to have a good agent on your side.

Around here, the seller most often pays for the termite clearance, because that termite inspector is making a general warranty to all concerned that the property is in the condition they say it's in, but that's subject to specific negotiation.

So before you make an offer, be aware that you are committing the costs of inspection and appraisal to this property should that offer be accepted. There are ways to avoid paying them, but it's not smart to do so, as it's likely to cost you a lot more than you could possibly save. Before you make that offer, ask yourself if you're willing to put up this money as insurance against all sorts of common issues that properties really do have. If not, perhaps you need to consider a different property. It is worse than useless - actually counterproductive - to try and get out of spending this money. Yes, if something goes wrong with the transaction, it's money down the drain, but better several hundred dollars for the inspection and appraisal than half a million dollars or more for a property that isn't worth what you paid for it.

Caveat Emptor

Original article here

An email:


I purchased a house in DELETED with two friends. Unbeknownst to us, one of them was in a legal domestic partnership relationship that she withheld from us (we knew about the relationship, just not about the legal part). We each had to sign these Domestic Partnership Addendums to our loan application. She did not indicate she had a domestic partnership relationship through that form. She and her partner split. The partner filed for dissolution in November and in her paperwork has named our property as joint property. Our "friend" has denied that her partner has any legal right to the property.

Apart from this mess, this house partner ...DELETED... has been a terror since we got the house. I have offered to buy her out three times since DELETED. THEN I found out she lied about her Domestic Partner situation.

Can I force her off the deed for fraud (since she clearly lied about the DP situation?) OR, can I force her to either get her partner to sign a Quitclaim Deed (or something like that) and, if she can't, then she has to remove herself from the Deed of Trust?

My feeling is that she intentionally committed fraud and therefore the Deed of Trust is either invalid or her part of it is. AND I dont feel like I should have to "buy" her out since she lied.

Please tell me you have an answer!!!

The best answer I can give is that this looks like a matter for an attorney. There's a lot of complexity to your situation, and my knowledge is limited. I'm not a lawyer and you need to talk to one licensed in your state. That said, I'll be glad to share my understanding of the issues.

You have run straight into an issue that bites folks all of the time. My understanding of the domestic partnership arrangement is that it is legally the equivalent of marriage with the exception of a couple of issues of which real estate title is not one. This makes your situation basically the same one as has been biting victims of gold-digging spouses for as long as their has been marriage and law and ownership.

You talk about the Trust Deed and Domestic Partner Addendums. However, those are between the lender and each of you individually, not between your group of partners. The main questions are, "In what manner do you hold title?" together with, "What sort of a business partnership do you have?"

In most states, the default title arrangement is "Joint Tenants with Rights of Survivorship." What this means is that you're all equal, undivided partners. If one of you gets married or domestically partnered, that new member becomes an equal partner. Nice for them. Not so nice for you.

This is a situation where "tenants in common" would likely serve the interests of business partners better. Tenants in common can hold other shares of ownership besides precisely equal. So if they put up only ten percent of the money, they can own ten percent, whereas if they put up ninety percent of the money, they can be ninety percent partners - or whatever arrangement you all agree to. If they get married or become domestically partnered, the spouse or partner only gets a portion of their share under the tenants in common arrangement.

In the case of a trust, it's whatever the trust agreement says. If you have a partnership agreement amongst yourselves, even better, because it can give explicit recourse for situations like this. Corporate ownership has its advantages as well. There are situations where each of these is appropriate. It all depends upon what's important to each of the partners and appropriate to the situation.

That said, whatever you've got is what you're stuck with. You can't go back to the beginning and change the situation now. You've found out first-hand about why the various forms of ownership came into being. If everyone was always a reasonable responsible adult, there would be no need for the alternative forms of ownership to have evolved. Even if you've got nothing written, though, dueling attorneys is a horrible way to settle the matter. It's likely to be a lot more efficient to sit down with a mediator and see if you can come to an agreement everyone can agree upon. When everyone's paying a couple hundred dollars per hour for an attorney, any advantage they might have gotten gets eroded quickly, and it's not very long before everyone emerges poorer for the experience.

At last resort, you do appear to be effectively the victim of fraud and should be able to use that as some leverage, although my understanding is that the law would mostly treat it as an additional side issue rather than the central fact of the matter. But when attorneys and the courts get involved, there aren't any easy answers, and the whole thing leaves your control when you submit it to the law. The plain fact of the matter is that it might be smart or fair to do a lot of things, yet it's unlikely you're going to be able to force anyone to do anything, let alone smart or fair. Even if your partners from the nether regions are completely insane, you're likely to come out better overall if you can come to some sort of mutual agreement you can all live with, rather than paying attorneys and missing work for court. However, it's smart to pay an attorney to get advice and/or assistance in avoiding pitfalls of negotiation in this situation. One more example of why, in real estate, an ounce of prevention is usually worth a lot more than a pound of cure.

Caveat Emptor

Original article here


One of the things that is really helping military families afford good properties is the military housing allowance and the way that lenders treat it, making it much easier for them to qualify with regards to debt to income ratio, while the magic bullet of VA loans makes loan to value ratio essentially a non-issue. Between these benefits, the military is sitting pretty for being able to afford housing.

I should mention that this math helps non-military getting a housing allowance just as much, but there are relatively few people outside of the military receiving a housing allowance.

Receiving a housing allowance actually works out far more advantageously for purposes of loan qualification than if they just paid them the extra money. $X basic salary plus $Y housing allowance is demonstrably more money than a salary of $X+Y as far as qualifying for a real estate loan goes. Here's how it works.

To start with, the housing allowance is generally non-taxable. I'm sure you know that's not the case with your basic salary. The $Y extra you get in allowance really is $Y, not the much lesser amount that you would get to keep if paid that in salary.

On top of that, the housing allowance is "soaked off" against the expenses of housing on a dollar for dollar basis. In other words, compute your cost of housing - principal and interest on the loan, taxes, insurance, Homeowner's Association dues, Mello-Roos, etcetera. Add them all up. From this, subtract housing allowance. If the housing allowance is more than actual cost of housing, we're all done. You made it, at least on the basis of debt to income ratio. If the costs are more than the allowance, all is not lost. At this point, you have to add in other debt service to whatever is left, but then so long as you are less than the normally allowed debt to income ratio as compared to your regular salary, you still qualify. Is this a great country, or what?

Here's a concrete example of how it all works: Let's say you make $3000 per month salary from the military. In addition to that, you get a $2000 housing allowance. You have other monthly debts of $250, and you want to buy a property where the monthly expenses of owning it (principal and interest on sustainable loan, taxes, and insurance, or PITI) are $2500. If you made that $5000 per month as a regular working schmoe, you would be told you aren't likely to qualify. Your "front end" ratio would be 50%, and adding the other monthly debt service makes 55%. Normal guidelines are 45% "back end" (housing plus all other debt service) for conforming loans, and you're way over that on the front end alone. Maybe in some circumstances such as disability or retirement income with a "walks on water" credit score, that might be accepted by one of the automated loan underwriting systems, but under manual underwriting rules you are dead in the water.

As the beneficiary of that housing allowance, however, things are quite different. The $2000 housing allowance draws off housing expense dollar for dollar, not at the 45% ratio of the rest of your salary. Instead of $1 enabling you to have forty-five cents of housing expense, it enables your to have $1. So subtract $2000 housing allowance from $2500 housing expense, and you have $500 left over.

If housing allowance was $2500 against that $2500 housing expense, or to use the general case, if housing expense was less than or equal to housing allowance, we'd be done, at least on the grounds of debt to income ratio. We're not done yet in this case, but the remaining $500 of housing expense plus $250 of other debt service equals $750, which divided by $3000 regular income yields a 25% back end ratio. Since this is less than 45%, bing! Debt to Income ratio works - by which I mean that you qualify and are over the most important hurdle in loan qualification.

So there you have an example where somebody making exactly the same number of dollars does not qualify where someone getting part of their salary via a housing allowance does. Since the military is pretty much the only folks that get paid that way (I can't remember the last time I had anyone not in the military with a housing allowance), advantage: military.

A couple of caveats need to be mentioned and emphasized right now. As should be obvious to the mathematically inclined, Comparatively small amounts of difference make much larger differences to debt to income ratio. Change the PITI payment to $3000, and your debt to income ratio stands at 40 percent, getting close to the ultimate edge of qualification.

You should also be careful that you really can make the payment on the loan. Foreclosure is no fun, as millions can attest right now. Make certain you really can make the payment, considering your family's lifestyle and other bills that may not be monthly debt but would be difficult to eliminate. I have written multiple times warning Never Choose A Loan (or a Property) Based Upon Payment.

Because I am normally careful to quote in terms of purchase price and loan amount and interest rate, I want to say why I did it this way, quoting in terms of payment, in this case. It's a complex subject, and the math gets hairy very quickly, and varies constantly and from market to market and time to time as interest rates and home prices change. Judging by my traffic, people are going to be reading this article months from now, if not years. I wanted a concrete, easily understood example of the subject that's not going to be completely out of line six months from now when the rates have changed and some housing markets are recovering strongly while others are in the process of crashing.

I also should observe that companies looking to help their employees while conserving costs can do this every bit as much as the military does by carving off a portion of the salary and paying it in the form of housing allowance - but in order to do that, they'd have to admit these people were employees. Pay the social security taxes lots of companies are manipulating the law to avoid, give them all the rights contractors don't have in employment. Of course, the reason why that happens is due to government action. Every time the legislature or some judge adds another cost to having employees or makes it more difficult to terminate those who need to be terminated, they give corporations another reason to avoid hiring them in the first place.

Caveat Emptor

Original article here

Most people don't stay in their first house their whole life. At some point, they want to move to a different home.

There are several ways to approach the transaction, but you have to decide which way fits you. You can approach it with an idea to maximizing profit, maximizing cash flow, maximizing speed, minimizing stress, or minimizing inconvenience. You really only get to choose one, but it's a good idea to rank them from most important to least important so that both you and your agent know where your priorities lie, and perhaps you can do some things from your lesser priorities.

Now, if this was a commercial site, looking to seduce you into listing with me, I'd probably have some corporate salespeak flack telling me to say you can have it all, but instead I'm going to tell you the blunt truth: You can't, not reliably, and any representation to the contrary is a lie, the words of a fool, or both. You can certainly do things in each of the categories (and others) but if you don't go into the transaction with a clear view of what is most important to you, chances are you won't get whatever it is that is important to you. Some people do luck out, especially in hot markets, but when the market is cooler, the fact is that you take what you can get, and the probability is better that you will get what is most important if you decide what is most important and stick to it.

Whether you are moving up market or down market, whatever factors there are that help you on one end of the transaction will hurt you on the other. If there are more buyers than sellers, it's going to be hard to compete against the other buyers, but easier to sell your current property, and vice versa. Generally speaking, Buyer's Markets Are A Great Time For Moving Up, while seller's markets are superior for moving down.

If you choose to maximize profit, move out of the old property and into a rental unit, and make whatever cosmetic alterations you're planning before the property hits the market. Newly renovated vacant units show better, and therefore sell better, than anything else. Your time of highest interest is typically for the time period immediately after it hits the multiple listing service. Particularly if you have pets or children, who are both highly efficient entropy generators, you want to move out if you can afford to. Since this is very costly in terms of cash flow, many cannot afford it. Nonetheless, in most markets under most conditions, the return you will get will repay your investment, as there are few obstacles and conditions to your prospective buyer moving in as soon as they can consummate the sale. Furthermore, because the property is vacant, they can more easily picture themselves living in it. Ask any artist which is easier to work with - a blank canvas, or one that already has a painting on it? Then consider that the average buyer has the imagination of a rock, which is why properties with just a little more oomph are much easier to sell. The less of your family there is in the property, the more potential buyers can picture theirs in it. The nicer it is already, the less trouble they have picturing their family in it nicely fixed up.

Staying in the property causes not only stress from whether the property is clean enough to show every day, but also from prospective buyers and their agents having both a window of observation on your life and the potential opportunity to debark with some material piece. I imagine it happens, but not nearly so much as to warrant the stress sellers put themselves through on this point. As an agent, I'm always aware that my good name is on the line as well, and I'm always watching prospective buyers, even though I've never had anyone attempt to remove anything (that I'm aware of). Nonetheless, many sellers insist upon being physically present, which often has the effect of chasing people away that I, as the agent, could have sold the property to given a freer hand. Given real estate practicalities, your concern over a couple of $15 CDs that might have potentially wandered off could have just cost you tens of thousands. So if you're concerned, move anything valuable or irreplaceable like jewelry and heirlooms out, and resign yourself to replacing anything that someone does take. You will come out ahead in the end.

If you're looking to maximize speed, moving out is a good idea also, but you're also going to want to price your property significantly lower. The higher the price, the harder it is to sell the property, the fewer people that can be expected to look at it, and the harder it will be for them to qualify. If you're priced 5 percent above anything comparable, the appraisal probably going to come in lower than the sale price, and not many people want to pay a premium for a property. It's going to take longer to sell, and you're almost certainly going to end up cutting your price below what you could have gotten in the first place. If you're priced a tad below the comparables, however, well everyone wants to buy homes with some built in equity, and the bank sees their loan as being less risky, so it's a little easier to qualify (They're still going to stick with the LCM principle, but from experience, they're less sticky about the little stuff if the appraisal is a little above the price). However, you walk away with less money than you could have gotten, a less than optimal circumstance.

If you're concerned about cash flow, on the other hand, moving out is not the way to go about things. For one thing, you don't have the money, or if you do, you're going into stress mode about whether some short deadline is going to be met, which can cause you to be forced to accept an awful deal that you would not otherwise have considered because you're running out of money to pay for all the extra stuff you weren't paying for before. If you think ahead, and make your agent aware of your concerns, you've got a better chance to come out ahead in the end.

Suppose your priority is to minimize stress? Then you typically stay put while researching other properties, and ask for a contingent sale, possibly with a leaseback that gives you a certain amount of time to find alternative lodgings. Alternatively, if cash flow isn't an issue, you might start looking right away, either with or without a "bridge loan" (cash out against your current property, as a down payment on the new one). Bridge loans are great, they are wonderful, they can do all sorts of things for you, but they are aren't cheap. Before you do one, consider whether there is a real need. If you have some cash and are a good credit risk, the better option may be to borrow more against the new property. Perhaps the better option is to split finance the new property and pay off the second loan on the new property when the current property sells. Because "bridge loans" are cash out refinances, then all things being equal, it's probably a better idea to get the money through a purchase money loan. It's even possible (albeit rare) that despite paying for two loans, the math may favor getting some money via a bridge loan, and borrowing the rest through the purchase loan on the new property. But if your debt to income ratio is tight, none of this may work.

If you want to minimize inconvenience, you probably want to stay in the property until it sells, and quite probably for a while thereafter, so you're going to want a short term leaseback as a condition of the sale. Many people do this to avoid moving the kids out of school in the middle of an academic year. If they're staying, it also gives them some time to find another property in the same district, or even that attends the same school. But here again, remember that you're limiting your buyer's options, which has the likely effect of scaring off the ones who would otherwise have offered you the best price, or causing them to not be willing to pay so much for it ("Darn it, my kids are in the middle of a school year, too!") If it's a buyer's market, you're likely to pay a certain price - or rather, your buyers are likely to be willing to pay less - but if it's worth it to you, you also get what you pay for.

There are other potential factors, certainly, and other strategies to maximize the blend of "goods" that's best for you. But these are the ones that most people need to think about ahead of time, and these are the ones where failing to consider them ahead of time will reliably cost you the most.

Caveat Emptor

Original here

There's an awful lot of nonsense out there that advises people to do without an agent. Quite often, first time buyers of real estate get seduced into not having an agent by this stuff before they get into the market, let along before they understand what's really going on. After all, it's pretty easy to get seduced by an advertising come on that says, "Save money!" when there's an explicit cash reason to do so, and there is no corresponding line on a HUD 1 that details everything it cost you. I get emails and even occasional comments from people who are convinced they did "just fine" without an agent, often despite evidence right in their own email that they did not.

The fact is that with a routine transaction, if nothing goes too horribly wrong there are no red flags or screaming flares that rub a layperson's nose in how badly they are missing a buyer's agent. You make an offer, it gets accepted, the loan gets approved, you move in. There's nothing to tell you you're going to spend tens of thousands in repairs, you spent tens of thousands too much on the purchase price, the seller and listing agent kited by on their legal requirements (reasons on top of the double commission why bad listing agents and brokerages love buyers without an agent or their own), or any one of dozens of other problems that really do crop up. But the person who said "ignorance is bliss" made one glaring omission that changes everything (unless you're a politician). Ignorance is only temporary bliss.

By the time of their second real estate transaction, most people have figured out that while an agent is an expense, a good one is a financial lifesaver as well. For most people, however, the second transaction is a sale as opposed to a purchase, and a buyer's agent makes a lot more difference to your result than a listing agent

The first thing you have to understand is that just because you don't have an agent does not mean there isn't an agent involved. Furthermore, the agent that isn't yours is working for the person on the other side of the transaction, not for you. If you think of agents as some sort of tollbooth, it makes sense to try to bypass them. It's very possible to do so. In no state that I am aware of is there any requirement whatsoever to have an agent. However, agency is not a tollbooth, no matter how many "do it yourself!" hucksters and crummy real estate agents make it out to be. There are real opportunities to make a positive difference at every stage of the transaction, and if these is no agent, chances are that not only will things not be made better, but that the other side will make them worse.

For buyers, the very first thing to understand about a listing agent is that they have a contractual and fiduciary responsibility to get the best terms possible for the seller. Highest price, quickest sale, fewest problems. When I take a listing, I am trying to sell that property. When a prospective buyer calls me wanting me to show my listing, and I am going to do my best to sell you that property. Nothing so crass as a high pressure sales pitch, but I'm going to get the job done a lot more often than you'd think. Whereas I might look at 100 houses or more for my buyer clients and show them only the ones where I see some value, my sales ratio is a lot higher than 1 in 100 or even 1 in 10 when I've got one listing I'm trying to sell to people who call me out of the blue to see one of my listings. The specific numbers might change, but you'll find that's pretty much the way of things with listing agents. Not the best property for the buyer? Better properties available more cheaply in the same neighborhood? You could get a lower price for the same property if you had a better negotiator? None of these is a problem from the listing agent's point of view. The listing agent's job is to get the best possible terms for the seller, and every one of these situations is indicative of a listing agent who has done their job.

If I'm the buyer's agent, my responsibilities are entirely different. The vast majority of the time, that listing agent doesn't so much as get to talk to my clients. That agent has my contact information, not my client's, and I don't have a financial incentive to sell them any given property. I'm not going to let my clients get pressured to buy something that doesn't suit them, and even if the listing agent does (due to showing restrictions) get to talk to my client, I'm going to keep the conversation where I think it belongs. I've put listing agent's noses out of joint quite effectively by bringing client attention to defects or any number of other tactics, including the old "talk to the hand" standby where necessary. These people have designated me their agent, therefore, you talk to me, Mr. Listing Agent. It's my responsibility to pass it to the clients - along with anything I believe is getting left out. A good buyer's agent is not looking to sell their clients this property, they are looking to find the best bargain for the client's needs and make that happen. A buyer's agent has no responsibility to the owner of the property beyond "fair and honest dealing" - our responsibility is to our clients, the prospective buyer.

Any time you are looking to buy real estate, you are in a situation of asymmetric information. The seller knows more about the property than you do. A good buyer's agent is going to remove most of that gap in information. I know the area, or I wouldn't agree to work there. Simply by practice, I've become much better at spotting issues that buyers need to become aware of before they make an offer. Quite often, the buyer was aware of something I point out, but hadn't considered it in this particular context. It's a rare property where I don't get a look from my client that all buyer's agents should recognize, because it means the clients hadn't thought of that. Often, it's something that means I've just talked them out of a property they would have been miserable in.

It's not just in spotting defects, either. A lot of what I bring up has to do with long term livability of the property or relative value. I've saved clients from so many misplaced improvements that you probably wouldn't believe me if I gave you a number. Saving people from spending money they don't have to (along with the interest on the bigger loan that goes with it) happens multiple times with most clients. Beautiful is nice - but it's also seductive and usually over-priced.

Then there are negotiations. A buyer's agent has seen what's sold in the area recently. Unless you've had a long and unfruitful search, chances are that you have not - and they're not going to let you in now. A buyer's agent knows how this property compares to what has sold lately in the area. It's disgusting how often I find listings where the agent literally has no clue about the antecedents or the current competition. Often it's because that agent bought a listing - promised to get an unrealistic price in order to secure the listing contract. They're not going to get that price - except from people who think they're being "smart" by not having a buyer's agent. Far and away the largest reason for overpriced sales is people trying to "save" a little money by not having a buyer's agent.

Furthermore, quite often once you do get into negotiations, you discover that the other side has decided not to be reasonable, and there is a tension between whether it's a good enough bargain to stay in the transaction, or whether the attitude of the seller and their agent has crossed over a line into territory where you are better off bailing out. Just because you have started negotiations doesn't mean you are under any obligation to continue. Sometimes, even if you have a purchase contract, the best way to respond to a given situation is to decide you don't want the property that badly. If the owner is not going to fix problems they should, the purchase contract needs to be re-evaluated in terms of the rest of the market. This property might not be the bargain you thought it was. Better to discover that before there is an offer, of course, but before the transaction is consummated is better than afterward. That owner is stuck with that problem. Whatever it is, you don't want to take it off their hands unless you're getting something out of the situation that compensates you in your own mind. Then there are costs associated with the transaction, and who pays for them. Your agent should know what is and is not customary in your area, and why, not to mention the basic law behind everything.

Everywhere in the United States that I am aware of, the listing contract calls for the listing brokerage to get a set percentage of the sales price, and split that percentage in some wise with the buyer's agent, if there is one. If there isn't, the listing agent gets to keep the difference. There are reasons why the seller effectively pays the buyer's agent, despite the questionable nature of it - and consider too, that the only one bringing any actual money to the table is the buyer. Without the buyer's money, nobody gets anything, so everybody is being paid by the buyer. Nonetheless, trying to save money by doing without a buyer's agent won't get you any actual money, and you will end up paying all sorts of extras that don't show up on any official paperwork but are no less real, because you didn't know what a good buyer's agent knows, and therefore bought the wrong property for too much money and spent extra for stuff that really should have been the seller's expenses.

Caveat Emptor

Original article here

During the initial interview with prospects, I like to cover the division of the labor that goes into a purchase that makes the buyers happy.

I have to know what's important to the buyers, how important it is, and what the budget I have to work with is. My goal is to get my clients some combination of better property and a lower price that's at least ten percent better than they would have had otherwise. That's a realistic, achievable goal. But in order to deliver that bargain in such a way as will make them happy, I have to know what's most important to them, what's not so important, and what's not important at all. That way I can ignore the property where the owner is so proud of some modification my client doesn't care about that they're not prepared to be reasonable.

Once I know what they want and what their budget is, I can tell them how realistic they are being. A good buyer's agent can hit a goal of making a ten percent difference with pretty much every property purchased. I can't guarantee it, but I'm pretty certain all of my clients would agree I made at least that much difference. In some situations recently, it's been thirty percent. But I can't find three bedroom houses in good shape on the top of Mt. Soledad for $250,000. It's not going to happen, and it's no service to anyone to pretend that it's likely to. If your budget and your desires are mismatched, it is my responsibility to inform you of that fact right at the beginning.

Once we have a meeting of the minds on what is possible and achievable, and what may be necessary to do it, the job that comes next is finding "possibles". I define a "possible" as any property which meets the client's essential requirements and might be obtainable within their budget. Budgets should be expressed to agents in terms of purchase price, not monthly payment. Expressing it in terms of payment leaves you open to being sold a property with a negative amortization or some other unsustainable loan with an initially low payment that becomes unmanageable later. You get a higher priced and therefore more attractive property for a payment that's within the payment you told them, and by the time you figure out the gotcha!, they've already been paid, and now they're going to want you to sell the property through them so they get paid again!

Back to the "possibles." The primary responsibility for finding them is mine, but if the client wants to suggest possibles, that's great also. Once possibles are identified, I've got to do a little records research and go look at them. It doesn't take long - fifteen minutes inside each one is more than enough to tell me if this one makes the cut, as far as amenities and value and condition go. Because I'm looking constantly, I've got a pretty solid sense of where the market in my usual areas is. In most cases, I've been inside several that were initially built to the same floor plan that have already sold recently. I've got a laundry list of common problems I specifically look for and evaluate how bad they are if they are present. I've also got to see if I can find a reason why it's obtainable within the budget I've agreed to work with. The obvious case is that if the asking price is less than the client's budget, that's pretty good evidence. That's not the only possible evidence by any means, but it's a pretty solid indication. Where the cut is varies. The easier it is to find what my clients want within their budget, the pickier I can afford to be. The one thing I don't want to do is waste my client's time with below average properties there's no reason for them to be considering.

If a "possible" makes the cut for value, amenities, and especially condition, while being obtainable within my client's budget, it then becomes a "worth showing". This is when I bring it to my client's attention, we go take a look at it together, and I tell them what I see that's right and wrong with the property. Most of my clients aren't real estate experts. On the other hand, they know what they like and are willing to pay for better than I ever can. If the only way you'll ever take action is if your agent tells you it's perfect and doesn't have any flaws, please get real. No matter how great it is, there's at least a dark lining to every property. If it's huge and beautiful, maintaining it is going to be expensive or you're going to be losing some of your return to deterioration. Fact of life. There is no such thing as the perfect property unless you've got an unlimited budget. Seeing as not even the richest man in the world has an unlimited budget, one hopes that you get the idea.

Agents should tell you about the pluses and minuses of every property they show you. I want to make certain clients understand the implications of things they may not have thought about. I looked at six properties with a client the other day, and on every single one, there were things I pointed out that changed the picture in her mind dramatically. Agents shouldn't be shy about making recommendations as to which one they like or has the best apparent value. With that said, however, it's not the agent's job to tell the client which one the client should like. You're the one that needs to be happy at the end of things. No matter how much I like a property, if the client doesn't like it, that property profile goes into the wastebasket. Similarly, if the client likes one that I don't, it's my job to report the facts, not to talk them out of it. I can tell them why they shouldn't like it, but if I explain why they shouldn't like it and they still do, well, it's their money and their life. I'm the consultant, not the boss. I'm the hired expert who knows more about the market than they likely ever will, but the most important thing is that they're the one that knows their own mind best. It's darned few who are silly enough to disregard my advice, but they must be able to do so. I'm permitted to try to talk them out of making an offer, but not to prompt an offer, and whatever the clients want to do, they have to be the final authority.

Once they've decided to make an offer, it's my job to figure out how to conduct negotiations such that the clients get the best possible price. To this end, I'm always looking for things that aren't money to offer. For instance, with sellers nervous about committing to move out before close of escrow, a short term leaseback can make an offer more attractive. It amazing the difference that can make to the price the seller may be willing to accept.

Finally, the due diligence period is mostly on my head. Getting the inspections and appraisal done promptly is important. It's great if the client is there for the inspection, but despite lawyers who advise agents not to be there, it really is a responsibility that can't be ducked. I can't see how it can not be gross negligence to be not be present at the inspection. Make certain the client knows and understands what is going on. If I have to call the inspector back to explain something, I have to call the inspector back. Make certain the client understands the title report, the hazard report, etcetera.

A good agent provides lots of professional advice and input. More than some clients want, as a matter of fact. But real estate is enormously complex and if there were easy answers, everyone could do it. It's my responsibility to help you understand the issues, to make certain that you've got the best possible set of choices to choose between, and to make certain you understand the advantages and disadvantages of those choices (There will always be disadvantages, and if you don't understand this, you shouldn't be buying real estate). The decisions themselves, however, must be yours.

Caveat Emptor

Original article here

During the Era of Make Believe Loans, a lot of folks got used to zero real scrutiny of transactions. With values increasing rapidly, it was hard to lose money on real estate, whether you were purchaser or lender. One of the most common abuses has been Straw Buyer Fraud. Well, with local prices having receded roughly 30% and no rapid increases on the horizon right at this instant, a lot of lenders are getting burned on loans, losing money, and going back after those who aided and abetted and made those transactions appear more solid than they were.

Against that backdrop I got this email, with the subject, "I am a straw buyer":


I thought I was helping out a friend and HONESTLY did not think and/or realize I was doing anything wrong.

The friend has been making the payments for 10 months and is due to buy the property back from me at the 1 year anniversary (DELETED).

If he can't buy the property back (which I don't think he can), I want to approach the Lender. I can't afford the payments of DELETED and I don't want the property which is worth DELETED.

What kind of trouble could I be in?

Also there is an agent, a broker and an attorney involved in this scenario as well.

Well, California is an escrow state, so this isn't anywhere I can get involved, and the rules are different in every single state. As I've said before, the best thing to do if you find you may have violated the law is consult a licensed attorney in your area, and if it relates to real estate, make it an attorney who's a real estate specialist.

There are some generally applicable principles, but keep in mind that I'm not an attorney, so if there's any conflict between this and what your attorney says, believe your attorney.

The situation is this: You signed a Note, and in most cases, a Trust Deed or the equivalent. The Note says you owe the money. The Trust Deed pledges the property as security for that money.

In many states, California among them, purchase money loans are not generally subject to recourse. Unfortunately, you have committed fraud, which is one of the exceptions and therefore subject to full recourse in every state I'm aware of. Furthermore, loan fraud itself is usually a matter that causes the federal government to get involved, as most lenders are federally chartered. So you have a criminal fraud case, most likely at the federal level, quite likely conspiracy added to that charge, and on the civil side, you are going to be at least one target of a civil suit if the lender loses any money. You can also expect to hold a share of liability for the lender's attorney fees. That's the bad news.

The good news is there's quite likely evidence that you were led down the primrose path by those alleged professionals who should have kept you from breaking the law. This won't get you released from your basic responsibility for what you did, but if the feds and the lender bother with you, you're not likely to be their primary focus, and on the civil side, you're not likely to be the deep pockets they are really interested in. While neither the feds nor the lender is going to want to let you off the hook, you shouldn't be their primary target if you can show that you were advised to do this. Ignorance of the law is no excuse, but when comparing the level and degree of culpability, I'd expect that a non-professional led afoul of the law by allegedly professional advice you should have been able to trust is a fraction the culpability of those professionals who willfully advised you to commit an illegal action.

Now before you breathe a sigh of relief, let's consider the following: What if those alleged professionals aren't there any more? What if they're already out of business, broke, and in jail? Now you're the only target left. Ouch. Now you know how the last of Custer's men felt at Little Bighorn.

Here's another not so comforting thought: What if that property wasn't really worth what was paid for it? From what I understand, a large proportion of felons like to combine their scams. For instance, adding appraisal fraud usually doesn't add appreciably to the risk, while adding greatly to the reward. They pay an appraiser to come up with an inflated value, get someone to pay it, and voila! Extra profit! The games that can be played are legion. Usually, the sucker or mark is just so pleased to be getting "such a great property" that they don't really examine what's going on. Sometimes, they're so happy to be qualifying for anything at all that they won't examine the situation at all, for fear that they will won't qualify and it will all somehow melt away. It's been said before, but you're never so vulnerable as when you're trying to get away with something. If something seems to good to be true, it probably is, especially where hundreds of thousands of dollars are involved. In real estate, you always look the metaphorical gift horse in the mouth. If it's real, it will stand up to the examination. If it's not, you might just avoid paying three times what the property is worth, not to mention criminal prosecution.

Read those contracts. Really read them. Pay attention to paragraphs that say stuff like, "It is a felony to misrepresent information on this application." With hundreds of thousands of dollars on the line, they mean it.

If anybody claims to be helping you break the law or circumvent safeguards, run away! If they're willing to break one law, or one of their ethical responsibilities, ask yourself what reason there is to believe they won't break others? To be precise, their duties to you? If you're trusting them for advice, it seems likely they know the system a lot better than you ever will. There is a reason for every single law and procedure in real estate. The vast majority of the time, it's to protect consumers. If an alleged professional is willing to admit to doing one thing illegal or unethical, what evidence do you have that you're not going to end up one of the victims?

If there are legal ways around legal requirements and procedures that have been put in place, they almost always involves full disclosure to all parties. There some stuff that's none of the business of some parties, but that's because they have no reason to be interested. For instance, the listing agent in a recent transaction asked me for some financial history on the buyers that they had no need to know - they were just trolling for data which might lead to future clients, i.e. trying to get my clients' future business. For that sort of stuff, it's good to tell them something vulgar and report them to the state. But if you know or have been led to believe that the other side of the transaction is being deceived or intentionally kept in the dark, you should be hearing more warning sirens than a ten alarm fire during an air raid. Do all the agents know everything they need to? Does Escrow know? Does Title know? Does the other side of the buyer/seller transaction know? Most importantly, does the lender know? Are you sure? Did you tell them? If not, what evidence do you have that they know?

Nobody should ever rush you into signing anything. Take your time. If you're not certain you understand it, don't sign, no matter who's hopping with impatience. Even me, although I don't recall ever committing that particular sin. Taking your time and consulting disinterested parties may cost you some money, although your agent or loan officer is doing their job if they inform you of what consequences there may be. Not doing so can cost you a lot more money, plus your freedom for years and your credit rating for the rest of your life. Worst comes to absolute worst and you lose the transaction and your deposit, that's better than getting convicted of fraud and owing half a million dollars that the property isn't worth.

Caveat Emptor

Original article here

what happens when house doesn't appraise?

I presume this question meant "for the necessary value according to the lender's guidelines".

Lenders base their evaluation of a property upon the standard accountant's "Lower of Cost or Market." This is intentionally a conservative system, because the lender is betting (usually) hundreds of thousands of dollars upon a particular evaluation, and if something goes wrong, they want to know that they'll be able to get their money back. Or at least most of it.

When you're buying, purchase price is cost. When you're refinancing, there is no cost basis, we're working off of purely market concerns, except that for the first year after purchase, most lenders will not allow for a price over ten percent increase on an annualized basis. Six months, no more than five percent. Three months, about two and a half. Mind you, if you turn around and sell for a twenty percent profit three months later, the new lender is going to be just fine with the purchase price, as long as the appraisal comes in high enough.

But as far as a lender is concerned, you can see that no matter what the appraisal, the property is never worth more than purchase price on a purchase money loan. There is a transaction between willing buyer and willing seller on the books and getting ready to happen. It doesn't matter if the appraisal says $500,000 and you're buying it for $400,000. The lender will base the loan parameters upon a value of $400,000.

But what happens if the appraisal comes in lower than the agreed purchase price? For example, $380,000 instead of $400,000? Then the lender considers the value of the property to be $380,000, no matter that you're willing to go $20,000 higher. You want to put $20,000 of your own money (or $20,000 more) to make up the difference, that's no skin off the lender's nose. Matter of fact, they are happy, because it means they still have a loan, where they would not otherwise.

Keeping the situation intact, if you planned to put $20,000 down (5%) on the original $400,000 purchase price, the loan is probably still doable (or was when this was originally written in mid 2006, and 100% financing will almost certainly be back), albeit as a 100% loan to value transaction instead of a 95% one, which means it will be priced as a riskier loan and the payments on the loan(s) will doubtless be higher than originally thought. The same applies if you were going to put $40,000 (10% of the original purchase contract) down, except that the final loan will be priced as a 95% loan ($360,000 divided by $380,000 is 94.74 percent, and loans always go to the next higher category as far as loan to value ratio goes).

Suppose you don't have the money, or won't qualify for the loan under the new terms? That's why the standard purchase contract in California has a seventeen day period where it's contingent upon the loan (many sellers agents will attempt to override this clause by specific negotiation). If you get the appraisal done quickly, you have a choice. You can attempt to renegotiate the price downwards. How successful you will be depends upon several factors. But if you're still within the seventeen days, the seller should, at worst, allow the deposit to go back to you, and you go your merry way with no harm and no foul, except you're out the appraisal fee. This is not to say that the seller or the escrow company has to give the deposit back; they don't. You may have to go to court to try and get it back, depending upon the contract. The escrow company is not responsible for dispute resolution. If the two sides cannot agree, they will do nothing without orders from a court. If the seller wants to be a problem personality, you can't really stop them without going through whatever mediation, arbitration, and judicial remedies are appropriate.

Suppose the appraisal comes in low on a refinance? Well, that's a little more forgiving in most cases around here, at least with rate/term refinances where you're just doing it to get a better loan. If you have a $300,000 loan and you thought the property was worth $600,000 but it's only worth $500,000, that just doesn't make a difference to most loans. Your loan to value ratio is still only sixty percent, and it probably won't make a difference to residential loan pricing (commercial is a different story, and if you have a low credit score it might also make a real difference). On a cash out loan, it can mean you have to choose between less favorable terms and less cash out, however, especially above seventy to eighty percent loan to value ratio.

Once an appraisal happens, it is what it is. If the underwriter sees one appraisal that's too low, they're going to go off that value, and if you bring another appraiser in, the underwriter will usually average the two values, so even if the second appraiser says $400,000, the underwriter who has seen a $380,000 appraisal will value it at $390,000 (not to mention you pay for two appraisals). And a low appraisal can mean that the reason you were refinancing becomes impossible, in which case you're better off walking away.

What can you do about a low appraisal? Your options reduce to four: You can come up with more cash than you initially planned. This option is not available to most purchasers, but it is there. You can renegotiate the purchase price. Not too long ago, when the quality of appraisals was better and more controllable, this was a very good option, but right now with Home Valuation Code of Conduct, a low appraisal means a lot less than it used to regarding leverage to renegotiate price. You can begin the process again with a new lender, hoping the new appraisal comes in higher - assuming the seller will wait. Or you can walk away and look for a different property.

Caveat Emptor

Original here


A while ago, I wrote Sourcing and Seasoning of Funds. You'd think I have a set spiel I give out, and I do. But I had a case where I didn't think I'd need it, and it burned me. Nice clean loan, plenty of down payment all sourced and seasoned, and then almost $100,000 appears in the account on the last statement as I'm getting ready to close it. Instant can of worms - Oops.

Any time money mysteriously appears, the mortgage loan underwriter is going to take an interest. I don't need all your financial statements, I just need enough to get the loan approved. But don't go dumping large amounts of money into the account, just like you shouldn't go apply for a non-mortgage loan while a mortgage loan is in process.

These two items are related because whenever a large amount of money appears, the underwriter's presumption is that you got another loan. Whereas there is nothing inherently wrong with doing so, when you get a loan, you're going to have to make payments. Those payments affect your debt to income ratio, the most important measure by which you qualify for a loan. The underwriter is going to want to know what the terms of that loan are, how much the payments are going to be, whether those payments are fixed or variable, and all of the other things that help them determine whether you qualify for this new loan even with making the payments for that other loan.

So when a large amount of money appears, the underwriter wants to see sourcing and seasoning of those funds. They want to know where the money came from and how you got it and how long you've had it. If it was a gift, they want to know how the person who gave it to you got it, and they want evidence that no repayment is expected. If you can't provide this information, the presumption is going to be that you got a personal loan of some sort. Obviously, if it's a loan, you're going to have to make payments. The payments are going to add to your monthly debt service, which adds to your monthly cost of housing to determine your debt to income ratio. Every dollar you add to monthly cost of housing or debt to income ratio is a dollar that might mean you don't qualify for the loan on your new property.

It's a horrible lie about people from Missouri, but think of underwriters as Missouri accountants. If you want them to believe anything but the worst possible interpretation of a given fact, they want you to show them on paper. That's their favorite phrase: "Show me on paper." It doesn't matter how much down payment you have, it doesn't matter how much equity in case of default. Lenders are not in the business of repossessing property; they are in the business of making loans that are going to be repaid. Especially in the current environment, they don't want to take any risks that your property is going to be one more property in their already too high inventory of lender owned properties.

When you move money from one account to another, you need to show that it has been in the previous account for a while, or where you got it from. You're going to need a paper trail back just as far as all of your other funds on this new money. If you got it from selling your previous property, the underwriters are going to want to see the HUD 1 form from that transaction. If it's a gift, they want a signed letter attesting to this fact from the donor, as well as a source of that money. If you got it from selling something else, the underwriter is quite likely going to ask for copies of the bill of sale. If you're going to be buying property in the near future (or refinancing), keep all the paperwork from anything you sell. And for crying out loud, before you move any large amounts of money around, talk to your loan officer about what you're going to need in order not to kill your loan. Even if you've got all the paperwork, it can make the difference between an easy, straightforward loan, and one where the underwriter takes it into his head that there's something funny going on. You really don't want them to do that, because when it does happen, they can start demanding more and more information, imposing more and more conditions to approving your loan, and in general, delaying your transaction and making the completion of it difficult. Every time one of their loans goes south, an underwriter is potentially in danger of losing their job - so when they think something may be not quite right, they are going to protect their job by requiring all of the information they can think of that might show something isn't quite copacetic. If they should find something specific they can point to, your loan will be declined, and your credit file could very well get an 'attempted fraud' tag. You don't want that, as it can lead to your loan being rejected not just at that lender, but everywhere. So you need to be very careful, and very clean, about moving money around, especially so within six months of applying for a mortgage.

My loan? The client had the paperwork necessary to satisfy the underwriter. Loan funded, he's living there today. But not everyone has that level of paperwork. Better not to raise the flag in the first place by showing the underwriter the statements for the money you actually intend to use for the down payment.

Caveat Emptor

Original article here

One of the things that most mortgage and real estate consumers get mixed up on is the distinction between low-balling and junk fees. Junk fees are when they add fees that really aren't necessary to what you're paying. Low-balling is when there's an essential cost (or the associated rate) that either gets underestimated or they somehow neglect to tell you about. This can also take the form of costs such as subescrow fees which happen because your representatives did not choose your service providers with your best interests in mind.

A lot of this has abated since the 2010 Good Faith Estimate became required, but there are still loopholes that unethical people can drive a truck through.

As I said in Mortgage Closing Costs: What is Real and What is Junk?, "The easy, general rule is that legitimate expenses all have easily understood explanations in plain English, they are all for specific services, and if they are performed by third parties, there are associated invoices or receipts that you can see." In my experience, the vast majority of what extra fees that appear on the HUD 1 despite not being on the earlier forms are not the result of junk fees being added for no good reason, but are the result of real fees that your agent or loan provider knew were going to need to get paid, should have known the amount, and chose not to tell you about them or chose to tell you they would be less than they are. In short, low-balling is a much worse problem in the industry than junk fees. I've had people tell me my closing costs seemed high, because despite the fact that I have negotiated for discounts from providers, other loan providers were quoting significantly lower costs. What's going on is not that my costs are high - in fact they're pretty darned low when you compare the fees clients actually end up paying - but the fact that a large proportion of my competitors will pretend that a large percentage of those costs aren't going to happen. The penalties for this, in case you weren't aware, are pretty much non-existent. It's harder now to cross the is and dot the ts of increasing what was quoted on the Good Faith Estimate, but the real crooks have the entire process honed to a science.

The reason they do is is to make it appear for the moment as if their loan is more competitive than it is. What happens is that because it appears that their loan is cheaper for the same rate, people will sign up for their loan. They then invest the six to eight weeks necessary to fund that loan working with that loan provider. By the time they discover the real costs and the rate of that other loan are going to be much higher than they were initially quoted, there's no time to go back and get another loan - and that's if the people notice, and industry statistics say that over half of the people do not realize even massive discrepancies between the initial quote and eventual loan delivered.

This is why most loan providers don't want to tell you what your loan is really going to cost. It isn't that the extra is junk or in any way unnecessary. It's that they want their loan to appear more competitive that it may really be. All of the incentives are lined up in favor of this behavior - they got you to sign up, didn't they? - and there is no penalty in law. Of those people who do notice discrepancies, eight to nine out of ten will give in and sign anyway. For the unethical, their experience is that 90 to 95% of the people who sign up because of their false quote will consummate the loan and they will make money - and they make so much per funded loan that they're doing ten times better than the ethical people who practice full disclosure. That the ethical people are almost certainly going to end up cheaper is your incentive to do what it takes to find them.

This principle applies also to many agents' "estimate from proceeds of sale" form. Despite the fact that the default purchase contract and usual custom may have the seller paying for certain items, such as a home warranty plan and an owner's policy of title insurance, many agents will leave these costs off the estimate. Unless you're selling a fixer in utterly "as is" condition, you're going to end up paying for a home warranty plan. Unless the buyer's agent utterly hoses them, leaving that agent completely open to lawsuits, you're going to pay for an owner's policy of title insurance. Unwillingness to do so is a universal deal killer unless the buyers are getting a price more than good enough to make it worth their while to pay for it themselves. Even if they've deliberately chosen escrow and title providers such that you're going to pay subescrow costs, they'll likely leave those costs off their estimates. Why? To make it seem like you're getting a better deal from them than you actually are.

I've seen more than a few people who signed up with other agents or loan providers based upon ridiculous low-balls (and over-estimates of sale price). Without exception, these people end up paying every single one of those loan costs. It's not like the people who do the work are going say, "Oh well, it's not like we want to get paid for all this work we did." In the case of sales transactions, that's if it sells - and it's very unlikely to sell at all if it's overpriced. Nonetheless, this gives the person who gives the great line of patter - a supposedly "bigger better deal" - a large advantage in getting people to sign up with them. By the time the clients learn the truth, it's too late. Most people don't want to do the research up front to find out what's really going on. They wait until after they've already been hosed to do the research they needed to do in the first place.

Caveat Emptor

Original article here

What can a seller do to get the deposit when the buyer backed out after the time limit and just won't sign off on the money? My real estate agent is not helping at all. The real estate office was representing both the seller and buyer and I believe they don't want to upset the buyer and that is why they aren't pushing her to do the right thing. Thanks for any help.

This agent is not representing your interests in a fiduciary manner as demanded by the listing contract.

Real Estate is not sugar and spice and everything nice. Sometimes - quite often, actually - doing your job as an agent means that you have to do something unpleasant by taking your client's side. If your agent isn't willing to be a complete jerk on your behalf if they have to, they're not worth a talking to, much less signing a contract with.

This is another reason why Dual Agency is a bad idea from the consumer's point of view. Most of the reasons are from the buyer's side, but here's a concrete example why you do not want to permit your listing agent to also represent the buyer. Since when I originally wrote this, about thirty percent of all purchase contracts fell out of escrow for some reason or another - and that number has since exploded to over fifty percent - ask yourself how you'd feel about your listing agent trying to preserve the buyer's deposit even though you, the seller, may be entitled to it. You gave them sixty days or more exclusive shot at that property, paid the mortgage and all the other bills for that time period, and could not sell it to anyone else while they were wasting all of that time and money of yours. This is a very common phenomenon when one agent tries to represent the interests of both sides. But your interests call for the buyer to forfeit the deposit, and if they want to continue to represent you, they need to act in your best interests. In this case, your agent hasn't done that.

This isn't to say they have to start with scorched earth. A simple request to sign the cancellation and release of deposit is very reasonable - and precisely what they agreed to when they wanted to represent both sides, if the transaction fell apart. When there's no other agent, there isn't anyone else to do the job. They're it, because they tagged themselves by requesting dual agency.

Agents, however, are not lawyers, arbitrators, legal mediators, or judges. They have zero authority to force their other client to sign the cancellation and release of deposit. Some people won't do the reasonable and intelligent thing, whether it's because they're hoping to get away with it, or because they don't think it's the reasonable and intelligent thing, or for some other reason. But a failure to even ask is gross dereliction of duty, and a failure to do their utmost in persuading the other side to release you the money is a failure of their contracted fiduciary duty to you.

This means that you quite likely have a valid reason to cancel your listing. Consult with an attorney, but from the information presented, they have clearly failed to represent your best interests in accordance with that listing contract. As far as calls upon agent loyalty go, listing contracts conquer everything but the law in terms of interests to guard, or at least they should. That's why I give each and every one of my buyer clients an explicit written release of any obligation if they should choose to buy a property I'm listing. They can always find another buyer's agent to represent them, but the sellers are contractually committed to staying with me for the contracted period. I also tend not to show my few listings to my contracted buyer clients, for reasons I've gone into elsewhere.

One hopes you see why I make such a big deal about putting in the work to find a good agent. Here you are with months and multiple thousands of dollars gone, and you have absolutely nothing to show for it because your agent is a self-serving bozo. You don't need to fret about finding absolutely the best agent there is, but you do need to find one who knows what they're doing and will do what is necessary to represent your interests. I wrote a two part article How to Effectively Shop For A Listing Agent (Part I) and How to Effectively Shop For A Listing Agent (Part II) on this very subject. Chances are, there is more than one good agent in your area, but the good ones are usually outnumbered by the bozos, so just using your relative or friend is like playing Financial Russian Roulette with four of six chambers loaded. Nor is "top producer" any kind of sobriquet I'd want for my listing agent, because they're talking about overall volume of sales, and that's not likely to be present in the agent who can actually get top dollar for your property. All of the agency mechanics that favor mass production of sales work against them getting the best price possible for any particular property. To be fair, this works in the other direction as well, but it's not your problem. You want someone who's going to get the best possible price for your property, not someone who mass produces transactions. If they've chosen the other path, you don't need to feel guilty about passing them up in favor of the boutique agency that busts their backside to satisfy you. That high producing chain is making plenty of money off the suckers who don't know any better.

Caveat Emptor

Original Article here

"buyers agent refuses to make offer" was a search hit I got recently. This is yet another reason not to sign exclusive buyer's agent agreements.

My hypothesis - and based upon experience it's pretty strong - is that the CBB is lower than the agent would like. The CBB is the "cooperating brokers" payment - that share of the selling agent's commission that will be paid to another agent who brings in the buyer.

Now, to repeat what I've said before, the standard listing agreement gives the entire commission to the listing agent if they bring in the buyer themselves, or if the buyer has no agent. But if they want buyer's agents to bring their buyers to this property, or if they want it to sell quickly, they'll make certain the buyer's agents have a good reason to bring the buyers by - in the form of a reasonable CBB. Three percent seems to be average around here now, up from 2.5 about a year ago, and properties that want to sell go higher. Even the discount brokers that will settle for 1% to list (or a flat fee) will tell you to offer at least three to a prospective buyer's agent. It's not mandatory, but it does work to sell the property.

The default buyer's agent contracts (exclusive and non-exclusive) in my area specify a 2% commission from the buyer to the agent but state that any commission paid by the seller is to be used to offset this first. What this means is that as long as the agent finds you a property paying at least 2 percent to buyer's agents (CBB) the buyer pays zero. See What Do Buyer's Agents Do? for more information. (If they don't find you a property that you buy, no commission or other obligation is incurred)

Now my attitude is that as long as my buyer isn't going to have to come up with cash out of pocket for my commission, I want to move from "looking" to "negotiation". Because my contract with the buyer is non-exclusive, they are free to look elsewhere, and with other agents, cutting me out of the process entirely if I don't perform. Therefore, my motivation is to find them the property they want, and get the transaction moving. This isn't particularly virtuous on my part; That's where the incentives are. I haven't seen a CBB lower than 2 percent ever, that I can recall, except for a few greedy, almost always drastically overpriced FSBOs.

Suppose, however, Joe Realtor has your signature on an exclusive buyer's agreement. Now he's got your business locked up for six months or a year, no matter what. You can't buy anything without Joe getting paid. This creates a different incentive. Now Joe can pick and choose what properties he wants you to see, what properties he wants you to make an offer on. If you don't like his work, you are still stuck with him until the agreement runs out. If you go elsewhere and buy a property, Joe still gets paid, without really doing anything. If Joe gets two and The Other Guy gets two, and the CBB is three, that's one percent you've got to pay out of your pocket at a minimum. Maybe two percent, because The Other Guy is going to take the viewpoint that he did the work for that property, and is entitled to the full commission. When lawyers get involved, you never know how it'll end up. My only advice to to heed Sancho Panza's words of wisdom, "Whether the pitcher hits the stone or the stone hits the pitcher, it's going to be bad for the pitcher." The legal system makes a pretty good substitute for the stone.

So Joe Realtor thinks he's got your transaction locked up with an exclusive agreement. So he's thinking of this transaction as being in the bag, and he wants to make it as large as possible in his favor. So if the CBB is listed as 2.5 or less, he isn't interested. He wants three at least, more if he can swing it. He also wants the transaction to be as large as possible, by the way, and if he can think of a way to talk you into a property where the only way you can qualify is a stated income negative amortization loan, boy has Joe got a paycheck coming!

Now it happens that flatly refusing to make an offer is one of the ways to potentially break an exclusive agency agreement (the relevant legal stuff varies). On the other hand, Joe is not going to let you go willingly. By the time you've spent fourteen months in court and thousands of dollars for your lawyer, you will probably wish you hadn't, particularly when it turns out that your claim is a "he said this, the other guy said that," case, as you have no documentation. Better to just wait until any claim Joe may have is moot. Better still not to sign the exclusive agreement in the first place.

If you're a seller wanting to make the best possible profit, you might want a listing contract which gives more than half of the overall commission to the buyer's agent. The larger their commission, the more buyer's agents you attract, and therefore, the more buyers. It's a "catch more flies with honey" sort of thing. Mind you, the listing agents will resist this, but until you sign the listing contract (which should be exclusive, by the nature of things, at least for a given property), you are the one who holds the power to control the transaction by walking out. Don't stint the listing agent, as they're the professionals who you're counting on to help you out in marketing and negotiation. But giving incentives for buyer's agents to bring buyers to your property, instead of the one two streets over, is typically money better spent in all but the strongest of seller's markets.

Caveat Emptor

Original here


My take on the matter is "mostly no", but they do have some uses.

The one advantage that they usually carry a lower interest rate. There have been exceptions to this, just as there have been exceptions to the 5/1 hybrid ARM carrying lower rates than a thirty year fixed rate loan. There was a period not too long ago where for exactly the same cost I could deliver a 30 year fixed rate loan three eighths of a percent lower in the interest rate than the best fifteen year fixed rate loan then being offered. I just checked again, and the world has gone back to normal in this regard with the 15 year loan being lower interest rate for the same cost. So that is one benefit - lowered interest rate and lowered cost of interest. For a $300,000 loan amount, that would save you $1125 per year in interest charges, or $93.75 per month to start with, and increasing as time goes by. Solid benefit. Mathematical Fact.

Now let's consider the drawbacks. The first is that the payments are much higher. Why? Because you have to pay that principal off in half the time. I'm considering rates to be had at wholesale par when I originally wrote his article, but these are equally valid in other contexts. On a $300,000 loan at 4.75% for a fifteen year loan, you're paying $2333.50 per month, versus $1633.47 at 5.125% on a thirty Suppose you have unexpected expenses, lose your job, or take a pay cut. On a fifteen year loan you are still obligated to make that additional $700 payment every month. The payment isn't twice as big, and it does save you a very large chunk of change if you pay your loans off. But there's nothing stopping you from voluntarily paying extra on a thirty year fixed rate mortgage, either. A month before, I was telling people who wanted fifteen year loans to do exactly that. If the rate on the thirty year fixed rate loan is lower (as it was then), it's a 100% gain to get a thirty year fixed rate loan and simply add extra to the principal payment every month. Plus you have the option of not doing it if your finances change.

Let me make another observation: most folks don't pay loans off - even 15 year loans. Statistically, the number of folks who haven't sold or refinanced before five years is is less than five percent. Some situation will arise which makes it better to pay off that loan early, via a sale or refinance. When it happens and you have been adhering to a fifteen year payoff schedule (whether you have a fifteen year loan or thirty year fixed rate loan you've been paying extra on), you get a large extra chunk of cash back on a sale, or you owe a lot less on a refinance. Bully for you, good show, and all that. But don't kid yourself that it led to an earlier payoff of your loan.

If you're the sort of person who is just buying their primary residence, going to pay it off without ever refinancing, just going to spend the extra money when the loan is paid off, and would never consider investment property or alternative investments, that's about the limit in complexity we're talking about here. Verdict: yes, get a fifteen year loan. But if any of those assumptions is not valid, then we've got some more work to do.

First off, if you're the sort of person who is looking to get into investment property, especially more than one: Higher minimum payments hit your debt to income ratio (and cash flow) hard. It would be very easy for me to come up with a scenario where you would be accepted on three or four thirty year fixed rate loans, putting the power of leverage to work for you where it does a lot more good, where you would be rejected for a second 15 year loan, simply because the debt to income ratio doesn't work. With the unavailability of stated income, this is going to bite an awful lot of people and keep biting. Where you could have your own property and three investment properties all with positive cash flow on thirty year loans, you could quite likely be stuck with your own property and possibly one investment property on fifteen year loans, and even if the loans were approved, be in serious negative cash flow land. Negative cash flow is a very bad thing for real estate investors - it's the number one reason why real estate investors are forced to do bad things they don't want to do, like sell in a tough market. If you've got positive cash flow and sustainable loans, the question is "How long is it going to be before I sell for a huge profit?" not "can I hold on another month?"

Second, we haven't considered a hypothetical alternative investment yet. Let's look at this very situation, and suppose we can earn an annualized 9% with alternative investments (right now, with the financial markets in the state they are in, I would bet on the historical average of about 10% being too low, for people with the guts to buy into a down market). Let's consider what happens when we take that extra $700 per month the fifteen year loan would require, and invest it. After 15 years, it has become $264,770 - which is actually more than enough to offset the difference in what you owe ($204,868 versus zero), despite the fact that the thirty year loan carries a higher interest rate. Start investing that $2333.50 you were paying every month to the fifteen year lender in exactly the same investment at exactly the same yield. Carry it out another fifteen years, and where both loans are paid off, that thirty year loan and invest the difference strategy has netted you $1,281,520.44, versus $883,009.86 if you waited the fifteen years to start investing while you paid off your property, a difference of almost fifty percent. Mind you, this does presume you actually make that investment every month, but if you're just treating it as an abstract problem to see which use of the same money nets you more money at the end point, the thirty year mortgage and invest the difference strategy really does come out way ahead. In the real world, nothing pays a smooth 9%, and there will be fluctuations - but those fluctuations are more likely to benefit the strategy that starts investing earlier.

If this seems counter-intuitive, consider that by taking the fifteen year loan, you're taking money you could earn (an average of) 9% on, and using it to pay off a tax-deductible 4.75% debt. Doing that doesn't make a whole lot of sense to me, and the numbers in the previous paragraph don't even take into account tax deductions for home interest, which will cause even more advantage to the thirty year loan. An accountant probably wouldn't bother running the numbers unless you insisted upon knowing exactly how much it would cost you..

One final item before I go: It is much harder to recover the cost of points on a fifteen year loan than on a thirty. Most people never do get the money they spend back on thirty year loans, but on fifteen year loans, it can be truly horrid. For the rates in effect today, it takes over half again as long to recover the cost of two points on a fifteen year fixed rate loan as it does on a thirty year fixed - and since the loans are for a shorter period, you won't get them back as many times over, even if you do keep the loan long enough to pay it off. I have seen many rate sheets where the payment and cost of interest actually works out lower for a higher interest rate, due to the costs of buying the rate down. In such circumstances, you literally never recover the additional costs. Watch your actual costs, and things that may not be costs like prepaid interest and money to seed an Impound Account. On fifteen year loans, they become proportionally much more important than on thirty year loans when they find they way into your mortgage balance, especially if the payment was something you only marginally qualified for to begin with.

Caveat Emptor

Original article here

One thing that is very common in the mortgage industry is masking loan costs by rolling them into your loan balance. People are less sensitive to being asked to roll this money into their loan balance than they are about writing a check out of their bank account. In the latter case, everybody understands that this is money you busted your backside to earn and save. In the former case, a lot of folks don't understand that the money is every bit as real.

Indeed, one of the standard ways to deflect questions about cost that seems to get taught to every loan officer by every loan provider is the phrase, "Nothing out of your pocket." This does not mean there's no cost. That's not what it means. What it means is that they don't want to talk about what the loan is really going to cost, as they're going to have to do if you're writing a check. Therefore, they want to roll it into your balance on the refinance. Most people in most situations have had their property value increase since the last time they got a loan, which likely means there's plenty of equity to cover it.

For purchases, you can't really do this because your value is never more than the purchase price. There are only three places for loan costs to come from: Your pocket, your down payment, if you have one, which reduces to your pocket, and Seller Paid Closing Costs. Seller paid closing costs are an agent and loan officer favorite, because it makes it look like you're not paying them, even though you are. If nothing else, a smart seller would rather take $10,000 less in purchase proceeds than pay $10,000 of buyer's closing costs, on which they are going to pay commissions and taxes to boot.

This trick of making it appear like you're not paying closing costs is one of the best ways to get stuck with an awful loan, but most folks won't do the research until after they've already gotten burned. You are paying those costs in one fashion or another, I personally guarantee it. There is more than one way to pay them, but if you don't know how you are paying them, you are probably not paying them the way you want to, and you're almost certainly paying too much as well.

There is ALWAYS a trade-off between rate and cost in real estate loans. It can be very intelligent to pay some or all of your closing costs by accepting a higher rate, especially if you don't plan on keeping the loan very long. Most people don't keep their loans nearly long enough to justify paying high closing costs. If you know you're going to sell or refinance within a few years, or think it likely that you will, it's likely to save you money if you accept a higher rate that has lower costs. On the other hand, if you're 100 percent certain that you're going to keep this particular thirty year fixed rate loan the rest of your life, sinking a couple of points into reducing the rate can be an excellent investment. However, be aware that if you later decide to refinance or sell after all, you're not going to get your previously sunk costs back.

People get talked into rolling multiple points into their loan because it reduces their rate, and therefore their payment, aka the check they're writing every month. Let's consider two rates and the associated costs I quoted the day I originally wrote this, on a maximum conforming loan, thirty year fixed "A paper" (Rates are much lower now, but the principle remains the same). 6.5 percent was 1.5 points, or $6255 in real money, plus about $3400 in total closing costs when you consider title and escrow and appraisal. You'll find a lot of loan providers will go a long way to avoid quoting you the actual cost of points in dollars. But at 7.00 percent, I could give them back about 15 basis points, or $625, towards reducing their closing costs of about $3400. So assuming a $417,000 loan, this person would really get:






rate

6.5

7.0

useful $

407,345

414,225

cost dif

+$6880

-$6880

int/mo

$2258.75

$2432.50

int dif

-$173.75

+173.75

breakeven

39.6 mos

39.6 mos




However, that's dodging the real purpose of this essay. Suppose a loan officer was to pretend that these costs didn't exist when quoting you their loan rate. Their loan would appear to be cheaper, so that you would be very likely to sign up with them, but when the facts became apparent later on - that those costs exist in reality, whether your loan provider tells you about them up front or not - you're likely to continue with their loan anyway, because you don't have time to get another loan for one reason or another, or you just decide to stick with what you've started.

Furthermore, by pretending you don't have to pay loan costs, that makes it easier to get you to accept outrageous ones. Suppose your choices were to pay that $9700 in points and closing costs to get that 6.5% rate in cash, or you could pay $15,000 by rolling it into your loan balance. It is a sad fact that most people don't understand that this is about a point and a half more in costs that are every bit as real as dollars coming out of their checking account. However, most people are a lot more careful with dollars in their checking account because they understand that those dollars are real money. They had to earn it, dollar by dollar - in the form of so many minutes out of your life per dollar if you earn an hourly wage. Then they had to not spend it right away, as soon as they got their pay! Most folks figure they have something to be proud of if they save ten percent of their pay, but if you make $5000 per month, it takes over a year and a half to save $9700 if you save 10% of your gross pay. They understand that $9700 in terms of the nineteen months of their life it took them to save it. If they're just rolling it into the balance of their mortgage where it's being paid for by the fact that the home increased in value, it may be more than half again as much money, but a lot of folks somehow think it's not as real, and they'll accept rolling it into their balance much more readily than writing a check. It doesn't matter if you're writing a check or putting the money into your balance - a dollar is a dollar. By accepting the higher cost loan, not only are you wasting over $5000 of your money, but you're paying interest on it in the meantime.

If it's an expensive loan, it's an expensive loan, whether you're rolling it into your balance or paying it direct out of your checking account. If you're paying too much money by rolling it into your balance, you're still paying too much money, and it's at least as bad as if you wrote a check or even counted out the cash. Doesn't matter whether you're writing a check or rolling it into your mortgage balance. So before you sign that loan paperwork, ask yourself if you'd be as happy with that loan if you had to write a check for every single dollar, or even count it out $20 at a time like an ATM machine. Chances are you'll be a lot more careful with your hard earned money.

Caveat Emptor

Original article here

One thing prospective home buyers need to understand and don't is that there is always a reason for a low asking price. To emphasize: There is always a reason for a low asking price. Sometimes that reason is something you can deal with, sometimes it isn't, but until you know, you're risking your money on an unknown.

Look at the situation from the seller's point of view: They have this valuable property. They want to get as much money for it as they possibly can. So unless it's your mother or favorite uncle or similar family member giving you a deal on property they've owned forever, get religion about the fact that there is a reason why they're asking fifty thousand dollars less than all the comparable properties. It could be that there's a broken slab. It could be that there's a condemnation about to start. It could be the golf course is about to close, or that a chemical manufacturing plant is about to get built. It could be something you can't see that will cost loads of money down the road, such as a broken water pipe undermining the foundation. It could be any number of things. Every once in a while, the reason is because their agent persuaded them to put a low asking price on it as one way to get lots of suckers to come out and bid against each other and run the price up (That rarely works, though).

Usually, the asking price on properties of this sort should be even lower. It only seems low because you don't know what's wrong with it and what it's going to take to fix the problem - if it can be fixed. Lots of prospective buyers don't seem to understand this. The "get rich quick" scams never point it out - doing so would severely restrict their supply of people willing to plonk down hundreds to thousands of dollars for whatever "system" they're trying to sell. But it's true, nonetheless. There are any number of reasons for a low asking price, but there's always a reason.

Every once in a while, the reason is "because they need a quick sale." But just because they tell you that doesn't make it true. Even if it is true, doesn't mean it's the only reason, or that you know the reason why they need a short sale. Just because you know one reason, doesn't mean you necessarily know all the reasons for the low asking price.

If you read between the lines on MLS, you can often figure out what the reason is before you even go out to a property - or at least an agent who does this all the time can. But it takes careful reading, and thinking about what they're really saying - or what they're not saying. Keep your eyes open when you visit the property, and the reason for a low asking price usually becomes obvious - or at least one such reason does. Fairly often, there are one or more secondary issues that aren't so obvious that may well cost even more to fix than the obvious issue that leaps out and grabs you.

If you're certain you know what the issues are, and you are able to deal with them, that's what people call an opportunity. But that is a very different thing from walking in cold and taking somebody's word for the fact that the little old lady who used to live here needs to sell because the nursing home needs the next month's payment (Hint: this doesn't happen. Granny can get a Reverse Annuity Mortgage if she's that desperate, and whereas I recommend against RAMs in almost all cases, this is one exception where they are the lesser of two evils, as compared to just giving away a big chunk of equity).

When there's a low asking price, be thinking in terms of things that most buyers can't deal with. Defects that prevent some or all loans from being funded. Probate where there is no money to rectify even safety and habitability issues. Things that prevent your average buyer from actually carrying through on an intention to buy a given property.

Sometimes, as with lender owned properties, it's merely that no one knows if there are problems or not. Maybe it's just cosmetic stuff like paint and carpet, maybe it's a bad floor plan, and maybe it's something a lot more serious. Get yourself a good buyer's agent and go into the property with your eyes open. Be religious about investigating the property; you're risking the full purchase price, not just the down payment, whether you realize it or not. Plus interest due on the loan, of course. Buying a property like this is always a risk - but it's what insurance underwriters call a speculative risk. As opposed to a "pure risk" where there is only opportunity for loss, speculative risk means there is opportunity for gain, as well. Gambling is the poster child for speculative risk so you need to understand it's a gamble, but when you buy a property of this sort, there is opportunity for both gain and loss. It's never difficult to understand the opportunity for gain - people will stand in line to point those out to you. It's the opportunity for loss that you've got to watch out for. A good buyer's agent will save your backside on this score more often than most people would believe.

Caveat Emptor

Original article here

What I still am unclear on is the pool and how (in my opinion) it's crazy to finance $40,000 into a mortgage when you *plan* on refinancing in a few years. By *plan* I mean you take out a mortgage that you know isn't what you want but you took it because the builder forced you into it with "incentives" or they just plain wouldn't build a house for you if you don't use their lender and the builders lender is looking out for the builder, not you. I guess you can't *know* that the pool won't add value . . . especially in a new area where there are no comps . . . but am I crazy here?

Another situation I don't get is with all the "upgrades" they try to get you to buy with a new house. Blinds, paint, water softener, ro water filter, counter tops, cabinet upgrades. I wonder if you would be better off just getting the cheapest options and then upgrading later when you can afford to pay cash. I can guess that's the case but people figure life is too short to live in a a despicable house that has a kitchen with laminate counter tops instead of granite!! (I have laminate and somehow my wife and I manage.)

And that leads me to the pricing on new homes and how the builder sets the price and somehow the lender will lend you money on a house that may or may not be worth what you end up paying (granite counter tops may add value to the house but probably not $10,000). The more I learn the more I realize how much I still have to learn.

Builder upgrades are an almost entirely different set of rules and calculations than after-market upgrades. There are reasons for this that mostly reduce to "The lender can do a lot of things if they really want to, but most lenders don't have a reason to want to." For all of this, keep in mind that my normal stomping grounds just don't have a whole lot of new developments any more, so I don't deal with developer issues a lot, and it's very possible for the rules to change while I'm not doing any developer deals. I'm working with one set of clients right now who might end up buying in a new development, but it's been over a year since my last set of clients who bought just one (although if there are any developers reading this, I do have one investment firm client who wants to buy out the last of any new development that isn't moving quick enough).

The normal after-market upgrade, if you want a normal mortgage loan for it, has to be justified in terms of the property's current numbers. In other words, if you want to take $50,000 cash out to put in a pool, you must already have $50,000 equity available to you. You have to qualify for that loan debt to income ratio and loan to value ratio exactly as if you were going to take that money and buy lottery tickets with it. In other words, without the value of the proposed pool or other improvement added to your property, solely based upon the situation as it sits now.

With builder upgrades, however, there's a little more latitude built in - especially where the builder controls the lender outright. Sure, the property is really only worth maybe five thousand more with that pool they charge you fifty thousand dollars for installed, but because the basic number equates to money in their pocket directly, as well as money that they're going to earn interest on, they have a motivation to be more forgiving than in the case of the lender who is not getting $50,000 placed into their left hand while they loan it out - at interest - with their right - and there is always a risk they don't get the loan repaid. In many cases, even if they don't control the lender directly because they're not that big yet, the developers have made an agreement to indemnify the lender for any losses they take as a result of lending that money. The builder is secure in the knowledge that they'll make a lot more from the increased number of upgrades than they'll lose from the small proportion of defaulters. However, this should explain to consumers why sometimes builder's preferred lenders can do things nobody else can - because they're getting paid to do it. Furthermore, because they can do something nobody else will, they can charge a premium, either in rate, points, or both, over general market rates. Because the consumer wants the home with these upgrades, and because this is the only way anyone will lend on it, there's money to be made! Usually, there's plenty of money to go around - the consumers are, in aggregate, paying for it. Surcharges and premiums on the secondary mortgage market can go anywhere from two and a half percent up to six percent, perhaps more. On a hundred $500,000 homes, four and a half percent is over two million dollars additional clear profit. Even if three of those homes default, losing roughly fifty thousand in each case, they've still cleared more than two million extra profit for having done this.

(This is not to say that many after-market contractors don't have their own finance department cranking out trust deed financing even if the equity may not be there to pay it right now. But this way they get the job, which means they make the money for that job, and most of these contractor loans carry rates well above regular current market, so they can make more on the job as well as on the loan. How remarkably analogous!)

An additional thing to be aware of is that being technically 'upside down' on your loan as far as any other lender is concerned, if rates drop it will be difficult to refinance and take advantage of them.

As for whether it's smarter to upgrade with the builder or wait and pay cash, there's an argument for each side. On one hand, the argument for waiting is that you are a lot less likely to owe more than the property is worth if you need to sell. Furthermore, you're not paying interest on depreciating fixtures, a classic double whammy anyone who's even bought a car on credit can relate to. It also lowers the likelihood of getting into a situation where you have to sell or refinance while you're upside-down on the mortgage.

Because you're not asking for anything special or difficult in the way of financing, you can at least theoretically go anywhere for your financing. Builders in California cannot legally require you to use their lender, which is not to say it doesn't happen - sometimes blatantly in violation of the law - but that's the theory, anyway, that you should be able to shop the market. If you want a loan any lender can and will do, you're going to get a better price on the loan - fact. The loan on a property with builder upgrades, however, is often something only the builder's chosen lender will do.

Finally, the cost of most upgrades is rarely recovered in increased sales price when the current owner sells. Spending a dollar, and paying interest on it, to make back twenty cents in eventual increased sales price strikes me as shooting yourself in the foot. It is to be admitted, however, if it was worth a dollar to you to have the upgrade, the twenty cents is icing on the cake.

Against this, however, is the cold hard reality of labor costs. If you build in granite counter-tops in the first place, the only increase in costs is the comparatively small increase for more expensive materials. If you wait until after it's done, you've got to tear all the old work you've already paid for out, then pay the labor costs to put the new counter-tops in, as well as new materials, the cost of haul away, etcetera - not to mention the restaurant meals you'll be eating while it gets done. At anywhere from $15 per hour up, plus benefits plus markup, that labor isn't cheap, and it's usually at least a couple of workers for several days.

Builders know all of this, and that it's very attractive to roll the upgrades into the cost like this. When they build a property "on spec" (meaning it hasn't sold before the framing is done at the very latest), they typically build in all of the upgrades they can, and if you went to them to take a completed property off their hands, but wanted something not upgraded, it's likely they will be unable to accommodate you (This is a negotiating opportunity on the rare occasions it happens!). They don't tend to build very many "on spec" around here, or anywhere else if they can avoid it without worse consequences, but that's what they do when they do it.

There's also one more argument in favor of builder upgrades: You won't get your extra money out of them, but in slow markets like right now, it's more likely the property will sell if you do need to sell it. There are always suckers out there who will zero in on the upgraded property because "it's soooo beautiful!" even though there are better bargains nearby. Real estate fixers and flippers worldwide make their fortunes on the backs of these people, but they're legal adults deciding this stuff is worth their hard-earned money. Who am I to say it isn't?

Builders set their prices on the same motto as Poul Anderson's Polesotechnic League: "All the traffic will bear!" (I highly recommend his Van Rijn and Falkayn stories, by the way.) Profit isn't evil, it's what motivates developers to build places for people to live. But there's nothing that says you have to cater to it by forking over excessive numbers of your hard earned dollars, either.

Caveat Emptor

Original article here


The genesis of this article is Something's Gotta Give, a report (.pdf format) from the Center For Housing Policy. Furthermore, there is an article in the Washington Times from UPI that connects the dots on the tactical level.

The Center for Housing Policy report details some of the costs to society. Not surprisingly, when people are forced to spend a large portion of their income on housing, they have less to spend on other things, and so they can't spend as much on other things. Lest you think I'm talking about Lexuses, Lattes and Liposuction here, I am not. I'm talking about bare minimum things like food - as in people going hungry because they don't have enough to eat. Far from talking about liposuction, I am talking about basic medical care and insurance. I am talking about clothing, which, rightly or wrongly, people use to judge the worth of other people, and people who cannot afford good clothing are not given the opportunity to advance because no one will hire them. I am talking about basic transportation needs, without which people's job-hunting prospects are limited to the places they can walk. If you cannot get from work to home and back again in reasonable amounts of time, then you're either not going to live here or not going to work there.

Nor am I talking about the needs of some nebulous underclass. As the NHC report makes clear, these are people earning up to 120 percent of national median income. Furthermore, they are among the fastest growing classes of worker.

Below the first level effects, there are others lurking, largely unmentioned in the report. But malnutrition, parental depression, and lack of good medical care are the causes of many other ills. Malnutrition allows health problems to become chronic and generates more health problems. These are people who have more difficulty getting and holding jobs. So long as we have societal programs of social insurance, these folks are going to cost us, as a society, tens to hundreds of billions of dollars annually. If they can't hold a job, they've got to get money somewhere. No job means welfare or crime, and both are bad situations not only for that person, but for everyone else as well. Poor or no medical care makes any problems they have worse than they need to be, further increasing both explicit costs, what we actually spend on them, and implicit costs, money they don't make, taxes they don't pay, and other stuff that they suck out of society. Long commutes people suffer in order to buy housing they can afford means less parental supervision of children, leading to delinquency, increased crime, and other problems a few years out. Most critically, difficulty with money is the number one cause of divorce, and when families go through a divorce, the standard of living suffers even more and more long term societal troubles ensue.

Who is causing all this bad stuff? The short answer is that we all are. The cold hard fact of the matter is that they are not making any more land. Housing needs land. Land that is in use for other uses, whether it is industrial, commercial, open space, or other housing is not available for housing. Higher population means we (as a society) need more places to live. Anytime we add a person or a family, we add the need for that person to live somewhere. We can't just push them under the workbench in the garage until the next time we need them. Well, actually, I suppose we could, but I am certainly not going to vote for policies like that, nor, I imagine, is a majority of the electorate. So that fry cook at Lenny's, the cashier at the supermarket, and the nice lady who helps you carry your purchases out to the car at Home Despot, all need places to live.

Cold hard fact number two: In the high density places where jobs are to be found, land is expensive. In fact, it is far and away the most costly thing about a place to live. I can show you places where the lot goes for $350,000, while the finished home goes for $500,000. Considering the economic realities: Developer has to buy the land, then apply for permits that take years, then put the homes up for sale. Developer has to pay for the land, the cost of the money to own it for the years that are necessary, the property taxes, the cost of the permits, the cost of the people to get the permits, the labor and materials to build, and of course, they have to pay the people that sell the finished product. Except for the comparatively minuscule costs of labor and materials to build, these are all fixed costs! They are what they are. So if the developer pays another $5000 for labor and materials, and can sell the house for $200,000 more because it's got two more bedrooms and Italian marble floors, that is obviously the way for them to make a better profit. So they build the higher end home, which cannot be afforded by the lower income buyer. If the government requires so many homes to be set aside for lower income people, that merely increases the money they have to charge for the rest. Plus the "low income" buyers are likely to sell as soon as their contract limitation on doing so runs out. Just because Mr. and Mrs. Lower Income Couple only make $40,000 per year doesn't mean they don't realize they can make enough money to pay their rent for the rest of their life by selling the home that the city forced the developer to sell them at a reduced price for a huge profit. It's not like there's any difference between their home and the house next door that the developer sold for full price. I assure you that they are keenly aware of this. This makes getting into low income housing akin to winning the lottery in expensive parts of the country, and that is not what it is intended for.

There are obvious solutions to this. More housing. High density housing. Shortening the approval process, and making it less expensive and less uncertain. But the observable trend is in the other way. Why?

This is where it comes down to you and me. We're making it tougher for the developer to get those permits. When developers offer to buy property with the intent of building, neighbors come out in force to protest. Oh, we use all of the high-sounding names like "open space" and "habitat protection" and "quality of life" and even the mostly honest "No higher taxes to pay developers costs!" They come out and throw obstacles in the way of the project and sue in court and delay as best they can - which raises developer's costs, forcing the rest of us to pay for them. Or at least the for the people who eventually buy those properties to pay them, thereby raising the cost for the end consumer.

But the real issue, the elephant in the room that everyone desperately wants to ignore, is scarcity. We all want housing to be scarce. Why? Because we're already owners, that's why. If there's not enough of something, the price goes up and people wanting to buy have to pay the people who already have more money in order to buy. Whether people who obstruct developers will admit it to themselves or not, they are trying to vote themselves a profit at other's expense. The cashiers who work at the stores in the strip mall where you buy groceries need to live somewhere, and the lower on the socioeconomic scale they are, the closer that they have to live. It has almost nothing to do with the "Eeevil!" developers or any other corporate alleged malefactor. If developers have to charge two million dollars per house to make a profit, they will build two million dollar houses. Or three. Or none at all, if they can't make enough for a profit. If they need to charge two million dollars per property to make a profit, they are not interested in building the $300,000 properties that a family with two breadwinners earning $15 an hour might be able to afford. It's the buyers that pay for it, and these buyers are real people just like you are, who need a place to live just like you do, and if they can't get one in a sustainable way, will do it in an unsustainable way, as too many people have. Sometimes it works out, more often it doesn't, with even worse effects down the road.

If you really want to watch something both amusing and eye opening some time, go to a planning commission approval hearing where you have nothing at stake. Let's say the proposal is thirty miles away on the other side of the city or county and you never go there. And watch them try to have a discussion about high density housing.

Oh!, the carrying on I've seen! The histrionics! The burying of the real issues! The hysteria! Ask for the mike and mention "property values" and the NIMBYs will go ballistic, guaranteed. "It's not about that!" some will scream. Then why, once all of the other concerns have been dealt with, do they continue to oppose the project? Or do you think it's really about a little bit more traffic on the roads, or open space that most of them can't see and never go use? "Ruining the character" of a neighborhood where they might know two or three other families at most? Why then, won't the people live near where they work? "Because it's not a nice neighborhood!" "Explain," you will say, and they will oblige with "Because it's all condos and apartments and it's a nasty neighborhood and and everything is expensive and property values don't go up!" And there the real agenda slips out. Figuring it out and getting them to admit it is about as challenging as dynamiting fish in a barrel.

A while ago now, the City of San Diego had just made a rational attempt to plan for housing affordability, lessened commutes, etcetera. Called the "City of Villages" concept, it envisioned more decentralized and distributed services, employment, and shopping, and in particular, a lot more high density housing with neighborhood parks and social centers. It's dead because the objections of suburbia which saw their future increase in property value drying up (as well as losing the ability to exclude the peasantry from their community). The objections of members of my profession who tried everything they can to obstruct it also helped kill it. Let's face it, when everybody who has a job in a county of about three million people is trying to get to one of three places, and then out of those same three zones where everyone works, all at the same time, it's a recipe for a traffic jam. Add in the fact that the median commute is something over twenty miles, and many people drive well into the next county over (80-120 miles) and it's a recipe for an extended traffic jam. We have three full-blown interstates and at least a dozen spur and connecting freeways, and they're all jammed solid at least ten miles and two hours one way every morning, and the other way at night. This doesn't make any kind of sense.

People in my profession aren't exactly blameless for the high cost of housing. Real Estate, as a profession, is responsible for a significant amount of price increases due to encouraging speculation and selling exclusive lifestyles. Actually let's stop for one quick moment and consider the idea of "exclusive lifestyle." Doesn't it have to do with excluding the masses? Making yourself one of the well off? Raising ones' self? It's not like the money to buy you out is coming from nowhere, and the poor schmuck who buys the property is going to have to deal with every penny of it.

Everytime I go into the MLS, a large percentage of the results have the statement "Quiet cul-de-sac," and these are all homes built within about the last thirty years. Cul-de-sacs were comparatively rare before then. Even in San Diego, with all of our hills and slopes and irregular terrain, neighborhoods older than that are designed for open access. The streets are laid out on a grid. Major and secondary roads cut all the way across entire developments. You can get from point A to point B without going around the whole thing. Cul-de-sacs were rare, and mostly there because the developer could get a few more homes into irregular terrain that way.

This suddenly changed sometime right around 1970. Suddenly developers realized that the "exclusive" label added to the value they could receive. Now streets were designed not to encourage access, but to discourage it. They start and stop and start again for no reason other than to discourage access. The quickest way to get from one major road to another, on the other side of the development, is to go all the way around the development. The developers lost very few homes to the redesign, if any, but now they could sell the cachet of "exclusivity," as in keeping the helots out. The start of accelerated growth in home prices traces to this period. It's also worthwhile to note that when these "keep the peasants out" neighborhoods start downhill, they tend to go a long way down, very fast.

The motivations for driving the prices up on the behalf of my profession are certainly understandable human motivations. We make more money on bigger transactions from the same amount of work and expense. That doesn't make them good for society, but higher profit for performing your professional function is at least an honest motivation. Ditto for the motivations of City, County and State. You're taking up X number of square feet of land, and they're not getting any more land in their jurisdiction. If the price goes up, they can sock you and they can sock the merchants and they can sock everyone in the area for more money. More money means more money for salaries - their salary. Their cronies. More lucrative contracts, necessitating more campaign contributions.

Fact: Given the current economic situation, the only way to get developers to build more housing that low income people can afford is to make housing for low income people more profitable than other housing.

How do you accomplish that? Allow more high density housing, but force them to plan the impact correctly. Enough parking, water capacity, sewage. Give the developers the parameters up front, so they know whether or not they can meet it, and enact a "must issue if standards met" law. Let the community get involved in setting the standards, if they want, but make them universal throughout the jurisdiction. Same standards for hoity-toity-ville as for the wrong side of the tracks. And make the citizens themselves subject to the same requirements. Make waivers as tough to get for homeowners as for developers, and come down hard on non-permitted activity. I just pulled up a couple dozen properties on MLS, and the well over half of the listings had the notation somewhere that "X may not be permitted." In my experience the owners know damned well that they didn't have the proper permits, but that it's very easy for the people who buy it from them to get a waiver as theoretically innocent, and they know that there's very little enforcement even if the new owner doesn't get it retroactively approved. So they put on an extra bedroom or bathroom without permits, knowing it made the property more valuable when they sell it, and because if they don't get a building permit, their property won't be reassessed until they sell. Incidentally, most of them don't use licensed contractors, either, but rather what our wonderful government euphemistically calls "undocumented workers" because contractors have to report where they did the work and woe be unto the contractor that does something without the proper permits. This means that the people who go through the process that society has agreed is necessary to perform competent, safe work in accordance with code, pay their people in accordance with the law, report their income so that a fair share of taxes are paid - the people who are playing by the rules - get cut out. Either do away with those rules or come down on the people who violate them, please. But I suppose that since it's "the little guy" who wants to make some money illegally, that makes it Okay? Even when in order to buy the property, this "little guy" has to have income in the top ten percent of the population? Didn't think so.

I am not trying to get all holier than thou on anyone here. I am as much of a capitalist as anyone, and more so than most. Capitalism works, but it works better when everyone has to follow the same set of rules. I'm tired and disgusted of bending the rules on behalf of one class but not another, because of lying, self-serving propaganda. My younger brother works - when he can find work - as an on the books construction worker at about $13 an hour or so. This works out to $26,000 per year if he was working full time all the time. This is well below the federal poverty line for a family. So far below that were he married and his wife working a minimum wage job, they still wouldn't beat the poverty line. Compare this to the "handymen" who work off the books, without any qualification beyond their word that they can do the job right, and who claim they make $80,000 per year when they're asked how much they make in order to get a loan. The taxes they don't pay means that you and I pay more. The property taxes their clients don't pay mean that you and I pay more. The permits that their clients didn't get means that there are more building code issues out there that someone else is going to have to deal with - after said client makes the inflated profit on the sale of the home, despite not having properly paid the increased property taxes they should have (and that they could well afford to pay, I might add).

Contrast this with the hell a developer has to go through, often for years, in order to get a project greenlighted and never knowing for certain whether some stupid technicality will put the whole thing back to square one. For smaller developments, it's hard to find a place where it they are economically feasible, even with higher sale prices.

Furthermore, no developer with a lick of sense is building condominiums here in California right now. For ten years, they have unlimited liability for anything that can be considered a "construction defect." There are several highly profitable law offices that actually make a career out of going around nine to nine and a half years after the project is sold out, and telling homeowner's boards they can get them money. Usually this is done without any prior complaints, and they don't have any knowledge of actual conditions there - they just know they can get money. There was a period not too long ago where you just couldn't find condos that weren't going through a lawsuit, which is why it was eventually dropped from many underwriter standards. I'm certain that a certain percentage of them had legitimate complaints, but there were just too many lawsuits filed with exactly the same sort of timing for anything else to be the explanation. For the record, what the developers are doing is building them as apartments, and then they are being converted after the unlimited liability period has expired. This is a severely bad thing, societally, but a full explanation would digress too far.

If a developer wants to build high density housing, there should be a fixed set of steps - parking, utility upgrades, etcetera - they have to go through, and then approval is immediate and mandatory - provided they actually sell the units for the stated price. If they renege, they are prevented from selling at all until they've gone through the whole approval process from the start, with no mandatory approval.

Put this into law, and watch the prices of available housing drop. We could even structure it into tiers, Tier A where the approval process is basic and automatic, Tier B with somewhat higher prices but more hoops and less certainty, and so on. Make sure you index these tiers to the median cost of housing in the area! I would love to be able to find young families affordable three or four bedroom condos with community parks and play areas - but three bedroom condos are scarce whether or not they are affordable, and four bedroom might as well not exist, affordable or not.

For the last decade or so, the various governmental entities even been requiring developers to set aside infrastructure projects which, under current rules, are more properly the realm of government. They have to build schools and deed them to the government. Funny, but I thought with the increased tax base they are getting and all the mandatory school laws that that was the government's job. It doesn't do anything beneficial for the price of the homes in the rest of the development. Ditto parks, which are an excellent and admirable idea, particularly near high density housing, but should not be part of a government shakedown to cut down on the profit margin of land the developer paid their own money for, and went through an extended approval process for. The population is already there, and whether the developer builds new housing for them or not, the government would be responsible for finding school and park space. At the very least, the government should reimburse the developer for the proportional cost of the land and utility capacity, and do the building themselves.

Many of you reading this are thinking about money - dollars and cents. And you know, that's fine. I like it when clients make money on their property. It's part of my job to help them make money on their property. But there's a difference between a reasonable profit at 5% increase per year, and extortion because you happen to own a place to live and there isn't enough housing to go around because you're doing your best to get policies enacted to make certain that there isn't enough housing to go around - Jay Gould writ in miniature, millions of times over, and without the long term benefits much of what he did had.

The gentrification has reached the point in many areas of the country where you need to be in the top ten percent of all income earners in order to afford to buy a place to live - any place to live. That's great and wonderful if you're seventy years old and you can sell your home for a three quarter of a million dollar profit to your retirement nest egg and go live somewhere cheap. It's not so hot if you're a young working class couple looking for a place to live that you can afford and here is where all the jobs are. The damage done to the latter far outweighs the benefits that accrue to society because of the former.

If this continues, what happens next? Instead of having to be in the top 10 percent, now you've got to be in the top five percent, or the top one percent. If mommy and daddy never owned a house, or were so unlucky as to sell for less than stellar profit, you won't either. If there's no place to live that you can afford, you have to stay with mom and dad - but what if they don't want you, or they're in no shape to host you, or they just don't live in the only place you can get a living wage job? Suppose now you're twenty-five or thirty, engaged or even married, and still cannot afford a place to live? This is a recipe for social disaster.

At one percent homeownership rates, we're below what the homeownership rates were when we had tenements and slum lords, even if they are single family homes in older areas of town. And many people who have been engaged in "condo flipping" are themselves priced out of the market. There are damned few folks who cannot be priced out of the market if it gets bad enough, and if policies remain unchanged, who is to say that it will stop just before you become one of the victims, the permanent underclass? Even if you're one of that fortunate class who isn't priced out, when there are ninety-nine people who want housing for every one who can actually afford it, what do you think is going to happen at the ballot box, or in the streets if necessary? I'd rather start now, while we can plan it rationally, as opposed to later when any old low quality crackerbox will be thrown up in panic mode anywhere and anyway it can be just to keep people from rioting in the streets. At this update, housing prices have fallen quite a bit from peak, but even without the unsustainable financing that drove the bubble, this is only a temporary lull that will allow politicians to ignore the problem for a few more years.

Other things that need to happen. Tax codes need to be rewritten. this article traces the most recent acceleration to 1998 - coincidentally about two years after the $250,000 profit exclusion on housing ($500,000 for married couples) was enacted. All you had to do was live in it for two years, and bang! you didn't pay taxes on the gain. I believe that instead of keeping it in the current "cliff" form (after two years you qualify for the full exclusion), I think it needs to be phased in over a longer period of occupancy. Two years gets you maybe $50,000, then another $25,000 per year until ten years are done. It's hard to argue that someone who makes more on flipping houses every two years than they do on their day job deserves to make that money tax free, when the poor shlub in the next cubicle who can't qualify to get into the first house pays taxes on every penny he earns.

I also suspect that we would benefit from more limits on Section 1031 exchanges (and reverse exchanges), which has to do with not taxing profits from real estate when it's replaced within six months with other real estate. Don't get me wrong, it's a beneficial code section overall and I'll keep helping clients with them, but I have to question whether someone who makes an exchange and then refinances to strip equity is really doing something to earn all that tax free money, or just engaging in paper transactions that make it look like they contributed something. I don't blame the participants for taking advantage of what is in the code, but some of what I have seen, and much of what I have heard about, is of questionable economic benefit to the country.

Zoning also needs to be heavily looked at, and not just for high density housing. "Granny flats" are just too useful, but prohibited by blanket R1 zonings with no exceptions allowed in too many neighborhoods. Many folks don't want and don't have room for granny to live in the same dwelling, but if they could put up a small second dwelling, whether attached or not, granny could live there rather than off somewhere else where the choices are often "completely alone" or "in a nursing home," by which I mean they are one of the best ways to keep granny out of a nursing home. Furthermore, granny flats are also good for young adults who may not be able to easily afford housing on their own. None of this was a problem before 1970, and it's not a problem now - except in so called "modern" "exclusive" neighborhoods where we've made it a problem.

Caveat Emptor

Original here

For all of the rants I post about bad business practices, there are a lot of things the mortgage industry gets right. One of these looks like a red flag not to do business with them, and may seem like a cruel trick, but it is neither.

With every single loan that is done, you, the client, will get a package in the mail from the actual lender. It looks very official, and in fact it is.

Depending upon lender policy, it usually contains intentional mistakes on things such as the loan type, rate of the loan, or the points involved.

And every so often, I get a panicked phone call because I forgot to warn the client the package was coming.

The point of this particular package is not what it appears to be.

You see, every so often, some criminal wanders into some loan office and applies for a loan on a property they don't own. Sometimes loan brokers actually go out and meet the client in their home, but other sorts of loan providers sit in their office and business comes to them. Therefore, the bank has really no way of knowing if this is the actually the person who owns or even lives in the property. So they mail a loan package to the owner of record.

The idea is that if you haven't applied for a loan, you're going to speak up. You're going to call the bank, the broker, and everyone else asking, "What the heck is going on? Is somebody else trying to get a loan on my property?"

This is the point of the particular package. It's an anti-fraud measure meant to catch criminal activity before the lender is out hundreds of thousands of dollars. And it has just worked.

Caveat Emptor

Original here

This was originally published in 2005, but is one facet of the meltdown that is still going on, unfortunately.

I found this article by Ken Harney in the paper.


WASHINGTON - Call it funny money for the housing boom: Now you don't need actual cash in the bank to buy a house. All you need is somebody who says you've got money in the bank.

Need a hundred grand on deposit to convince a lender that you deserve a million-dollar mortgage? You've got it . . . even though you haven't really got it because you "rented" it from a company in Nevada for an upfront fee of 5 percent - $5,000.

Sound bizarre? Welcome to the wonder world of "asset rentals" now being investigated by bank and mortgage industry fraud experts. It works like this: Say your loan officer discovers that you lack the financial wherewithal needed to qualify for the mortgage you want. Rather than lose your business, however, the loan officer turns to a service that offers "asset rentals." For a flat fee of 5 percent of the amount you need, the service will verify to anyone who asks that the $100,000, $500,000 or $1 million in bank deposits you've claimed on your loan application documents are yours indeed.

I am sorry to say that this is not the first time I've encountered said phenomenon. Nor lenders. This is why assets require seasoning or sourcing. In other words, the lender requires you to show that you've had it and built it up over a period of time, or they want to know where and how you got it.

Most loans should not require a large amount of assets - A paper loans, the best loans of all, want one to two months Principal, Interest, Taxes, and Insurance (PITI) for full documentation (and I can usually get it reduced), three to four months if there is a "payment shock" issue. "Stated income" loans are no longer available, but when we had them, six months PITI was the standard requirement. Neither of these is a large number if you're really making the money, and they can be in a variety of places.

Some sub-prime lenders, however, will take large amounts of money in an account somewhere as evidence that you can afford the loan. These loans usually end up looking more like a propagandized No Income, No Asset loan than anything else. They don't get the best rates and terms, even for sub-prime, and there's likely to be a nastily long pre-payment penalty on them as a GOTCHA! The loan provider, be it broker or lender, is likely to make a lot of money on them - In California there is a thing called section 32 limiting total loan compensation to six points, which on a $400,000 loan is $24,000, and many so-called "discount" real estate agents turn around and require their clients to do the loan with them. It doesn't do you a bit of good to save a couple thousand on the sale or purchase in order to get ripped for twenty on the loan, where it's easier to conceal it. I can point you to many of these so-called "discount" houses who do these loans all day, but they are not loans you should want. If a friend came to me and asked for one, I'd try my best to talk them out of it.

But wait! It gets better!


This and other e-mail pitches, copies of which were provided to me by mortgage industry recipients, carried the sender name of Loren Gastwirth, identified on the e-mail as vice president-marketing for Morgan Sheridan Inc. of Mesquite, Nev. The asset rental attachment carried the name Independent Global Financial Services Ltd., with an address in Las Vegas.

... to a Zexxis Co., with the same Mesquite, Nev., address on Loren Gastwirth's Morgan Sheridan card. When I called the number listed for Gastwirth, I received no reply, but instead heard back from a person identifying himself as Allen Paule. Paule is listed in corporate filings with the Nevada secretary of state as the "registered agent" for Morgan Sheridan, Independent Global Financial Services, and Zexxis Corp.

Paule said the asset rental and employment pitches - including downloadable attachments and forms carried on Morgan Sheridan's Web site - were not connected to his firms. He said, "somebody hijacked our Web site." He confirmed that a Loren Gastwirth works for Morgan Sheridan. And he also confirmed that Independent Global Financial Services, Morgan Sheridan and Zexxis Corp. have overlapping ownership and management. According to Nevada corporate records, a Paul Gastwirth is listed as president and director of Morgan Sheridan.

The Web site of Vault Financial Services Inc. of Las Vegas lists Paul Gastwirth as CEO of that firm, and president of Independent Global Financial Services, "a company specializing in asset rentals and enhanced credit facilities for individuals and companies worldwide."

In other words, they are playing a Nevada Corporation shell game (There is a reason Nevada Corporations are a red flag for underwriters). A long head swallowing tail chain of corporations, each of which is likely to be a shell set up to insulate criminals from the consequences of their actions. The stuff about "somebody hijacked our web site" is almost certainly bogus.

but it gets better yet!


That's where the asset rental service's "VOE" (verification of employment) program comes in. Essentially you indicate on a faxed form what annual or monthly income you or a home buyer client needs to qualify for a mortgage, and the asset rental company will verify to anyone who asks that you have been paid those amounts.

The cost: just 1 percent of the claimed annual income. "For example," says the pitch, "$100,000 of annual income - cost of $1,000. Minimum is $50,000." The e-mail came with attachments that directed payments for asset rentals and employment verifications to an account number at Wachovia Bank in Roanoke, Va

In other words, they're also volunteering to help you circumvent one of the most basic protections to the whole process, making sure for both the lender and the borrower that the borrower can afford the loan. If you cannot afford the loan, you are probably better off without it, although many people don't realize that this requirement is partially for their own protection. If you can't make the payments, you're going to get foreclosed on. If you get foreclosed on, you're likely to lose everything you put into the house and get socked with a 1099 form which the IRS will use to go after you for taxes as well.

Lest you not have realized this by now, all of this is FRAUD. Serious, felony level FRAUD. Lose your home and go to jail FRAUD.

I'm going to share a little secret with you, widely known within the industry but not in the general public. That real estate agent or loan officer getting you your house or your loan may not be the brightest financial light bulb in the world. Many loan companies and real estate offices select for this, usually by only hiring people who have never been in the industry before. Some of them are even among the biggest names in the business. They select for sales ability and "make sales" attitude, not the knowledge (and more importantly, willingness) to say, "Wait a minute! Something is not right here!" Especially when it may cost them a commission. And hey, if the companies involved lose a few low-level sacrificial victims to lawsuits and the regulators, that's no skin off the owners' noses and they still got the commissions out of the transactions those people brought in before they were busted. These schemes are pitched to the agents and loan officers as a way to "save" a client. Sounds like it's in your best interest when you put it that way, right? It is not. The bank discovers this (and Nevada Corporations, among others, are a red flag that loan underwriters look very hard at) Most of these deceptions are discovered before the loan gets funded - meaning that the client they were helping to commit FRAUD wasted their money, and they have a case against the agent and employing broker, whose insurance will probably not cover the issue.

The ones that do get funded are even worse. When the bank discovers the FRAUD, they have a right to call the loan. This means you have a few days to repay the loan, or they take the house. All of those wonderful consumer protections the federal and state governments have enacted become mostly null and void, because you committed FRAUD. You can count upon losing all of your equity in the home, and getting thrown out with nothing. Furthermore, depending upon company policy of the lender, you may find yourself sued in court, and possibly even under criminal indictment. Judgments for FRAUD are nasty, and they don't go away. Convictions for FRAUD can really mess up your life completely and forever, not just in applying for credit, but in employment and other ways as well. If your loan is sold to another lender before the discovery happens, the probability rises even further, because the new lender is going to sue the old lender, who is going to take action against you as part of a defense that says they were acting in good faith. The shell corporations that pretended you worked for them or had deposits with them will be long gone (or untouchable) of course. You may have a claim against the agent, loan officer, broker or possibly even original lender, but if someone else beat you to it or they are out of business for some other reason, good luck in actually collecting.

In short, relying upon an agent or loan officer as an expert without doing your own due diligence is likely to get you in hot water. As good rules of thumb: Never lie. Never allow someone to lie on your behalf. No matter how desperate you are, it's likely to buy a lot more trouble than it's worth.

Caveat Emptor

Original here

Have a "looking for cheap" attitude, especially on services meant to protect you.

It's great to have a "looking for value" attitude. If I cost more than someone else, it is in your best interest to ask why, and ask me to justify what I make in terms of value provided to you. I don't resent people that are looking for value. If I can't show them something they agree is more valuable to them, then I can't blame them for going with the person who may not offer everything I do but works cheaper, and truthfully, I'm probably not the agent they should use. There's plenty of room for all levels of service in the industry.

But to have the attitude that "cheaper is better" presupposes that there is only one possible level of service, and therefore, anyone who provides it any cheaper must therefore be a better value. This is preposterous. I just finished a transaction where my brokerage made about $7000 grand total for the purchase of a condominium and the associated loan. Somebody else might have rebated close to half of the buyer's agency commission - but somebody else didn't get my client a condo for $75,000 less than a model match in the same complex that sold six weeks previous - over a 25% difference in price. Furthermore, that $7000 was the grand total of what the brokerage made. That's not what I got to put in my personal bank account. That's got to pay office rent and electricity and all the costs of staying in business for the brokerage. Once I get my share, I've got to pay taxes and mileage and licensing and continuing education and all the costs I have as an individual of staying in business.

You may get the idea that what's left over isn't as much as most people assume it is. Now you know why discounters cannot afford to provide the same level of service a full service agent can. There are full service agents out there providing discounter service for full pay, but there are no agents providing full service benefits for discounter pay. Even if they were doing twenty transactions per month per agent, they simply aren't making enough to stay in business by doing it that way. Full service agents - the ones providing the type of service which sees results like that - aren't doing twenty transactions per month. Maybe four, possibly five, more likely three. Not twenty.

If you're working with an agent who doesn't have the time to do the same due diligence (and may not have the expertise), you're either going to deal with it yourself or hope that the other side of the transaction isn't intending to do anything unethical. Even if they're not intending to do anything, that doesn't mean that nothing will have happened on its own. Sometimes, it really is nobody's fault. When I originally wrote this, I was working on a transaction where the septic tank failed the inspection and the inspector said it needs to be replaced. The seller is out roughly $20,000 in order to be able to sell the property. It was fine a few months ago, but isn't now. Nobody's going to buy the property if they can't flush their toilets, so this needs to get taken care of. If I hadn't done my full due diligence, my clients would have had a nasty surprise that cost over twice the total check the brokerage got for the transaction.

It's not just agents. Appraisers and inspectors are two allied professions where spending just not quite enough can mean they missed what you were paying them to find. Or the appraiser charges you $50 less, but takes three weeks to get it done, during which time you're out four tenths of a point in lock extension fees. On a smallish $200,000 loan, that's $800.

This also applies to loans. It's trivial - and legal - to low ball people who want to know what sort of loan they're likely to get. The lenders who want to low-ball know all the loopholes. Are they quoting what they actually intend to deliver, or are they just getting into the spirit of a game of what amounts to liar's poker where the only way to call the bluff is wait until the end of the process? In such a situation, there's no real reason not to say you've got, "Ten nines," but nobody really has ten nines - I just looked and dollar bill serial numbers are only eight digits long. But if there's no proof until final documents are ready, what happens when they deliver a loan that's pair of ones? I'll tell you: Most people are still going to sign those loan documents. I've gone over how much lenders can legally low-ball quotes in the past. If they can't deliver their quote, they can't deliver it, and it gets you no benefit. I get many people hitting the site every day asking questions that indicate to me that their lender presented them with an entirely different loan than they initially told them about to get them to sign up. Unpleasant consequences to the lender: Zero. Consequence to the borrower: Now you have a choice between signing the documents for this loan, or doing without. Chances are that you're going to sign their papers anyway, which means that lender will be rewarded for lying to get you signed up, and the attitude of "looking for cheap" is what did it to you. I dealt with any number of people who metaphorically plugged their ears and refused to listen to the downsides of the negative amortization loan. It doesn't change the fact that there are enormous downsides, or how bad they are. It just means you don't know about them. But they sure did have that low payment (for a little while). I'd say it was too bad that so many of them lost their property and their investment, but it wasn't coincidence - it was baked into the recipe from the start.

In real estate, breaking the law is only the second best way to create problems for yourself. Since in the current environment, you can count on law breaking being discovered, that should tell you how bad looking for cheap is.

Caveat Emptor

Original article here

Hello,

When my husband and I bought our home 2.5 years ago (two bedroom condo) we qualified for the loan ($250,000) based on both our incomes. Then I had a baby and stopped working. We've never missed a payment or even been late, and we're getting by just fine by being frugal. However, our loan is a 5/1 ARM, and I'm skeptical of our ability to pay the adjustable rates once our fixed years are over. Our original plan (when we got the loan) was to see about refinancing at the end of those five years. (Five years worked well for us because my husband was still in school and we knew we'd be here about that long, if not longer.) However, now that we no longer have my income, all the mortgage calculators online are telling us that we can afford a loan of just about half the value of our home. What do we do in a situation like this? Is it possible to do anything other than sell our home once our five years are up?

A few other (maybe) pertinent details: currently we're paying interest only on our first mortgage (4.75%) and a principal and interest payment on our second mortgage (8.75%) Our home has gone up in value since we bought it, and we've made some improvements as well. Likely selling price right now (based on comparable properties that just sold in our area) is $325,000 to $340,000.

What do you think?


The first thing I want to ask someone in this situation is "How long do you have until reset?" The second would be, "Are you going to be able to afford the payments when it hits reset?" These two answers I'm fairly certain of, looking at the information provided. The third would be "Do you intend to change something about the situation before that time?" and "What's your market trends?" would be the fourth. In San Diego, I know the answer to four, but question three would be a guess, and you're not in San Diego or close to it, so my answer to question four doesn't apply to you.

You have the loan. It is already funded. You have lived up to all the qualifications you agreed to in order to get it funded. You don't have to do anything other than make the payments in order to keep this loan. If this were a 30 year fixed fully amortizing loan that you were already making the payments on, there would be no reason for you to do anything, because that rate is very hard to beat by enough to make it worth refinancing. If you have already got the loan and you can afford it indefinitely, you don't have a problem.

Unfortunately, that's not the case here. You're fine for now, but not forever. You have a known time approaching at which point you will be unable to make your payments. To make matters worse, even with rates the lowest they have been in fifty years right now you're not going to qualify to refinance. That's the worst news. If you were in a situation where your current income was enough to qualify for a new loan, this would be fixable at your convenience. Unfortunately, again that is not the case.

The mildly bad news is that you're not paying your balance down much. Assuming you're not paying anything extra, you're not going to pay that $200,000 interest only first down by anything, and you've only paid the $50,000 second down by about $1000 now, and you'll only pay it down to about $47,800 by the end of the fifth year.

The mildly good news is that you've got 2.5 years left to do something with. You could go back to work, and if you do so now, you'll have two years continuous same line of work before the 5 years are up. Your husband could also start making more money, as is common the first few years out of school. Or some combination of the two. Assuming you make as much as you used to, you should be able to afford the property. Doesn't really apply to these folks, but if rates are lower than the last time you got a loan it can really help. On the flip side, if they're higher, that's can be a real problem.

This 2 1/2 years is time on your side. I keep telling folks time makes a great ally or a horrible enemy, but it's never neutral. Right now, it's on your side - giving you time to do something to change the situation. Once the adjustment hits, or even gets close, time will become your enemy. Don't waste time, but right now it is on your side.

The really good news is that your market has gone up, and you have a good amount of equity. This is about as surprising as gravity, but it is still good news. You're under 80% loan to value ratio if the numbers you gave me are valid. I wouldn't touch your loan right now, if I were you, but if you were in a sub-prime situation to start with, chances are good that you'd be A paper by now. You've got a 5/1 A paper loan with plenty of the initial fixed period left - but there's a lot of folks out there with 2/28 C paper. Especially if your adjustment had already hit, moving from 8% adjustable to a 5% or less thirty year fixed A paper without points (as of this update) makes a lot of sense. Even if you don't want to sell or refinance now, know that that kind of equity means you've got some breathing room if you've got to have it.

There is one more piece of good news: A paper 5/1 hybrids use a lower maximum debt to income ratio than do A paper thirty year fixed rate loans. What this means is that the income to qualify for the thirty year fixed rate loan and its payment are not going to be as much higher as you might think. Especially since A paper uses the fully amortized and adjusted payments for 5/1s in the qualification ratio. With 'A paper' loans, it harder to qualify for a 5/1 than it is for the thirty year fixed rate loan even though the payment and interest rate on the 5/1 may be much lower.

The bad news is that if you sell, you're going to sacrifice some of that equity. It costs money to sell property. Assuming yours sells for $325,000, you'd probably only net roughly $299,000, of which your loans would eat $249,000, leaving you with $50,000 in your pocket. Right now, a lot of places are in a world of hurt for trying to sell, so your could be out more than that and still have to take a lower price in order to get it sold. If your condo was in San Diego, for instance, you'd be doing extremely well to net $35,000 from an actual sale right now, even if your condo really was worth $340,000. The condo market is just saturated with sales that people couldn't really afford. I think this will change soon enough to surprise a lot of people, but I don't know for sure.

Let's assume that you don't intend to return to work. If your loan was adjusting any time in the next year, it would be time to sell. However, you've got some time. If your market doesn't look like it's in danger of collapse, I'd probably wait. If your market is on the road to recovery, selling later would be better. Most likely, more than enough better to justify waiting. If your market is just peaking, however, you've got a real issue, and you might want to get out now before you've lost all of your lovely equity.

One former possibility was planning to wait and refinance, doing the loan "stated income", telling the lender that you make more money than you do. This was always dangerous. Quite aside from the fact that you are intentionally defeating one of the most important safeguards for your protection as well as the bank's, this is not what stated income was intended for, and you need to be careful that you're actually going to be able to make the payments without going backwards (in other words, no negative amortization). Furthermore, stated income is gone and with the way the government is pretending it was always evil, may not come back for a long time. Better would be a fully amortized loan, but since you're already in the property, interest only is acceptable. If the situation is at least stable, why incur the costs of selling while the property meets your needs? However, at this point we do not know what the rates will be two and a half years from now. I don't know what the maximum rate you could afford is. Can you afford even an "interest only" payment on a 6% loan ($1250/month on $250,000), which is roughly 1/3 more than you're paying now? 6.5%? 7%? Finally, no interest only loan is interest only forever. Getting another interest only loan is recycling the problem you find yourself facing now.

This isn't a situation that can be tackled using only numbers, but the situation is not likely to be sustainable as it sits. You do have some choices on the table. The three most obvious are that you can go back to work, your husband can start making more money, or you can start making plans to sell the property. Any of them beat the default option, which is "do nothing and let the situation ambush us when time is up." And if you decide it's likely you'll be able to afford to refinance, keep an eye on rates. A point at which it makes sense to refinance could come at any time. I think the rates today are a freak low caused by a perfect storm economically, but there's nothing that says they cannot go even lower. Unfortunately, since you're not able to refinance right now due to low income, even the best rates ever aren't going to be any help to you, as your debt to income ratio is going to prevent a new loan from being approved. You somehow need to start making more money, enough more in time enough to be able to afford your property, or your best option is going to be to sell before you lose the property after the loan adjusts.

Caveat Emptor

Original article here


Or: Figures don't lie, but Liars Sure do Figure!

NOTE: At this update, rates on first trust deed loans are about as low as they have ever been while rates on second mortgages aren't particularly low. However, that won't last forever and we are likely to see a fresh round of this nonsense in the near future. The figures are unchanged from when I originally wrote the article, but it's the attitude that's important.

We've got a lot of people with loans in the low fives, interest rate wise, and we will soon have another wave of people with interest rates in the high fours. Lenders and loan officers need to have someone refinance now in order to get paid. One of the tricks they use to persuade folks with low interest loans to refinance is Weighted Average Cost of Capital, which really does take a page out of corporate finance books, but ignores a lot of details and alternatives.

This was an actual example that someone put online as an argument to refinance:

Current situation:

$350,000 first at 5.25%
$100,000 second at 8.5%
$50,000 consumer debt at 12%

This person then used standard practice to compute a weighted average cost of capital of 6.575, and justify refinancing all of it into a new first at 6.25%. They also assumed a tax bracket of 40%, which is a little higher than most folks pay, even with state tax figured in. Furthermore, it just took for granted the fact that there's enough equity in the property to absorb the full amount of excess debt without PMI. Robert Heinlein introduced me to this kind of attitude in Stranger in a Strange Land, calling it "straining at flies and swallowing camels," which is an apt description of what's going on. Theater.

What's really making the calculation work in favor of refinancing is that $50,000 at 12% without deductibility, and assuming a tax bracket higher than most people are in. Even the top federal bracket is 39.6%, so if you live in a state without income tax (quite a few), the article was overstating any possible current benefit. Furthermore, those states without income taxes tax mortgage loans on the basis of size, some of them pretty steeply. I just got an email from someone in one of those states back east, and for a mortgage under $250,000, the state was charging about $7000 in taxes. That's almost a 3% surcharge on the base mortgage, and if you're going to roll it into the balance, you're likely to be paying points up front. You're also paying interest on it basically forever.

Doing the calculation on the basis of pure interest rate calculation, like the manuals teach (I've got an accounting degree) ignores the costs of consumer loans. For corporate transactions, the costs are built into the the interest rate of the obligations. For consumers and residential real estate loans, this is not the case. You're going to be paying thousands of dollars for the privilege of refinancing - points and fees, and in many states, taxes. As I've made clear in the past, there is ALWAYS a Tradeoff between Rate and Cost in Real Estate Loans, and the standard WACC computations do not include cost of doing the loan in whether it's worthwhile, only the rate. This makes it seem like the rate with three or four points is necessarily better than the rate with none, when in reality it's likely to take eight to ten years before the lower rate pays for its cost in terms of interest savings. Most people will never keep a given real estate loan that long in their lives.

Now just for a moment, let's give the author of that article everything they're asking for. In order to be able to absorb this debt without PMI, the property has to be worth $625,000 minimum, plus 125% of whatever fees and prepaids get rolled into the balance.

What this means is that I could at that same time, without touching that 5.25% first, refinance that second into a 30/15 at around 7.25% (lower today), and still get paid half a point yield spread to do a very easy loan that costs the consumer less than $1000 all told. You see, not only do we get a price break for the bigger equity loan, but because it's only 80% Loan to Value Ratio (actually CLTV), and so we get a price break of

$350,000 at 5.25%, 40% aggregate tax bracket, 70% of the loan, =2.205% contribution from this
$150,000 at 7.25%, 40% aggregate tax bracket (on 2/3) 20% of loan = 0.870% contribution
$150,000 at 7.25% non deductible on 1/3 10% of amount =0.725%
2.205%+0.870%+0.725%=3.8% weighted average cost of capital, which essentially ties the projected 3.75% on 6.25% which is 40% deductible, but the lowered cost more than covers the difference in interest - $250 per year - for ten full years, just based upon the difference in closing costs, never mind points or cost of interest on the increased balance.

So why do loan officers push a full refinance when there are better options? Quite simply, they make a lot more on first mortgages than second, so it's in their best interest to make it seem like refinancing a first is in your best interest, even when it clearly is not. Second mortgages are something I'll do for existing clients, but it's not business I chase because I just can't make enough to make it worthwhile, and chances are that a credit union is going to do about as well as I can. First mortgages, however, are a different matter - and not just for me. The projected first mortgage would make me roughly 7 times what that second does, and my margins are low by comparison with the rest of the industry.

Because of facts like this, you need to know enough to think about alternatives like refinancing a second and leaving a low interest rate first untouched. This is also why you need to talk to more than one potential provider, to increase your chance of getting one of them to give you a better way of doing things.

Caveat Emptor

Original article here

Prorated Property Taxes

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January first and July first mark turning points in the year for California real estate, as property taxes are collected for a period running from July 1 through June 30. They are paid in two installments, the first due due November 1 (past due December 10) that covers the first six months, from July 1 to December 31. The second is due February 1st (past due April 10th), and covers the second six months, from January 1 to June 30. Other states have different set ups. For instance, Nevada property taxes are paid quarterly.

Most folks don't actually pay their taxes until just before the "past due" date. If you have an impound account, the bank doesn't send the money until sometime around December 8th and about April 5th, respectively. But they are due and payable on the dates above, and whether you are refinancing or selling or buying, if they are due they need to paid either before the transaction is consummated, or through escrow. Prorated taxes aren't part of refinance transactions. If they're due, they have to be paid, and the current owners need to pay all of them. But for sales, what happens is the property taxes are paid past the date of the sale, or not paid up in full through the date of the transaction.

Let's pick a date the transaction closes. Say June 15th. The taxes were paid back in April through June 30 by the seller. But the seller didn't owe taxes past June 15th; they don't own the property any more after that. The buyer owes the other fifteen days' worth. So the way it is handled is that the buyer comes up with, in addition to the purchase price, fifteen days of property taxes and pays those to the seller as part of the transaction. This way the county gets its money on time, and everyone is still even.

If the effective date of the sale was, on the other hand, July 31st, and the seller has paid only through June 30th, then the seller will owe the buyer for taxes for the month of July, because the buyer will be paying those come November. So thirty-one days worth of taxes are taken off of the sales price by escrow and given to the buyer because they will be paying for those thirty-one days worth of taxes in November.

Prorated sales taxes are part of most sales transactions. The only exceptions are those taking place within the periods from November 1st to December 10th, and February 1st to April 10th, where taxes are paid through escrow, and not even those if the current owner already paid the taxes. Be advised that during the last couple of days it can be tough to get an written receipt that you paid before past due, especially if you have to walk them in, so if the transaction hasn't recorded at least three or four days before the end of the grace period, you want to go ahead and pay the taxes. If the transaction doesn't close, the government doesn't care why they weren't paid before the end of the grace period; you'll have to pay a penalty for being late.

Caveat Emptor

Original article here

Most days I get loan wholesalers coming into my office. I'm always happy to talk with them, providing they want to talk about what I want to talk about. They usually want to talk about this gimmick and that gimmick and the other gimmick. They feed me lines about service and fast turn around and quick approvals and loan commitments. Ladies and gentlemen, these are all things that every lender should be capable of, and if someone hoses one of my clients, I'm no longer interested in doing business with them. Everybody makes mistakes, it's how they deal with mistakes that I am interested in. I'm very forgiving if they make their mistake good, completely unforgiving if they do not.

What I want to talk about is two things. The first is loan programs nobody else has, or that nobody else has in that category. Suppose a lender has a program to deal with people in default just like everyone else with only a small penalty. If they have something special, I'm all ears, and I make certain that goes into my database. I expect the rates for the underlying program to be higher, but that's cool. I'll price loans with them anyway, and if they're the best I can do for the client, I'll use them. Next time I have somebody in default, though, they get my first call, because they've got something nobody else does, or very few do. At this update, however, with the federal government controlling and tightening all the major loan markets and regulating all the competing private products out of business, it's rare that a wholesaler has such a program.

The second thing I want to talk about is price. A loan with given terms is the same loan no matter who is carrying it. So long as they are both legal, my client sees no difference between National Well-Known Megabank and Unknown Lender from Nowhere. The loan is the same. If the rate is the same, what's important to my client is how much they have to pay in order to get it. This comes back to The Trade-off Between Rate and Cost. If one lender's par pricing is a little bit lower, I can either get the client the same rate cheaper, or I can get the client a lower rate for the same price. There is otherwise no difference between standard loan terms for the standard loan types. I can always get the client a lower rate for the same price if they'll accept a prepayment penalty. If they want a true zero cost loan, the rate will be higher. How much higher or lower? That varies with time and the lender involved. But except for the rate printed on the contract and the cost to get that rate, these loans are the same.

Wholesalers don't want to talk about price, and they don't want to compete on price. If they're competing on price, they're making less money in the secondary market. Less money for the same work. I can't blame them. Suppose I walked into your office and proposed cutting your pay by somewhere between twenty and fifty percent? Somehow, I don't think most of you would appreciate it. But turn that around, because you're in my office now, as consumers, shopping for a loan, and you want the loan with the terms you want at the best price possible. If I get a lower price from the lender, I can pass it on to you. I can maybe even make a little more money while still saving you some money. Aren't you entitled to a bonus when you make money for your company or their clients? Ask yourself this: If I saved you $1000 and $20 per month over the next best quote, would it break your heart if I made an extra couple hundred? It shouldn't. When I'm out shopping, it doesn't bother me at all. By delivering the item on better terms to me, that company has earned whatever money they make.

This doesn't mean I necessarily look for the lowest price. When I'm shopping for myself, many times I'll buy something that is close to the top of the line. Why? Because it has something worth more than the extra money to me. What is worth extra money in real estate? Getting you a better bargain. You spend three percent instead of one, but your $500,000 home sells for $25,000 more, or it sells when it perhaps would not sell under a less aggressive marketing plan. $25,000 minus the 2% difference in commission ($10,000) is $15,000 in your pocket because your agent can afford to market and negotiate more aggressively on your behalf, never mind the difference between selling and not selling. Can a full service agent guarantee a better result? No. But I can tell you through personal experience that I find it much easier to get a better bargain for my clients who are buyers from someone who listed with a discount brokerage or flat fee place, and my clients are probably going to think I'm superman by comparison before the deal is done. But note that the difference in price does have to be justified. A loan is a loan is a loan, as long as it's on the same terms, but buying and selling real estate is an entirely different ball game.

A couple days before I originally wrote this, I got an email calling my attention to someone calling me an "alarmist", and furthering that with an accusation that I was trying to paint everyone else as a crook. Nope. There are a large number of basically honest practitioners out there, and a significant number of scrupulously honest ones. But there are also a fair number of people out there who, like my loan wholesalers, don't want to compete on price, don't want to compete on service, basically just expect to make money by virtue of the fact that they've got a license. Do I blame them? In most cases, no. As I said the day I launched this site, this is the way they were trained and they don't know a better way is possible. Plus they want a larger amount of money for the same work rather than a smaller. Many of them resist changes for the better for the consumer because it means they will make less money for the same work. Seems like every day there's a seminar advertising that they'll teach agents and loan officers how to attract clients without competing on price. This is what is behind the rise of the corporate agent. You see their billboards everywhere, saying how great they are, but that doesn't make it true, any more than agents working at Biggest National Chain With Large Advertising Budget are better than the agent who doesn't. It's all a matter of individual performance. Find an agent who will spend the time to get you the best service themselves - and this is not the corporate agent who spends all their time running their office and whom you will never actually talk to once you have signed the dotted line on the listing.

Well, suppose someone makes enough money per transaction to be happy, even though they are competing on price? Then what they want to do is attract more business, which is a part of what I'm trying to do here. More importantly, I'm trying to give you, my readers, the tools necessary to get yourself the best possible bargain. Nor am I trying to tell you that I'm purer than the driven snow, and I don't think I ever have. That is for you to judge with the tools I put out, and there's no way to know for sure unless and until I do a transaction for you.

How far you want to go with these tools is up to you. Real Estate transactions are the biggest transactions most folks undertake in their lives, and as a consequence, small percentages tend to be a lot of money by the standards of lesser transactions. If you only want to do a few easy things, they should save you some money or net you a better result. If you want to do the work for the whole nine yards, they should save you a lot more. But when you have the tools, you are better armed consumers, more likely to get bargains that are better for you, given your situation. Like all tools, they are to be evaluated on the basis of how well they do the job. If they are used properly and nonetheless fail you, you are right to fault them. If there are tools that do a better job, you are right to use those instead. But to say, essentially, "Pay no attention to that man behind the curtain!" is not the optimal response to the issue. Through issues clients and potential clients have brought me, I have encountered every single issue I raise here. There not only is a man behind the curtain, you need to keep your eyes on him and you need to learn how best to deal with him. That is what this site is about.

Caveat Emptor

Original here

I've been looking around for an answer to this but my searches haven't returned anything useful.

Say you buy a house and with that house you finance in a pool. House was $210,000 and pool is $40k. $250k mortgage. Okay, so two years later (the average!) you decided to refinance. Especially since you didn't get a good deal in the first place because you wanted a new house and to get the incentive you decided it was okay to finance with the company the builder tells you to finance with. Anyway, in those two years the housing market slumps a bit but for the most part after that time your house doesn't loose value. At the same time, the pool does not add value to your house. Comps in the area put your house at $220,000 but you still owe $245k. Is it possible to refinance? Was all the refinance hype only because the markets kept going up? Is this the reason why people who got an bad loan, maybe thinking they could refinance, are going to loose their house because no one will refi a house that isn't worth more than it was when you bought it?

(sic)

No, the refinancing craze was only partially because values kept going up. Rates kept going down as well. What this combination meant was that not only were better rates coming along all of the time, but that people who were stretching to the utter limit for 100% financing could refinance into more favorable loans as their equity picture improved. If you bought for $180,000, and comparable properties are selling for $360,000 now, that's 50% equity even if you didn't have a down payment. So people who bought for $180,000 were refinancing into single loans without PMI once values hit $225,000. Let's use the rates when I originally wrote this as a comparison. Instead of a first for $144,000 at 6.25% and a second for $36,000 at 9%, with payments of $886.64 and $289.67, even if the rates are absolutely the same and you refinance after 18 months for the $177,000 you owe (paying closing costs out of pocket), when your appraisal says $225,000, that's one loan at 6.25%, with a payment of $1089.82. This cuts $86.49 off the monthly payment, which is how most people think, and cuts your monthly cost of interest by $81, which is how smarter people think. It probably isn't worth refinancing at anything like par for such relatively small savings, but rates were dropping at the same time. This led a lot of unethical agents and loan officers to lead a lot of clients down the primrose path by saying things like "real estate always increases in value," and "You can hold on for a year, right? You'll have equity and we'll be able to refinance you." Lots of folks have a tendency to assume trends of the moment are going to continue, and it's amazing how consistently they get burned by this assumption.

A lot of what I wrote for the original article wasn't true for a while, but is now the way things are again. For a while, there were two new twists: a cluster of special programs from Fannie Mae and Freddie Mac allowing refinancing up to 125% of value (now ended) for loans originally done "A paper" and Mortgage Loan Modification for loans that were originally sub-prime or variable rate, basically renegotiating your existing loan. As a note, the so-called "minor" modifications of forbearance and displacing any missed payments to the end of the loan have over a forty percent recurrence of default within about a year. In plain English, unless your situation has changed permanently for the better (e.g. found a better job, or recovered your previous one) or you have fully worked through the one time problem that got you into trouble (e.g. temporary disability that is now in the past), all you're likely to be doing is delaying the inevitable. Most people need at least an interest rate modification that puts them at a bearable debt to income ratio. Better the bank do this than lose money through a default. On the other hand, many people want their principal modified, which is not likely to happen - one case in sixty are the statistics I'm hearing, all of them having to do with the "killer Ds" of death, disability and divorce. Rather than reduce the principal owed, the bank might as well lose the money they'll lose by foreclosing. At least that way, they know their losses are at an end.

Rates as I write the update are the lowest they have ever been, but prior to that tumble due to the financial meltdown, had been broadly rising for a while. People don't like refinancing when it will raise their rates, and quite often, they can't afford to refinance, even if they have to, if the payment is going to go up. This has caused many lenders to get desperate, and is certainly one of the reasons for the way the negative amortization loan had been pushed. Loan Officers don't get paid unless they are originating new loans this month, and negative amortization loans look wonderful on the surface, when all you know about is the minimum payment. (I've also published an article debunking the Weighted Average Cost of Capital scam some lenders are also using to persuade people to refinance out of low rates into high ones).

If your equity situation has deteriorated due to decline in property value, however, it can be a real problem. Outside of the two alternatives I talk about above, both of which were temporary, lenders don't want to risk money in situations where Loan to Value ratio doesn't support them getting all of their money back if you default. The problems created by declining value are far deeper than the benefits that arise when prices are rising rapidly. When the loans total $500,000 and the property is only worth $420,000, that's a problem. That's a real problem. Lenders do not want to lend more than a property is worth. The highest financing regularly available is 100% of value, even when the market was going gonzo with Make Believe Loans and 90% is the highest refinance I'm seeing now. The situation I have just illustrated is a 120% financing situation. On a straight refinance, that's not going to happen. Period.

Now before anyone goes too far off the deep end, being upside down is no problem at all if you don't need to sell or refinance. You just keep making the payments and everything is fine. It may be possible that real estate won't eventually return to the pattern of appreciation we've come to expect these last hundred odd years, but that's not the way the smart money is betting. You will have equity again. I was upside down myself for a little while after I bought in 1991. It was no big deal. I just kept making those payments, and the prices came back. By the time I had a reason to refinance, I was back at 80% loan to value. For those people who have sustainable loans, being upside-down is a non-event.

Where it becomes a serious problem is when you've got an unsustainable loan. Whether it's negative amortization, or something somewhat less hazardous to your financial future such as a 2/28 or something short term interest only, you're looking at a time when refinancing is going to be pretty much mandatory. If you could have afforded the payment it's going to adjust to, you could have had a sustainable loan. But people have a tendency to stretch too far and buy more of a property than they can really afford.

There used to be more options and potential options if you needed to refinance while you're upside down. The one involving the least amount of mental effort was and is to come up with the difference in cash. Most people don't want to do this even if they have it, but it's an option. Actually, it's a pretty good option if you have that cash.

The second option for refinancing was a 125% equity loan piggybacked onto an 80% first loan. The first problem was that the terms on these were ugly. It's not likely to cut your interest rate or your payment, and they are all full recourse loans, where purchase money loans are mostly non-recourse. This doesn't work for a lot of people, not the least of the reasons for which is that the lenders that were offering these when prices were increasing rapidly have largely withdrawn them from the market now that prices have been decreasing. 125% loans were a function of a rapidly increasing market. I can't remember the last time I had a wholesaler offer me one. Still, if you're in trouble it can be on option worth asking your current lender about - the worst that can happen is they tell you those are no longer available. The situation is this: If you can't make your payment now and go into default, they lose money. If you can afford the payments on the 80/125 combo loan, and don't go into default, they won't lose money, not to mention they potentially move you from a non-recourse purchase money loan to a full recourse refinance, a very good thing from the lender's viewpoint. Easier to do a loan modification, but this option might be available.

In some circumstances, it is conceivable if highly unlikely that the holder of a second trust deed may agree to subordinate their loan to a new first. They're not going to agree if your payment or the loan amount on the new first increases, so you're going to have to pay all closing costs out of pocket. The amount on the new first is also obviously going to be above 80% of value, so you're likely to have PMI on it, but if it gets you from a 2/28 that's adjusted to 9% to a 30 year fixed at 7, it's probably worth doing. If the second goes from sitting behind a $410,000 first at 9% to sitting behind a $410,000 thirty year fixed at 7%, it has become more likely that second loan is going to be repaid in full, where if you default on the first trust deed that second is likely to be completely wiped out. Obviously, the holder of the second would rather not do this - they'd rather be refinanced out of their losing position. But nobody is going to come along and rescue them from their bad decision making if the property is only worth $420,000 and you owe $495,000. If you need to refinance your first in order not to lose the property, the holder of the second can either agree to subordinate, step up to the line themselves and be on the hook for the full amount, or be wiped out completely when the first forecloses. The options for them might all be bad, but subordination is the least bad.

The next option is the worst of all possible worlds: default and foreclosure. This is something you want to avoid if there's any way around it. Slightly better is a Deed in Lieu of Foreclosure, where you sign the title of the property over to the lender. Lenders may or may not allow this if you're upside down, though. Typically, they want to have at least a little bit of theoretical equity in order to agree to a Deed in Lieu. On the other hand, if they avoid the money that the whole default and foreclosure process costs, they may agree. A Deed in Lieu does hit your ability to get a future real estate loan, although it's not nearly so bad of a hit to that or your general credit as a foreclosure, particularly if you can see it coming and take action before you have a spate of late payments. Most folks won't.

Finally, if you need to refinance and can't, you can get yourself a good listing agent and execute a sale subject to a short payoff. This has potential consequences for your financial situation that start at 1099 love notes and might include a deficiency judgment. This is definitely not something to try "For Sale By Owner" or even with a discount listing agent. You're going to need an on the ball full service agent in order to make it happen, because the lender isn't going to listen to you as the owner, and a discounter is unlikely to be willing and able to devote the time necessary to get the lender to approve it. The big advantage to this is that it doesn't hit your credit nearly so badly as a foreclosure, perhaps less even than Deed in Lieu, and if you want another real estate loan sometime in the next decade, you would probably rather do a short sale than go through foreclosure.

None of these situations where you need to refinance a mortgage you can no longer afford, but owe more than the property is worth, is a good situation to be in. But if you take action before you've got late payments or a notice of default, let alone a notice of trustee's sale, you can get away surprisingly little damaged. The worst thing that can happen, will happen if you don't do something to fix an untenable situation before it gets that far.

Caveat Emptor

Original article here

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