March 2024 Archives

The first piece of advice I have for buyers who want to get a fantastic bargain is to find a good buyer's agent. Nothing else will make as much difference as a good buyer's agent who is dedicated to the idea of getting buyers a bargain. They spot problems before you're stuck with them, keep you from wasting time, bargain hard on your behalf, debunk all the nonsense that sellers and listing agents throw your way, and most importantly, know when and under what conditions it's a good idea to walk away.

The second piece of advice I have for buyers who want to get fantastic bargains is to be willing to zig when everyone else is zagging. The gorgeous property in a high demand area of town, the award winning new development that's selling like hotcakes, and the freshly remodeled high end property are not where you're going to find bargains. Timing is as important as location and condition. It's much harder to find a bargain in the spring and summer, when everyone else is looking to buy, than it is to find a bargain around Christmas, when nobody wants to move that tree. You find bargains by being willing to consider what relatively few others will. A buyer's market is where the buyers have all the power simply because there are so few buyers in proportion to the number of sellers. Seller's markets are the exact opposite, but it's pretty easy to get people to want to buy during seller's markets, and difficult to get people to buy in buyer's markets. The psychology of increasing prices motivates greed on the behalf of buyers, but if you want to make a large profit, buy when nobody else wants to. When everything is going bananas and prices are increasing 20% per year and everything sells in three days or less is the time to be selling, not buying.

This isn't to say that every property or every situation that everybody else is avoiding is a ripe bargain. That is not the case. Sometimes the reason why a given property isn't selling is a sane, rational reason - far and away the most common reason for a low asking price is a defect that means you can't get a loan on that property. If you don't need a loan, and the issue with the property is one you are certain you can fix, that's a real opportunity. If the property is next to an explosives factory or a maximum security prison, there's a good reason why people are giving it a wide berth. There is a reason to do due diligence on every property.

The third piece of advice I have for bargain hunters is that the beautiful, turn key property where you sign the papers, move your furniture in, and you immediately become the envy of your neighbors is not bargain priced. Those properties don't need to be bargain priced, because they appeal to everyone, and people will line up to pay top dollar for those properties. The owners don't have to negotiate much, because everyone's making offers on these. You find real bargains by being willing and able to consider what other buyers can't or won't. Bargains happen for people who are willing to make it beautiful, not for people who already want it beautiful. The prospective buyer who cannot or will not sink cash into the property can't touch it. The person who isn't willing to work - or pay to have work done - won't be interested.

This segues into the subject for the fourth piece of advice: Being on solid financial footing is worth gold to buyers - lots of gold. Not being on a solid financial footing may or may not be worth waiting until you can fix it, depending upon your market. That's a question that can only be answered on an individual basis. But people with low credit score, low to zero down payment, or insufficient ability to document income will have substantially fewer properties to choose from, and a lot less bargaining power to boot. These challenges become much more difficult if you've got more than one of them. Any one of these issues can be dealt with. Stated Income is dead, leaving you with the options of a seller carryback, higher down payment, or less expensive property. People without much of a down payment have to go through the rigamarole of a government loan - which many sellers are unwilling to put up with. People with bad credit can still get loans if they can document income and provide a down payment - or even if they can't document income with a larger down payment. But put these items together, and you're very constrained as to which properties you have the opportunity to buy. Sellers want cash, not promissory notes, which means the ones who are able to offer carrybacks have a huge lever to hold on you. You're likely to end up paying full asking price or more simply because your options are that property or none.

You have cash, or at least the ability to pay the seller in cash via a loan. The sellers have property and they want cash. Every property is not appropriate for every buyer, and I've yet to find a property that's an exception to this rule - but cash is appropriate for every seller. Your cash, my cash, Uncle Sam's cash - sellers are complete agnostics when it comes to whose cash. That dollar from your pocket is worth exactly the same as the dollar from mine. It all spends, and any seller with any pretense to rationality is going to be the ultimate agnostic about who that cash comes from. So long as they get it, it all spends. Cash is always king - but it never produces more cash just sitting there.

But you have needs and wants for the property, and unless you've got a license to run your own private currency printing press, you don't have an unlimited budget. You have to know what that budget is, and blowing your budget is the mistake most likely to cause a disastrous failure in the home buying process. One of the things I do that my buyer clients absolutely hate is I force them to sit down with me and have a talk about what's important to them in a property, how important it is, and what's not important. Furthermore, I always want to cover alternatives. If they can have two or three features of lesser importance, are they willing to give up one item that may be highly desirable but extremely expensive? People hate this because they hate any indication that they might have to "settle" for anything less than a dream home, but dream homes turn to nightmares very quickly if you don't stay within a budget you can afford. You can always move up again later, but if you can't really afford it now, you will be better off not buying it. A good buyer's agent should give you a very good idea how well your budget and your desires match up before you look at a single property. Furthermore, when looking at properties, always shop by purchase price, not payment. Never never NEVER choose a house or a loan based upon payment!

All of this reduces to one word: Planning. People hate to plan. A good working definition for human beings is, "an otherwise sentient species known for its unwillingness to plan." Me, too, except where there's something important on the line, and getting my clients a better properties at lower prices is a large part of how I feed my family. Effectively planning your purchase will save you many thousands of dollars. Several tens of thousands, around here; perhaps hundreds of thousands in places like Manhattan. I plan everything about my client's purchases except whether they'll like a particular property. There is no way in the known universe to predict that. I've found people exactly what they told me they wanted, at a price within their budget, only to be told "Show us something else." I've had people immediately fall in love with something that I almost didn't show them because it really didn't match well with the desires they told me they had. I've had people insist they wanted a property even though I gave them a dozen good reasons not to. They're the boss. I'm just the expert. Push comes to shove, people will buy what they like - it's my job to make certain they know about the warts and have a chance to avoid them. People marry people with warts and buy properties with warts all the time. Most properties, just like most people, have their warts. It's my job to make sure my clients know about that property's warts - not to prevent them from exercising adult judgment on whether it's something they can live with.

About warts: If you're one of those people that cannot accept the fact that everything in real estate is a trade-off, you're not going to do well. If you're only willing to buy a perfect property in the perfect situation at a perfect price, there are three possibilities. One: you pay a lot more than the property is worth. Two: You don't buy anything, either because nothing satisfies you or because someone else gets into escrow first. Three: You are the victim of a con where they pretend to have the perfect property in the perfect situation at a perfect price.

There are properties without metaphorical warts of any kind. They all command a premium in any market. If you want a bargain, there are going to be warts. There's going to be a reason why buyers didn't line up to outbid each other, because that's what happens with premium properties in any market. Location, surroundings, condition, size, floor plan, orientation, structure, commute, missing something it needs or has something it shouldn't. Usually, more than one of these. Some things that are a big deal to most prospective buyers are cheap and easy to fix, while other things that don't seem important at first are expensive or impossible. Some things make a large difference on resale, others don't. Some things are impossible to live with, some things trivial. A good buyer's agent will make all the difference in the property you choose, and it's not just knowledge, but attitude as well.

Penultimate item: Sometimes, there are things that are more important to the seller than some amount of cash, and if they are less important to you than that amount of cash, this is a good way to get a bargain. Sometimes there will be clues in the listing that a good buyer's agent can spot. Sometimes, a seller who wants it all their way will give away this crucial information in negotiations, usually by asking for something other than the way things are normally done in your area. Once again, it's the buyer's agent who is going to spot that and know what it's really worth in the way of other concessions. Everything that's unusual, out of place or out of the ordinary is a possible flag here. This works both ways, so if you don't have a sharp buyer's agent and the seller has a sharp listing agent, you can very easily put your foot in your mouth to the tune of thousands of dollars or even blowing the purchase altogether. Get with your agent and plan how you're going to craft your offer to get from where you are to where you want to be.

The final item, and one of the most important: Always negotiate honestly and in good faith. Never make an offer you're not prepared to have accepted. Never represent yourself as being happy when you're not, or being unhappy when you're trying not to chortle with glee. It's amazing how many people simply do not understand how likely this is to bite you. The purchase contract is not the end of negotiations - even the consummated sale may not always be the end of negotiations, but that's the way to plan. It takes two willing parties, a buyer and a seller, to get from the purchase contract to the consummated sale. One side gets too greedy or too demanding, the other side gets disgruntled and walks out. The net result is no transaction, and you're right back where you started from, except you're out the time and probably a not inconsiderable amount of money. Lose-lose, where a viable transaction is always at least commensal, and symbiotic is better.

None of this is "Buying below market." There is no such thing as "buying below market". Market is whatever the price a willing buyer and a willing seller agree the property is worth. End of discussion. If you don't understand this, don't get involved in buying and selling real estate. You would only get hurt. But it is a collection of ideas and principles that enable savvy buyers to get the real bargains - the sort where you look back in amazed satisfaction at how well you did, and if you don't know any better, you'll think it was dumb luck. And luck does happen, but fortune in real estate favors those who are prepared, who get good advice, and who are prepared to undertake reasonable risks when the probability and magnitude of a payoff more than compensate. Real estate is always a competition, and like every competition, you want to practice, you want to prepare, you want to have the best coach and the best strategy, and you have to be willing to take calculated risks. The prize isn't a gold medal - it's a property where you can be happier than in the property you didn't spend tens of thousands of dollars more for, and resell when the time comes faster and for a higher profit.

Caveat Emptor

Original article here

People sometimes ask how they can improve their credit if they have old collections on their credit record.

Well, the answer is NOT to simply pay them. Paying off a five year old collection can cause your credit score to drop by 100 points.

You say that makes no sense? Well, here's the logic of it: Collections are weighted by how old they are; when your last activity was. They are weighted heaviest for the first two years, then somewhat lighter from two years to five, then lighter still after five years. If you pay it off, it's still a derogatory notation, because after all, you were way past due on it. But now the date it gets marked with is TODAY, and now you've got an absolutely fresh collection on your credit record. In other words, it comes back to bite you just as hard as it ever did, for another two years, after which it'll still be worse than it was for another three. You pay off an old collection, and it will be five years before it hurts you as little as it did before you pay it off.

So what you do is get a promissory letter of deletion. This says that *if* you pay $X, they promise to issue a letter of deletion. You need this promise in writing. Call or write the company involved, and come to an arrangement that if you pay however many dollars you agree upon, they will give you a deletion letter. Tell them to send it to you at your current mailing address. Don't pay until you do have the promissory letter in your possession, lest your credit suffer the hit I discussed above. These things are old - it is better for your credit to simply leave them sit than to pay them off and bring the delinquency date to TODAY. Many creditors apparently do not understand this. Make sure you explain it to them. "Without your written promise to delete this account upon payment, I am better off not paying this." Because that is the truth.

Once you have the promissory letter in your possession, then pay the bill. Include a copy of the letter with the bill to remind them. They will wait until your payment clears. They should then issue an actual letter of deletion. This is on company letterhead, has a contact name and phone number and an authorized signature. It should be short and sweet, reference the account, and say "Please delete this account."

You then send copies of that letter to the credit reporting agencies (Experian, Equifax, and TransUnion) and get your account deleted. Once the account - and the negative reference - is deleted, it's like it never existed. It is only once the account is actually deleted that your credit will see any actual benefit, and for the period between paying it off and deleting the account, your score will plummet. If you don't get to the point where the account is deleted, paying off old bills maims your credit instead of improving it as most folks would think.

If the company reneges on the deletion letter after promising to issue it, you have the legal ability to sue them. That promissory letter is a legal contract, with offer, acceptance, and consideration, for a legal purpose, etcetera. Talk to a lawyer about the details, I'm just a loan officer who's helped people with this a few times.

This entire process does take a month or two, and it can take thirty days to show up on your credit after it's complete. There is a process called Rapid Re-Score which can accelerate it, but Rapid Re-Score should not be something you plan on using - it's expensive, and doesn't result in as good a score as doing it the normal way. Optimally, deletion letters are not something to try when you already have a mortgage loan in process; it's something to do before you apply. Trying to do this while you've got a loan in process is expensive, because you're going to blow your lock period and need to extend it, sure as gravity. Thirty days of extension for your loan lock is approximately half a percent of your loan amount, so on a $400,000 loan, that's $2000. Most collections are a lot smaller, and you may have to resign yourself to the hit on your credit in some instances, in which case you will probably be better off to have it paid off through escrow at funding, where the loan will be funded and recorded before paying off that old collection hits your credit score by being brought up to the present day. Otherwise, you could find your loan denied due to credit score dropping, and discover that you're not getting another one on anything like comparable terms. Maybe you are not getting another loan at all, because your score has dropped too much. Be careful, plan ahead, and take care of old collection accounts ahead of time.

Caveat Emptor

Original here

Is there any problems with having all your money in only real estate?

That was a question I saw.

The answer is YES there are problems!

1) No diversification. The real estate market tanks and you are hosed. The more so because of the leverage attaching to most real estate investments. If you own five properties with a total value of $3.5 Million maximally leveraged, and the market loses 20% of value, you may have lost more than the entirety of your equity. If you need to get out now for some reason, the fact that prices are down hurts you much worse in real estate than any other investment except maybe commodities. If you had other investments, you likely would be able to hold on until market recovery and still make money.

2) Most people who do it get too strongly leveraged. Leverage is great, it makes your money work harder. But you've got to do some heavy thinking about how much leverage you're going to accept. If your cash flow is positive or tolerable, you can last out downturns. If you get into a situation where you can only make the payments for a certain amount of time, that can create desperation, and force you to accept an offer that leaves you owing money to the lender, and money to the IRS.

3) Real Estate is not liquid. This is the real kicker that drives the first two. You can't just call your stockbroker and get cash in seven days or less. You have to find the right buyer to get a decent price. If you need money in a hurry, this can force you to sell property for less than it's worth. If there are no good offers but you need to sell, you can find yourself forced to accept a bad one.

4) Landlord issues. The more properties you have rented out, the more likely that either blind chance or one of your tenants is going to do something to one of your properties which requires a lot of money in a hurry. If you're maximally leveraged and have no money anywhere else, where are you going to get that money? Particularly if the nature of the damage renders the property uninhabitable, in which case you're not likely to get any new loan on the property until it is fixed, and your lender might just decide to keep any insurance money in order to cut its losses.

If they're not rented out, of course, you're flushing cash every month.

Don't get me wrong. Real Estate is a great way to make money. In fact, given the phenomenon of leverage, you can make more in real estate with less risk than in practically any other investment field. But you've got to have some money somewhere else, and the larger your investment in real estate, the more money you need in other investments.

Caveat Emptor

Original here

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Unpermitted additions are popular in California because of property tax implications. You see, due to Proposition 13 back in 1978, taxable assessments are based upon purchase price plus no more than 2% per year since acquisition (although if you bought prior to 1975, it's based upon the taxable basis in 1975). Let me say that this is a very good thing, because someone who buys property today has a reasonable assurance they won't be taxed out of their property, something you could not say prior to the passage of Prop. 13, where the legislature had more than tripled property taxes in the three years before it passed. Indeed, Prop. 13 has been one of the background factors leading to the elevated values today. If you bought a property for $40,000 in 1975, your taxable assessment 40 years later would be just over $88,000. In the open market, it would probably be about a $500,000 property, perhaps even $600,000, even with the market having taken its recent tumble. People who bought in the early nineties are sitting around $200,000 assessments for the same property, and even those who bought back around the time of 9/11 have assessed values of perhaps $300,000.

However, one exception to Proposition 13 is if you build an addition. New additions are assessed based upon the value it adds to the property when it is built. So in the case of the person who bought in 1975, expanding the living room or putting in a new bedroom could double the owner's property taxes. A new master suite could go much further than that. Building a second story to add multiple rooms could make your tax bill resemble a new purchase.

But if the county never finds out about it, and never updates their records, they don't make the new assessment, and the property taxes don't go up.

The way the county keeps track of all of this is via building permits. The theory is that anyone making an addition is going to get the proper permits, have all the inspections done, and happily pay their newly increased taxes.

Yes, I'll wait until you're done laughing, but it works out to be the intelligent thing to do, as we'll discover.

This is aside from all the usual headaches of dealing with your self-interested bureaucracy. Predictably, a lot of people decide that they will do anything they can to keep the county from finding out about that addition. No permits, no plans, no inspections, no bureaucracy, just do the work and enjoy the results.

Well, not quite. Licensed, insured contractors have legal and insurance based requirements to make certain any work they're involved in has all the necessary permits, inspections, etcetera. Go to Bureaucracy, Go Straight to Bureaucracy, Do Not Pass Go, Do Not Collect your nice little tax evasion. So this also encourages the use of unlicensed contractors, who as a group aren't precisely known for their unswerving dedication to high standards of construction and repair. Their work may or may not adhere to code, it may or may not do what it was supposed to, it may not continue to do so even if it does initially, and it may or may not even be structurally safe. Not to mention you're going to need Divine Intervention if someone gets hurt building it, or even on that portion of the property at a later time. Homeowner's Insurance companies have been known to be sticky about such details, and for excellent reason.

But if the county finds out about it, you've got all the issues you were trying to dodge right back at you with penalties and compound interest. I said if, but it's really more a matter of when.

You see, most folks want to sell the property at some point in time. When they sell it, they want to get a price appropriate for the property. They've got a 4 bedroom 2000 square foot property now, so the owners want the price 4 bedroom 2000 square foot properties are bringing in the market, not a 3 bedroom 1400 square foot price. When that happens, somebody usually notices that what they're trying to sell doesn't match county records for the property. It's one click on MLS to find out. The Era of Transparency bites everyone with something to hide. An agent I know told me he once asked someone in the assessor's office how they found out about cheaters. The answer? Mostly Real Estate Agents, but the context and way he told the story leads me to believe that the real answer is more properly "people unhappy with some other party to a transaction that may or may not have come off." It doesn't take much. Given even an anonymous tip, there isn't a judge in the world that's going to deny the assessor the right to investigate, especially given that you're on record trying to claim it had something more in order to sell it for a higher price. It's not like MLS records are private, or that the county assessor doesn't subscribe. Unless you've got some trick to make the extra room vanish when the tax man knocks on the door, they're going to find out the truth.

If the addition happens to be to code - current code as of the time of investigation, not the time of construction - you can get a retroactive permit. The process isn't too horribly much worse than if you'd done everything legal in the first place. But you're still going to pay all those back taxes, plus penalties and interest.

However, it's rarely to current code. Building codes get updated all the time, and when you get a permit legally and dot all the i's and cross the t's, you almost always get grandfathered into any code updates along with everyone else. It was fine and to code when you built it, so unless it has somehow become unsafe, you're still cool as far as the code goes. I see stuff every time I go looking at property which couldn't get approved now, but because the permits were obtained, the work was done, and everything was legally signed off however many years ago, it's still legal today.

Grandfathering doesn't apply, though, if you didn't do things the legal way. It's the code now that's important, and if it's not to code now, they can and will make you bring it up to current code standards. This often entails completely demolishing it and starting over, or simply putting things back to the way they were originally, if anyone can figure out what that was. Whatever happens, you're going to have the county inspectors looking over your shoulder every minute until the situation is resolved, and the licensed contractor you're going to have to retain isn't going to have much sympathy for what you did to yourself without paying a member of his brotherhood (most contractors are male). Upshot: It's going to be a lot more expensive and time-consuming than if you did it correctly in the first place.

It can be, and often is, worse than that. If the addition is unsafe, if you don't bring it to code within a specified period of time, they can make you demolish it. Actually, they can make you demolish the entire structure if it's bad enough. Suppose there's other stuff done there that was legal at the time, but there were no permits needed then? Nobody believes liars and cheats, and that's you at this point.

Sometimes, the additions are not compatible with zoning, set back regulations, etcetera. In that case, they're coming out, end of story, and the entire structure may be condemned. Granny flats are one common issue that often impacts setbacks and or zoning. I may not like it, but it's not like I've been elected dictator for life. We've got to deal with the law as it is, not how we would like it to be. We can work to change it, but in the meantime, it is what it is.

Now, about buying such a property: Are you really comfortable plonking down your hard earned cash (or worse, borrowing money so the seller can have cash) for a property where part or all of it may be at risk of being demolished, when (not if) the county finds out? Particularly the same price the your new neighbor paid for his fully permitted property? I don't think that's likely. Not many inmates of insane asylums are purchasing real estate, and when they do, they need to get their trustee involved. I can't see any trustee agreeing to it either.

There is one potential loophole: If you can show the property was as it is when you bought it, then the addition will be treated as part of the sales price, and you can potentially get forgiveness as an innocent purchaser, but it's still got to be to current code. See above for issues with that. There's a also time limit on this, usually two years from date of purchase is my understanding. The issue is this can be difficult to show without the cooperation of the former owner, who's going to be assessed for the difference, plus penalties and interest, and is therefore unlikely to cooperate! I understand there are other limits upon this loophole, but these are the most important ones.
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Even if you manage to unload one of these white elephants upon some unsuspecting fool, you're not in the clear. It can come back to bite you. I heard about one case not too long ago where the seller bought in 1986 and sold in 1999, and they swore it was like that when they bought, that they had no reason to suspect it was unpermitted. All to no avail. The judgment was rendered against them, and they're going to have to find the people who sold it to them to get any satisfaction in return. Good luck with that, especially if they're dead.

One final issue: In the era of make believe loans, anything went, but lenders are once again balking at lending at properties with unpermitted additions. In particular, they're not willing to lend based upon the current configuration, but based upon what's in county records if at all. As one lender fairly close to my office found out when they tried to sell their repossessed 1500 square foot lender owned property that the county records showed as 640 square feet, this can put the kibosh on the vast majority of potential sales. How good of a price do you think you're likely to get when the buyer can only get a loan for about fifty percent of value, and the lender wants to treat that as 100 percent financing? Result: It sat for eight months until a buyer came along with the resources to deal with it, and that buyer got a fantastic deal as the property was essentially ineligible for a loan.

(Question: How many "get rich quick in real estate" seminars mention that most of the very best deals happen for buyers willing and able to sink a lot of cash into the property for the time it takes to deal with the issue that's preventing everyone else from buying it?)

in short, unpermitted additions are a landmine waiting only some random event to explode, and it can do so years after you thought it was no longer your problem. They can be good news for buyers with the resources to deal with them, but they can cripple your ability to sell the property, particularly for a good price. They can actually cause you to be forced to sell for a price below what you'd get without doing any of the work at all. Looking at the costs, I find it difficult to believe that anyone considering things rationally would willingly do this, but in looking at MLS and visiting 20-30 properties most weeks, I see a lot of hard evidence that not everyone thinks these things through.

Caveat Emptor

Original article here