December 2021 Archives

This is a pure scam throughout, but it's legal as far as I know.

I'm not going to go into more details than I can avoid. The universe knows there's enough people pulling this right now, but the bad guys already know about it, so let's even the level of illumination a bit. Here's the general way it works. The owners are in default, and there's no way they're going to bring the loan current, as the lender can require once the Notice of Default hits. They do not have the requisite cash. Along comes a blackguard masquerading as a white knight, and makes the homeowner a proposition: Sign the property over to me, and I'll bring it current, rent it back to you long enough for you to get back on your feet. Pay the rent on time for two years, and I'll sell it back to you. There may even be a small amount of cash involved, as compensation for your equity "in case" you end up unable to purchase it back.

People desperate to stay in their property will agree. They think they'll be saving their equity, their kids won't have to change schools, and nobody will have to know they were in foreclosure. Of these, only the fact that the kids will be able to stay in their schools a little longer might be true.

Here's what happens: These scams are usually structured as a sale subject to existing deeds of trust, with all of the problems entailed in that, but not always. A signs the property over to B. B now owns it. In the absence of a contract for future activity, B can do whatever the heck they want to with the property. Usually, B will try to talk A out of demanding any actual written contract, and a verbal contract isn't worth the paper it's printed on. Without such a contract, what's preventing B from evicting A is essentially B's goodwill.

But with a contract or without, B is usually motivated to keep A in the property by the fact that they're going to charge A an above market rent - usually enough to pay not only the mortgage, but a significant monthly profit for B. I had a guy come to me a couple months ago who had accepted such an arrangement. His monthly payments had gone from $3100 to almost $4300. Where else is B going to get that kind of rent for properties that normally rent around $2000? And, of course, A is going to maintain the property. After all, they still think it's theirs.

If you can't make the payment now, let me ask you what makes you think you'll be able to afford a much higher payment? What makes you think you'll be able to pay it on time, as the contract, assuming there is one, demands in order to retain your right to re-purchase the property? It isn't going to happen. If you had that kind of spare cash, you would have brought the property current yourself. If you could afford the payment in the first place, you wouldn't be in this trouble. You probably wouldn't have been behind in the first place. But people will tell themselves all kinds of things, because "it's only temporary".

Now it's worth noting that for the ones of these structured as sales subject to existing deeds of trust, B is going to make a point of having some late payments on that mortgage. These hit A's credit rating. Chances of A being able to qualify for a better loan, that they can actually afford, when the two years are up? Zilch.

Even if they're not structured as sales subject to existing deeds of trust, the chances of A being able to qualify to buy the property back at the end of those two years are basically zero. There's going to be a late payment somewhere. "Sorry, but you're in default upon the contract terms." They can take the contract and a decent lawyer to court, and paint themselves as being a saint who kept A in the property, tried to give them the opportunity to buy it back, and was rewarded with default on the rental agreement and this lawsuit. Chances are that A ends up paying for B's lawyer, as well as their own. Even if A somehow manages to make all the rental payments on time and in full, they are now even more broke than before. No cash for closing costs, or anything else. Particularly in the sort of lending market we have now and expect to be having for the next several years, A is not going to qualify for the loan they need in order to repurchase the property.

What does the blackguard who pretends they're a white knight get out of all this? Well, they won't do it for properties without a good bit of equity. So for an investment of a few thousand dollars to bring the loan current, they get a property with 10% equity at a minimum, and usually more. They get a positive cash flow from having it rented above market for up to two years. And if A should somehow manage to leap all the hurdles to repurchase the property, that repurchase contract will give them back every penny they invested with cash to spare. And for the vast majority where A is unable to repurchase the property according to the terms of the contract, I'll bet that they get a good chunk of change, not only out of the equity built in to the deal, but also out of the differences between the market now and the market two years from now.

For being in denial, and unwilling to face the fact that they can no longer afford the property, A loses basically all of the equity they have built up. They would have lost some of it anyway, as it's not free to sell a property and in a distress sale, you're unlikely to get top dollar for anything. But this ends up costing them more - tens of thousands more.

If you get into a situation where you're looking at losing the property, and someone pretending to be a white knight rides up and offers you this kind of deal, you're better off selling outright in pretty much every case. Yes, you've just lost the property. But you would have lost it anyway, together with basically every penny of equity if you accept one of these deals. How is that better than being responsible and realistic enough to accept the situation as it is, and sell on the regular market for the best deal you can get?

Caveat Emptor

Original article here

When things went south in the real estate market, I saw more changes in the lending industry in a few months than the previous five years. But those changes mostly restored us to the place we were a few years previous.

There is plenty of money available, rates are so good right now because lenders want very badly to lend money. For all the howling and gnashing and grinding of teeth you see in the media, and elsewhere, I can get loans at rates that are very low, historically speaking. 100% conventional financing may not be available any more, but I'll bet money it's going to come back, and I do have 95% conventional loans, 96.5% FHA loans (which are really 98.25%) and 103% VA loans.

You just have to be able to prove you can afford the payments.

And that's the rub. Starting a few years ago, and increasing until the house of cards collapsed, many real estate agents and loan officers stopped worrying about whether or not their client could really afford the property. The question was could they get the loan funded, and let the client worry about whether they could really afford it later.

The relaxation of lending standards was like manna from heaven to the less ethical members of my professions. Agents could sell people who could barely afford a condominium in reality a beautiful huge detached house with its own yard in an affluent community with great schools, and loan officers could make it look like they could afford the payments. Talk about your easy sale! The clients expect a chintzy little condo in a rough neighborhood, and the agents shows them a beautiful five bedroom home half a block from the beach, and says they can get it for the monthly payment they told the agent they could make. Prices skyrocket! People who bought a couple years ago and are strapped for bills refinance into these ridiculously low payments while getting cash out for all of the toys they can imagine! New SUV? How about two new SUVs! Some loan officer needs to get paid for a loan, and everybody has a thirty year fixed rate loan they got when rates were lower? Offer to cut the payment in half!

Never mind that the real interest rates on these loans was much higher. People just naturally assumed that if they kept making the payments, they'd pay the loan down, and eventually, off. After all, that's what loans are! Except that wasn't the case with the Make Believe Loans that were so popular. That small minimum payment, way below the real cost of interest, caused thousands of dollars to be added to the loan balances, where the above market interest rate could be charged on that money also - and the lenders could report all of this as income, doing wonderful things for their revenue and stock prices!

Some others may not have gone in for negative amortization loans in a big way. Instead, they put people into "interest only" loans where the loan and interest rate was fixed for two, or maybe even three years. They may have used stated income, or they may not, but they put people in unsustainable loans where the clients could barely afford the initial payment, and never mind thinking about what would happen, sure as gravity, when the adjustment hit. When the loan started to amortize at the same time the rate jumped by two percent, they affect to be somehow surprised that their former clients cannot afford the payments!

Or perhaps they used stated income only because the clients had two thousand dollars of other debt service per month. Well, hello! debt to income ratio is the most critical measure of whether someone qualifies for a loan there is. It protects the lender, but it also protects the borrower, and this intentionally short-circuited it. Yes, they could have afforded the property if they didn't have have this debt. It's not a distraction; it's the central, single most important issue in whether or not they qualify for that loan!

For those who were taken advantage of thusly, may I recommend finding a competent real estate attorney? The last couple years have seen some very interesting court decisions. One court in Ohio started it off by ordering a negative amortization loan rescinded due to failure to disclose its nature sufficiently. For a while, there were all kinds of lawsuits going on. Unfortunately, they pretty much came to an end when the bailouts happened. I was looking forward to seeing criminal trials for the worst crooks, but it appears as if orders have come down from Our Beloved Political Class not to put anyone in jail. Probably fair enough, as Our Beloved Political Class was at the heart of the reason for the bubble. Still, it doesn't precisely discourage a repeat of the whole mess, does it?

All of that is neither here nor there, really. My point is that the only thing that's changed is that the lenders have woken up to the fact that was evident all along - that they were the "deep pockets" who were liable to eat most of these losses from the price collapse, and from people who couldn't make payments on unsustainable loans, particularly after the payment started adjusting. The lending standards that contributed to the bubble are gone, and they are not coming back any time soon. Forget about them. That was then. This is now.

The lending standards in effect now are very livable. Bankers transported from the fifties would be horrified at how lax they are. Until 1997, there was precisely one lender that would loan 100 percent of the value of the property (when they bailed out of the 100% loan market in late 2005, it was the first sign that collapse of the lending market had actually started). When I originally wrote this, I still had at least a dozen lenders who would go 100%, but they wanted to see proof you can afford the payments. Failing that, lenders wanted to see enough equity (which means down payment in the case of purchases for you real estate agents reading this), so that if the loan were to go south, that lender would still get their money.

This means real affordability and down payment have become a lot more important to the purchase market, and if you're looking at a refinance, you had better be able to afford the real payments. If you can't, that refinance is not going to happen. Even the now discontinued 125% refinancing programs require documentation of enough income to afford them - they're in existence for loss mitigation, and loss mitigation only. If you can't afford the loan, even Fannie and Freddie are going to cut their losses by foreclosing.

If, on the other hand, you're willing to restrict yourself to properties you can really afford, welcome to ownership! For every person who can no longer qualify because they can't document enough income, there's someone else who can, and who has the down payment. Down payment requirements are very achievable for anyone who is reasonably frugal and doesn't make a habit of stiffing their creditors! Affordability of property has increased dramatically, and at this update, most properties in reasonable condition and with realistic asking prices here locally are going for the asking price.

The catch is that if you can only afford the payments on $300,000, then $300,000 is all you're going to be able to borrow. I've been selling my clients what they can really afford all along - the only difference it makes to me is that I'm no longer competing with the jokers that can only sell houses by showing clients the beautiful property they can't afford. I've been telling people about real, sustainable loans all along. The only difference this makes to my loan business is that I'm not competing with jokers who sell negative amortization loans by the minimum payment to unsuspecting people who don't understand what's going on.

What this means is that lazy agents and loan officers are going to have to bite the bullet and sell the client a property they can really afford with a loan they can really afford. Agents can have people make offers on property they can't afford, but they're wasting their time and the clients'. Loan officers can tell people about this loan and that loan they used to have, but they're wasting their time and the clients'. Possibly the clients deposit, inspection, and appraisal money too, in both cases. The loans to make this nonsense happen do not exist any longer.

On the other hand, low to (in some cases) zero down financing still exists for those who can afford the payments. But they have to be able to actually afford the payments. This means working within a budget, and settling for what you can afford within that budget. Settling is a very hard message to send someone who's going to be spending six figures on a property and is all emotionally tied up with how they want it to be beautiful, and in a great neighborhood with wonderful schools and all of the usual things that have buyers gushing - particularly when everyone else is telling them they don't have to settle. They really did have to settle, all along, and those that believed ethical practitioners when they were told that are doing just fine, thank you, while those who didn't are in real trouble. The real world has come crashing back into real estate. The fantasy may have been nice while it lasted, but the real world always comes crashing back.

Among those real world facts that have come crashing back is that all of the long term benefits of owning over renting are just as real, just as relevant, and just as true, as I painted them back when I wrote those articles. Let's review a few:

Should I buy a Home?, Leverage in Real Estate - Making a Decent Investment Spectacular, Why Renting Really Is For Suckers (And What To Do About It) (and its counterpoint, When You Should Not Buy Real Estate), Save For A Down Payment or Buy Now?, The High Cost of Waiting To Buy A Home, Real Estate: Getting From Where You Are To Where You Want To Be.

My local market in San Diego County has been on the bleeding edge of all of this, because it's such a desirable place to live, and our housing supply is probably the second most constricted in the nation (after Manhattan, and although the City of San Francisco also has a decent claim it covers a much smaller area). Between natural obstacles to growth and zoning codes constricting the building of new housing, I think we've had about all the downwards adjustment we're going to get. If you can't afford to buy a detached house, buy a condominium, townhome, or PUD (indeed, how dead the condo market has been is directly attributable to two factors: Over-conversion of apartments, and the fact that lazy agents were selling people properties they couldn't afford because it was easy), or think seriously about moving out of town, because with the number of people who want to live here, it's only the current meltdown in lending that's causing the hiccup in prices (and what effect do you think over-conversion of rentals will have on the rental market?). With local housing demand trends going the way they are going, even the prices at the peak of the bubble are going to look pathetically cheap in a few years, and that's pretty much the facts of the matter, albeit perhaps not so strongly where there's still room and the building codes to allow growth People are able to qualify here locally. Right now, the only thing preventing them is irrational Fear and Greed, exactly opposite to but caused by exactly the same psychological factors I wrote about in February 2006, back when everybody else thought the market was still going gangbusters, and updated here. But psychological fear and greed are difficult to maintain. People have figured out, en masse, that the economic basis is there to support the sales that are happening. Actually, the economic basis is more than there to support current prices - We've seen a definite increase in sales prices already. Buy something you can really afford, and be ready to see it increase in value.

If you buy something you can really afford, the moderate increases in value I expect to see will leverage your money favorably, such that you will be better able to afford something more expensive, more quickly, than if you saved your money, even if you invested those savings in the stock market. Even if you never move up, the fact that you have fixed your costs of housing now means that if you can afford those costs now, you will be even better able to afford those costs in the future, assuming inflation and all of those other economic factors we've gotten accustomed to these last fifty years. Homes are not going to continue at today's prices any more than candy bars are still ten cents, or that you're going to be happy working for today's wages thirty years from now. What's going on right now is still an opportunity for buyers, and an opportunity for those who would like to be able to continue to afford to live here for the rest of their lives. If you decide to wait until future events prove me right, that's your prerogative, but neither I nor anyone else will be able to bring the market back to today's state. The moving finger writes and moves on.

Caveat Emptor

Original article here

Real Estate information is asymmetrical. One of the central facts of real estate transactions is that the seller always knows more than the buyer. They've lived in the property for years, and had to deal with any defects first hand. Even if it was rented out, the chances are that the tenants contacted them over every defect those tenants encountered. It's not like tenants are noted for their desire to spend more money on behalf of someone else. The vast majority of the time, that seller could quote you chapter, verse, and receipt number for every repair they've had done, tell you more than you ever wanted to know about the time the tenant called them at 3AM to take a plunger to the toilet, or about the time the water heater exploded while they were on vacation and they came back to a property filled with water up to the window line on the second story. Water bills, stucco cracks, the cracked slab that was revealed the last time the floor covering was replaced. The question is: Will they?

The law is clear. The owners are required to inform prospective purchasers of any known issues, or for that matter, issues that they reasonably should have known, that a reasonable person might consider in their decision of whether or not to purchase that property, and by obvious (and well precedented) extension, on whether or not to purchase it for a particular price. Failure to do so can make you liable for the entire purchase price, repairs, legal fees, and even damages. Please, consult with a lawyer as to your responsibilities. I'll bet you a nickel, in advance, they advise you to disclose whatever issues with the property there may be.

There are exceptions. The major one where the sellers really don't know anything is lender owned property. The others may be legal exceptions like inherited property - but I'll bet you Junior knows all about the problems with Mom's property even though he may be legally exempted.

Nonetheless, two factors stop a lot of owners from proper disclosure. Particularly in this market, those owners may be hoping just to get out even, or even simply owe less money in taxes than they might after the lender accepts the short payoff. The old "blood from a turnip" argument. It's one of the maxims of the legal industry never to sue people who are broke. You can get a judgment. What you won't get is the money.

The second factor is that the current owners intend to shield their assets (via homesteading, etcetera), leave the country, or simply hope you're not going to sue due to one of a number of reasons. Mostly, these amount to denial. If you've got to put out $50,000 to get the property into the condition you were led to believe it was in when you bought it, it's worth their while to pay the lawyer and chase you down.

The various inspectors are your friend. Quite often, I encounter resistance from clients about spending the money for the inspection. I make it very plain that I will try my best to spot defects, but I am not a licensed inspector of any kind, and there aren't very many agents who are. I've met exactly one who was, and let's just say that I'll bet significant money that my clients end up happier than his, and expect to win a lot more arguments and disputes with him than I lost. Especially if our respective clients were asked how happy they were five or ten years out.

Admittedly, inspections cost money. However, on the scale of the value of real property, this is money you need to spend. Maybe $400 to make certain that a $500,000 property is basically sound. Look at it this way: Would you spend an extra eighty cents for a third party vouching for quality on a thousand dollar item? Particularly if you can sue them if they're wrong? Say you were looking at a $10,000 used car. Would it be worth $8 to you to have your favorite mechanic tell you what, if anything, was wrong with it? I'll bet every single one of you who drive answered "Yes," and that's even without the liability issue. The point I'm trying to make is that these are equivalent bets. It's just that "$400 is a lot of money." Well, $500,000 is a considerably larger pile of money than $400, and it's no less real if you happen to be borrowing the whole amount. In fact, it's even worse, because if you lose $500,000 cash, all you've lost is $500,000. If you borrow $500,000 and lose it, not only do you have to pay it back, you have to pay interest on it until you do. Not to mention that it's kind of hard to refinance, among other problems.

However, you don't want to be putting out that $400 inspection fee for properties you're not going to buy anyway, because there's something wrong that a knowledgeable agent can spot before it gets that far. Nor do you want to spend it before you've got a fully negotiated contract, especially in the current market, because the fact that you've spent $400 inspecting their property before negotiating a contract can be interpreted by sellers as giving them more power. Furthermore, negotiations post contract are always subject to whether the other side wants to be reasonable about their end of what the inspection reveals. You've already got a deposit in escrow, and my experience has been that it's easier for the owner to break an escrow that's not going anywhere, than it is for the former prospective buyer to force the owner to release their deposit money from that same escrow. You'd really prefer to find out about Vampire properties before you put an offer in.

This is one of the many areas where a good buyer's agent pays for themselves many times over. If they spot the vampire property before you make an offer, that's a minimum of about two weeks and $400 you saved, and it's likely to be a lot more. If you put a $5000 deposit down (and nobody sane accepts offers without a deposit), now you're wondering whether the other side is going to return it, which not only might necessitate hiring a lawyer, but also impact your Loan to Value Ratio until and unless you get it back, and could very well impact your Debt to Income Ratio. Time, money, headaches. All saved because your buyer's agent spotted the problem before you put an offer in. There aren't any spaces on the HUD-1 to document them for the government, but they're all real.

So when you're going around looking at properties, it's a lot more important for your agent to look critically at what might be wrong with the property, and compare and contrast it with other similar properties on the market, than it is for them to tell you about how the floor goes so well with the walls, or how gorgeous the view is. Most people really can figure those latter qualities out for themselves, and if they really want input, a good agent is happy to provide it, although most people will only be asking for confirmation that other people feel the same pain in the optic nerve that they do. The real job of a buyer's agent is to consider things other than the transient decorations that are likely going away. Physical situation (including defects!), orientation, and of course, location, location, location. How easy will be to maintain or improve the property's value? What will it be like to live there? What does the future hold for the neighborhood, at least according to current plans? What's the commute like? How's the grocery situation? What about other shopping? City services, how far to common activities? Most importantly for most people with kids, What are the schools and how good are they, really? None of this stuff is part of the standard disclosures from seller to buyer, because the buyers are theoretically just as capable of finding it out as the sellers. Not true in practice, I might add, because the seller has usually been dealing with these and other neighborhood issues the whole time they've owned the property. These and other questions are some of the reasons why good agents can only cover so much area, and why it's a real good idea for even current residents of a neighborhood to find a good agent and use them to help them buy a property.

Caveat Emptor

Original article here

I got a search for how one spouse could sign while the other was out of town, and act on their behalf. Since both spouses usually need to sign real estate papers, this is a real concern.

Actually, almost anybody you designate can sign for your real estate transaction, whether or you're available. The usual thing is you're out of town for some reason when closing happens, and so your spouse signs for both of you, themselves in their own right, and you by Power of Attorney. This actually covers all kinds of situations, not just real estate.

It is to be noted that real estate documents can usually be signed anywhere in the United States, so long as there's a notary available. I've had documents sent across the country multiple times. It's only when the principal is out of the country that life becomes difficult, as there's a requirement for the documents to be signed in the United States. The only way I'm aware of to have that done abroad is at an US embassy, where according to international law, the grounds are US territory. The chances of a US embassy having a notary are excellent, as they are employees of the US State Department, after all, and such services are part of the ones they exist to provide, but they're typically on a forty hour week Monday through Friday schedule and their fees are higher than most. I have done one such transaction, and I do have to report significant potential stumbling blocks.

The document required for someone else to sign documents on your behalf is called a Power of Attorney. You must sign it and have it notarized that it was really you that did so. In the case of real estate, it will be recorded along with the document it enabled your representative to sign. In it, you designate one particular person who has the right to undertake an action or group of actions, and they then act on your behalf, as your "attorney" for this matter.

Powers of Attorney can be made for all sorts of things, not just real estate transactions. For instance, pretty much everyone should have a Durable Power of Attorney for Health Care. Powers of Attorney can be broad and ongoing or limited to one specific action in a limited range of time. You set this up at the point in time when you execute it. Whatever terms you set up when you signed it are binding, both upon you and the person you designate. Most stationery and office supply stores have ready made ones where you just fill in a few blanks and you're ready to have it notarized. I've seen ones with check marks, but those are dangerous in my opinion, as when a particular check mark was placed on there is a matter for considerable legal dispute. I'm not an attorney, but you don't have to be an attorney to be able to understand the potential problems there.

It is a misconception to believe that this person must always be an actual licensed attorney. In general, they need not be an actual attorney, only a competent adult. I'm sure there are circumstances when being an attorney is necessary, but it is not necessary most of the time. There may be circumstances where you may want a licensed attorney even where it is not legally necessary, but there's a major difference between being legal and being smart.

I've seen not only spouses used, but other relatives, close friends, and professionals such as accountants and attorneys. Note that the person you designate does not have to accept, and does not have to act on your behalf even if they accept. The idea is to get their consent first, and make certain they know your mind in the matters you designate them for.

Extremely important: You really need to trust the person you designate to act in your best interest, as well as to make certain they understand everything they are signing. If they sign something that you would not have, you must honor the contract, as long as it is within the mandate of that power of attorney. Whatever contract they signed on your behalf, you can be legally forced to live up to the terms. Your designate doing something you would not have is a side issue between you and the person you designated. That person with your power of attorney designate's signature on a contract can force you to live up to that contract, which is how it should be. Otherwise, nobody would accept powers of attorney as valid, and they would be regarded as one more way to run a scam. They're not supposed to be a scam at all, it's intended to be a way for one person to do another person's business legitimately. If they weren't as enforceable as the contract you signed yourself, nobody would accept them, and the business would have to await your ability to deal with it in person.

Caveat Emptor

Original here