Dan Melson: July 2013 Archives

Not interested? Most people aren't when it's talking about how they got taken advantage of in the past. First off, it's in the past so it is over and done with, and there's no use dwelling on it, right? Second, there's the ego thing. Nobody who's been bragging about what a great deal they got likes to find out they've been had. Taken for a ride. Conned. Big time.

Anyone reading this who isn't interested in improving what happens next time can tune out now, because that's what the rest of this article is about: educating you in how to shop for a loan and what the tricks are, and if you've never had a real estate loan but want one someday, chances are you'll benefit from reading it too. If you're the sort of person who isn't interested in improving your future loan, chances are you're not a regular reader because helping folks understand their financial options for next time is the most consistent thing I do here.

On a very regular basis people tell me how they got taken advantage of by a loan provider. Actually, a lot of them think they're bragging about what a great deal they think they got, when in their situation, I wouldn't take that loan if the bank paid me. High points charges that stick around in the balance essentially forever. Points on hybrid ARM loans (3/1, 5/1 and 2/28 are the most common). Prepayment penalties, especially needless prepayment penalties, or prepayment penalties that last longer than the period of fixed interest rate. Fixed rate loans where hybrid ARMS are more appropriate. Long terms where a shorter term would be more in your best interest. Most loan officers are looking for an easy sale, and no loan officer ever complains that a sale was too easy to make. Failing an easy sale, they'll look for any sale. If they don't get you signed up for any loan, they don't make any money. They are not responsible for your best interest, they are responsible for making money and not stepping over legal limits which are very different (in the sense of being less restrictive to loan officers) than most members of the public believe. If ever a loan officer tells you that in your circumstances, they wouldn't refinance, make sure you get their contact information and put it someplace you will be able to find it when you go looking for your next loan because such a loan officer is a treasure worth keeping.

First off, if your credit score is above about 660 and you have a prepayment penalty, chances are excellent that you were taken for a ride. People with credit scores above 660 should usually be A paper, not subprime. A paper does not need a prepayment penalty except when the loan officer wants to get paid more. A 2 year prepayment penalty is worth a good chunk of change on the secondary bond market - usually about 4% of the loan amount. This means that if you have the $270,000 loan I use as the default here, they made almost $10,000 over and above the normal price spread when they sold your loan. And even when they retain servicing rights, lenders sell loans over 95 percent of the time. At the very least, you should get some kind of benefit for accepting a prepayment penalty A paper. A current "maximum conforming" loan of $417,000 would be worth almost $17,000 more to the lender with a prepayment penalty than without. This, all by itself, is often a reason they stick folks in subprime situations. If you think you're A paper, make them show you the turn-down from the automated loan underwriting program (Desktop Underwriter or Loan Prospector) before you even consider a subprime loan.

Since I first wrote this, it has become more difficult to get A paper loans in the 660 to 720 range, especially if you're in a situation above eighty percent loan to value ratio. Keep in mind, however, that 720 is the median credit score nationally (half above, half below). It isn't difficult to get a 720 credit score if you will try, and that FHA loans are now much more useful than they were for avoiding the need for subprime loans. No to mention that it's very difficult to find a real sub-prime loan these days - the few sub-prime lenders left that I'm aware of have basically the same qualification standards as A paper. The way I'm putting it is they're looking for borrowers who don't think they're "A paper" but are.

If your credit score is below 620, you're almost certainly stuck with a loan where you have a prepayment penalty by default. Buying it off is usually a good idea, but buying them off isn't free. Between 620 and 659, there's some wiggle room as to whether you will get an A paper loan. If you have twenty percent equity in the property or are making a 20 percent down payment, chances are good you'll make it full documentation. Since Stated Income loans are not available anywhere I'm aware of at this update, full documentation is the only way to get a loan.

But most people never undertake the most important step they can to get a better loan. They don't shop multiple lenders, and by shop multiple lenders I mean have conversations about the best loan for your situation. When I first wrote this, I advised people to ask for a quote guarantee and sign up for a back up loan, but changes to the way lenders handle mortgage loan rate locks mean that nobody can give those at loan sign up. But shopping a very few lenders and having real conversations will likely save you $10,000 over the period you keep an average loan. There are lenders out there doing oodles and scads of business charging borrowers thousands of dollars more than the average lender.

I have changed where I hang my license several times since I entered the business, and the one thing (other than looking for loan officers who don't understand the way the business works) that most of the firms out there have in common is that they don't want to compete on price. They know they may have to the first time, but they want the client that just automatically comes back to them that they can soak for two or three points on every loan, in addition to whatever they earn for the prepayment penalty. I understand this yearning very well; it's a normal human desire to want to make more for the same amount of work, and also to lock up the customer for the future. If all you think about is how easy the loan is to get, you are these firms' favorite type of client. Guess what? You may not see their extra $10,000 or $15,000 as a separate charge on any of your paperwork, but it is there and you are paying it, and someone who knows what they are looking for can find it. Most folks would never dream of paying $50 for the same toaster that everyone else is buying for $13.99 at Target, but the way loans are priced is confusing at first sight, and people don't want to sort it out. It's pretty easy, actually. Figure out what kind of loan you want and qualify for, then price the rate/cost trade-offs of that loan type amongst the various loan providers. Figure break-evens on the extra cost of the lower rate. One rule I have never encountered an exception to is that if a loan provider pushes a low payment to sell a loan, they are a crook. If they sell by interest rate, they may be worth talking to, providing the loan type is what you're looking for. If they sell by the Tradeoff between rate and cost, they're definitely worth talking to. And if someone suggests a different type (i.e. not 30 year fixed), hear them out but make certain they tell you all of the details. There is always a reason why one loan is significantly cheaper than another loan. Never sign up for a loan until you are certain you understand what that reason is

Another very common tactic used to induce your business is advertising. Remember the loan ads that went "Lost another one to (mega corporation which shall remain nameless)"? That particular mega corporation is not competitive rate-wise or underwriting wise with others. Joe ShadyBroker who earns six points on every loan can often deliver better rates than they can. What they were trying to via their advertising is create the illusion of low prices by telling you they have low prices. Then, when you call and they quote the superficially low payment due to a rate where you have to pay three points to get it, they've got the average potential client suckered. Because their payment on a 2/28 loan with a 3 year prepayment penalty where you have to pay three points to get the rate is lower than mine on a thirty year fixed with zero points, people will sign up. Why? Because it looks more attractive to them at first glance. Get the calculator and the checklist of questions and ask the questions and do the math. Nobody can take advantage of you without your consent, but those who allow themselves to be intimidated by numbers are giving their consent. Actually, with most places, it's like begging, "Oh, please, I want to pay thousands of dollars more to get a higher interest rate!"

If someone doesn't ask questions like "how long are you planning to keep it?" or "how long do you usually keep real estate loans?", especially if they just launch right in to a spiel based upon a low payment, they are a cash-sucking Vampire. They may be an intelligent vampire doing what they are doing in full cognizance of what it does to you, or they may be an innocent vampire who doesn't really understand the business and who is being controlled by a green-blooded master cash-sucking vampire, but in either case you don't want to do business with them. Yes, these are sales questions. Yes, they get you talking to a salesperson, who then has a possible opening to talk you into something that may not be in your best interest. If they don't ask the questions, I guarantee that they're trying to push you into something that isn't in your best interest. Which is better: Not talking to a salesperson and being certain of being messed with, or talking to a salesperson and possibly being messed with? Note that there is no option that says "Don't talk to a salesperson and not get messed with." If their people don't know enough to help you from their own knowledge, those sales folk were probably intentionally hired because they didn't know any better. It is not a crime to make money. They are looking to make money, I am looking to make money, everybody in every line of business is looking to make money, including your employer - that's how they pay you. If I were independently wealthy and never needed or wanted to make money again, I certainly wouldn't be doing real estate loans, and neither would anyone else. You can take the attitude that you're going to pay a reasonable amount, and while you can take steps to hold that amount down and make certain it doesn't get outrageous, you know you're going to pay what it costs, or you can take the attitude that a cheaper quote means you'll actually get that rate at that cost when the overwhelming probability is that they're lying to get you to sign up. You need to look gift horses in the mouth. If someone's quoted fees are lower or higher than everyone else's, there is a reason. If they're too low, it's probably because they're pretending that a large percentage of what you are going to pay doesn't exist, because that gets people to sign up. Ask them if they will guarantee their total fees in writing. If the answer is anything less than a (qualified) "yes", they are lying. Actually, most of the liars won't tell you "no" in response to that question. They'll try to distract you with some line about how they're a major corporation or how they honor their commitments or any of several other lines that mean absolutely nothing. The MLDS and Good Faith Estimate are not commitments. Major corporations pull the same games as everyone else. In fact, they usually get away with playing even worse ones than Joe ShadyBroker because of their "name recognition". Even though the government has stepped in and made it harder to justify changes to the amounts, the companies who do this have figured out all the loopholes - and there are some big ones.

So shop around. Ask every single prospective loan provider every single question in this article. Pull out the calculator to see if it's believable, to see if the numbers work.

The typical savings of being a savvy consumer is literally thousands and likely tens of thousands of dollars every time you get a real estate loan. You may not see the savings directly on the HUD-1 at closing, but they will be present nonetheless. If you don't accept a prepayment penalty, that's thousands of dollars you've saved yourself down the line when you've been transferred and need to sell. If you get a rate that's a quarter of a percent lower (for the same price!) on a $270,000 loan, that's $675 interest you are saving per year. That's a couple of car payments; perhaps enough to let you buy for cash next time you need a car. If you invest the difference over the potential lifetime of your mortgage, a difference of over $127,000! If you save yourself the two extra points of origination that they were going to charge you, that's over $5500 that either is in your pocket, and that you can invest or spend on other things, or $5500 that isn't in your mortgage balance, where you're going to pay hundreds of dollars in interest on it per year ($357.50 per year at 6.5% interest), in addition to owing the base sum.

My point is this, folks. If I were a financial advisor trying to score an extra quarter percent commission off of you, most of you would be upset. Many people are so upset by 0.25% 12b1 fees in mutual funds that they won't pay the advisor who would save them a lot more money than the 0.25% per year simply by simply reminding them of sound investment principles. If I were a car salesperson trying to pad the cost of the car you were interested in by $5500, a large percentage of the population would most likely slug me. But because real estate transactions are complex and people don't want to take the time to understand them, they unwittingly walk into situations like this, and many people do so repeatedly throughout their lives, making the same mistakes about every two years. The dollar amounts are large enough that even small differences are thousands of dollars. If you're not going to guard your pocketbook, most loan providers will pick it.

The workman is worthy of his or her hire. The person who gets you the loan is entitled to be paid. Judge the loans on the bottom line to you; how much it costs and what you will get. The proof that they got you a better deal was that they delivered a better loan, not that they made less money. And if the person who does your loan can make an extra half-point while actually delivering you a loan that is the same rate on the same loan at less cost than the other provider, haven't they earned that money? You came out ahead because of their work - had you gone with any other loan, you would have paid more or had a higher rate. They made more. Definition of win-win. There is a loser here, by the way, but you'll never know who it was. It is the lender or the broker you didn't sign up with. But by finding you a program you fit better, the loan officer you did sign up with got you a better deal and made more money. It happens every day, if you make the effort to look for it, and go about it in the right fashion.

Caveat Emptor

Original here

I have never had someone tell me they wanted more information than this letter provides. I also require the prospective loan officer to fill if out for prospective purchasers of my occasional listings.

DELETED (Mortgage Corporation)
Address DELETED
City and ZIP DELETED
Phone DELETED

My name is Dan Melson and my License number with the Department of Real Estate is DELETED. I have funded in excess of one thousand real estate loans

This is to certify that I have performed initial investigation as to whether Mr. Client and Ms. Client are eligible for the contemplated loan and purchase under the purchase contract being submitted on (property address)

I have run their credit score with all three major credit reporting agencies. Credit scores as of DATE are

The credit report lists their current monthly debt service as being a total of $X/month, and according to Mr. Client and Ms. Client, they have no other debts.

I have in my possession copies of paystubs for current year and w-2s or tax forms for the prior year, acceptable to lenders for documentation of income. These indicate pay for the last thirty days as well as year to date pay and prior year.

Total Income for the period to be averaged $X (DELETED months)

This indicates an average monthly income of $X

This monthly income, per (details of specific loan) guidelines, allows a total debt service plus housing of up to $X per month.

Projected Property Taxes: $X/month
Homeowner's Insurance: $X/month
HOA Dues: $X/month
Mello-Roos: $X/month

Fully Amortized Loan Payment: $X/month ($X at Y%, type of loan, pricing date)

Total of housing and other debts : $X/month

Since this is less than the total allowance based upon income, I have reason to believe Mr. Client and Ms. Client will qualify for the loan based upon Debt to Income Ratio. Projected back end Debt to Income Ratio: X%

The Allowed Loan to Value Ratio for contemplated loan per lender guidelines is X%.

I have in my possession current bank and other asset statements indicating the presence of liquid assets in the amount of over $X

Projected down payment: $X
Projected loan closing costs: $X (includes loan closing costs including all third party costs as well as points, if any)
Projected impound account and prepaid: $X
Other projected expenses: $X (Inspection and anything else I know we'll need)

Total: $X

Accordingly, Mr. Client and Ms. Client appear to be in possession of sufficient cash to fund the projected down payment and other closing costs.

Therefore, according to known underwriting guidelines applicable to the specific loan indicated above, having verified and tested Debt to Income Ratio, Loan to Value Ratio, Credit Score, and cash to close, I have a reasonable basis to believe that Mr. Client and Ms. Client will qualify for the above contemplated loan in a timely fashion to complete the contemplated purchase in a timely fashion.

Sincerely

Dan Melson, Loan Officer
DELETED (Mortgage Corporation)
Address DELETED
City and ZIP DELETED
Phone DELETED
Fax DELETED

This website does not speak for my brokerage, therefore I do not use their name here, but those are filled in on the real thing. Actually, I use computer generated letterhead. This is the precise equivalent of an accountant's testimonial letter. Whomever it is given to needs to be able to contact me with questions, and I am responsible for specific details I mention. Without those details, I might add, whatever paper this is printed upon is completely worthless.

I write every one of these specific to a given property and a given purchase contract and loan pricing as of a given date, and usually with quite a bit of wiggle room on the actual rate and cost. It doesn't do any good to write that the loan depends upon getting financing that may not be available tomorrow if the rates rise even slightly. It certainly doesn't do anyone any good to write that "Mr. Client and Ms. Client are pre-approved for a loan up to $X" without specifying the parameters I used to justify that statement. Debt to Income Ratio, Loan to Value Ratio, Size of loan, size of payment, estimated closing costs, estimated cash to close, specific tradeoffs between rate and cost that vary daily (at least) - all of these have an effect upon whether the prospective buyer will qualify for this loan under this proposed contract today. Without all of this information, the seller's determination as to whether to grant credit by signing that purchase contract is missing some vital information. It's not that any prequalification or pre-approval is actually worth anything, in the sense of being able to hold that loan officer responsible for any and all failed loans, but they can be held responsible for material misrepresentation. Without a representation or relevant facts used to reach the conclusion, what assurance have you that the person who wrote it didn't just flip a two-headed coin? "Sure, they qualify!" (I'll figure out what they really qualify for later, but they sure are happy with me for saying they qualify...)

The whole idea of such a letter is that the person to whom it is presented can go to any competent loan officer and ascertain whether or not this loan can be done. I have never had anyone call me for more information or for verification - which means one of three things must apply: 1) The people on the other end can tell that the loan can be done, 2) They're just putting the letter in the file for CYA, 3) They're just asking for this letter so they can illegally refer people to a specific loan provider who refers the clients back to them or gives even better kickbacks.

I'd like to see this or something like it standardized across the industry. If you're going to write a letter, you might as well write one that means something, that contains enough information for the person on the other end to be able to make a reasonable determination of whether this is, in fact, a reasonable transaction that has every likelihood of becoming a fully consummated transaction. That is the only possible excuse for requiring such a letter in the first place - your client's best interest. You can satisfy your client interest without violating RESPA - all you need is the information to know whether the loan officer writing the letter based that letter on solid facts or not.

Caveat Emptor

Original article here

Agents rationalize this in all sorts of interesting ways, so let's just start by quoting the cold hard federal law. It's pretty damned clear:

RESPA

no person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.

Let me repeat the important part: no person shall give and no person shall accept any fee, kickback, or thing of value

Is a "business relationship" a thing of value? It seems straightforward enough - I can't find anybody who says "no" - until we're talking about prequalifying my clients with their favorite lender. Then I get all kinds of hemming and hawing about there being "no money involved," as if the relationship itself were not valuable. That lender would now have client information, the ability to contact them per that "business relationship" codified in law, and likely the ability to sell that client's information (amazing how often the ability to opt out isn't offered until after the information has already been sold). Look up the legal definitions of consideration and value: I assure you that those definitions are not restricted to transactions where money is involved.

This pretends, of course, that there might exist such a referral relationship where there's absolutely no element of "You scratch my back - I'll scratch yours" involved. I have yet to find such a relationship. I suspect that even if I were to pull a Diogenes looking for such, I would die unsuccessful. Even when I am referring folks to real estate agents elsewhere, despite the fact that I accept no referral fees, there is some possibility they will eventually refer me some business back. Even if they don't, I still get the knowledge that these folks I dealt with in some way were satisfactorily served by a competent, conscientious provider. All of these things are of value to me, and if you're a professional agent or loan officer, they should be to you, also. And the business relationship is certainly valuable to the receiver. Therefore, all of these things involve both the giving of and the receipt of value.

REALTOR Magazine

Generally, to operate an affiliated business arrangement legally, you need to:

* Disclose to consumers your interest in the affiliated company
* Tell consumers the cost of the service
* Explain there's no required use, i.e., consumers are free to go elsewhere for the service without penalty

And there's the rub. When you require that consumers use a particular service, they are not free to go elsewhere. It doesn't matter if you don't have a financial interest. The only difference if you have no financial interest is that you don't have to disclose that interest.

It is one thing if the consumer asks for a referral. Then you can tell them about any companies, any providers of services you like, so long as you disclose any financial interests you and your company may have. It is a completely different matter to require them to use your favorite loan provider - and illegal. Even "just for prequalification"

Now if you want to argue about "How do I fulfill fiduciary duty to my client by filtering out unqualified buyers rather than wasting months on transactions that will never fly," you simply need a very few pieces of information: Debt to Income Ratio, Loan to Value Ratio (which you should know yourself from the contract) Credit Score, and Cash to Close. I guarantee you this is more information than 99.9 percent of all loan officers investigate when writing a qualification testimonial. Your client is entitled to this information - they are involved in a decision as to whether to grant credit by agreeing to the purchase contract, which will cost them thousands of dollars if unsuccessful. Then take this information to anyone you choose and ask them if they could get a loan done for this borrower. You have absolutely no reason to require any potential buyer patronize any particular loan provider in order to get this information.

(Here's a letter with an example of the information required)

And here's my public service for the day, to inconvenience those ethically challenged individuals that persist in this illegal practice of requiring buyers to pre-qualify with a given lender:

report RESPA violations

You should send a written complaint describing the practice that you believe violates RESPA. The complaint should include the names, addresses and phone numbers of the alleged violators. It is preferred that you include your name and phone number in case an investigator wishes to ask further questions. You may request confidentiality. Send the complaint to:

U.S. Department of HUD
Office of RESPA and Interstate Land Sales
451 7th Street, SW, Room 9154
Washington, DC 20410

Caveat Emptor

Original article here

As of July 1, 2005, mortgage providers have to have explicit written authorization to run credit.

I am not certain of the political forces that made this bill, and it is still not clear to me whether this extends to non-mortgage credit providers. If it does, this is probably one of the niftiest consumer protection things to come down the pike in a long time. On the other hand, if it's limited to mortgage providers, then it's a stab at making life difficult for Internet brokerages, which may do business at a remove of thousands of miles.

An Internet broker employee is talking on the phone with a client, not physically in the client's presence. They can be some of the cheapest and best loan providers out there, if they are so minded (as I keep saying, a far more important concern is how low a provider is willing to go, not how low they can go. Internet brokerages can also be consummate ripoff artists). It becomes a real hardship on their business if they can't run credit without explicit written permission, whereas it's not a major issue with a more traditional brokerage or direct lender.

Recent changes in the business mean that this is becoming less important. Nobody is locking loans any longer before they have a loan commitment (i.e. basic underwriting approval with enumerated conditions for actually funding the loan). I still can't run your credit until I get a signed form that says you give me permission. No big deal if I'm sitting right there. A real pain if I'm in California and the client is in Florida. I'm not even certain facsimile permission (no original signature) is acceptable, as it's not something that enters into my current business. This means a delay potentially of days while the form gets back to the lender. So life for an ethical Internet broker suddenly gets a lot more difficult, while life for the crooks becomes no harder.

On the other hand, if the requirement for written permission extends to all providers of credit, then it becomes worth the game. Mind you, an adult should be aware of what's going to happen if they give a social security number to a car dealer, furniture store, or anyone else. I've never heard of anyone using it just for liar's poker ("Oooh, this is a good one - four 8s!"). If you give a merchant your social, then they are going to run your credit. Treat it as a mathematical certainty, because it might as well be.

Each time somebody runs credit, it's an inquiry - a ding on your credit. Inquiry dings are progressively damaging. They cause your score to go down, each and every time you have an inquiry, and the more inquiries you have, the more each new inquiry drives it down. There used to be a game among mortgage providers until the new rules a few years ago - see if they could be the last ones to run your credit before it went under a threshold score, and some would run it multiple times if they could. Anybody running after that would be at a disadvantage, because you no longer qualified for a given credit score's pricing level.

The exception to "a ding for every inquiry" is mortgage credit. With the new rules that every consumer should get down on their knees and give thanks to the National Association of Mortgage Brokers for getting through Congress, consumers are now actually permitted to shop around for mortgage rates without getting dinged every time their credit is run - provided they run credit under a business code that say's "inquiry for mortgage." (So if you are mortgage shopping at a bank or credit union, be sure they run your credit under their mortgage inquiry code, and not a general inquiry code). All of the times it is run within fourteen days by mortgage providers count as exactly one inquiry. This gives consumers the ability to shop as much or more for a mortgage as they would for, say, a toaster oven, without being penalized.

But if the new rules apply to non-mortgage credit grantors also, this is a good thing. Here's why: Every time I start a loan, I have a set spiel that I go through. "Don't change anything, credit-wise, even if you think it will help. Don't buy anything. Don't charge anything on your credit cards. Make your normal payments - no more, no less, unless you ask me first. And don't allow anybody to run your credit for any reason. Don't even let them have your social. Because they will run your credit, I guarantee it."

On every home loan, one of the last things that will happen before your loan is recorded in official records at the county will be that the lender will run your credit again to make certain nothing has changed. And if anything has changed, you will very likely lose the loan (and the house if it's a purchase). Even if the escrow company has the money or it's actually been disbursed, the lender will pull it back, as they can do that until the deed is recorded. So there is a real need for prospective borrowers to understand that until the final documents are recorded with the county, they shouldn't so much as breathe differently.

For a certain personality type, being told she can't shop for curtains and furniture and paint for her new house is nothing short of torture, and so I've learned to be very explicit. "It's okay to look, to talk to the nice salesfolk, and to get an idea of what you want. But don't actually buy anything. Tell the nice salesman who says he just 'wants to get a head start on your order' that your mortgage loan officer said that you're right on the line, and anybody else runs your credit and drives you under the line the first consequence to the furniture or paint or drapery salesperson will be no order, because they're likely to cost you the loan.

So while you have a home loan pending, tell the nice salespersons that you're really protecting them by not giving him your social, because if they run your credit and cost you the loan you'll have to tell your uncle Bruno the mobster about it. And we all know what happens then.

Back in the real world, things are not usually quite that bleak. But it's surprising how often people end up with higher rates and higher payments and worse loans because they didn't understand this one point. Suppose your monthly payment is $50 higher than you thought it would be, in addition to what you spent on the new stuff that caused money to go into that salesman's pocket. Doesn't that make you feel all Warm And Tingly towards that salesman? Didn't think so. And a certain percentage of the time, this new monthly payment you now have because you Bought Something means you Do Not Qualify for the loan. So: No loan. No house (if it's a purchase). No lower payment (if it's a refinance). No cash out of your equity (if that's what you were trying to do). And so now you've got this stuff, and no house to put it in. Now you've got to tap the vacation or retirement account to pay for it because you're not getting a refinance on reasonable terms. Not to mention all the times these people run credit and hurt people's credit scores without real permission when there's no mortgage loan in the offing. So I can put up with one segment of my industry have a slightly higher bar to jump over if that's the carrot.

Caveat Emptor

Original here

When you have more than one loan on your property, there are some issues you should be aware of. Keep in mind the fact that some states still use the mortgage system, requiring court action to foreclose, as opposed to Deed of Trust, which does not. For practical purposes they are similar, yet I have never done significant work in a mortgage state so there may be small but significant differences.

Each loan is secured by a different Deed of Trust. Two loans, two Deeds of Trust. A Deed of Trust is a three way contract between the borrower (called the trustor), the lender (called the beneficiary), and a third party known as the Trustee, to whom title is nominally conveyed for purposes of selling the property if you default on the loan. The Trustee and the Beneficiary are often the same, and while there is no legal impediment I'm aware of to the Trustor and Trustee being the same, I also cannot imagine a lender agreeing to it.

Trustees can be changed, and this is accomplished via a document known as "Substitution of Trustee," which is required to be recorded with the appropriate county in every state I've done business in.

Each Trust Deed operates independently of all others there may be against a given property. They take priority in order of date. When a Trust Deed is recorded against an property on which there already is an active Trust Deed, it automatically becomes a Second Trust Deed, if another happens it is a Third Trust Deed, and so on.

The reason they have the ordinal is because they are paid off in the order they happened. Suppose the property is sold, and the sale price is not sufficient to pay all of the debts. The trust deeds are not paid proportionally; The First Trust Deed is paid off in full before the holder of the Second Trust Deed gets a penny. Then the Second is paid before the third, and so on. This is why Second Trust Deeds carry higher rates than First, because they are riskier loans for the lender. As I've said elsewhere, just because the property is sold doesn't mean you're clear. If there is not sufficient money from the sale to pay all debts, you can expect the lender to hit you with a form 1099, reporting that you have income from debt forgiveness, and you will be expected to pay taxes on it. Not to mention that there may be recourse in many cases.

Now, if for whatever reason you pay off your First Trust Deed, the Second automatically goes into the first position, and any subsequent loan goes into second position. This is most common when people go to refinance the loan secured by their First Trust Deed. Even if you do not particularly want to pay off your Second Trust Deed, it may be the best thing to do. Because what happens if you just pay off the First Trust Deed (only) and get a new Trust Deed, is that the new Trust Deed will go into the second position. Unfortunately, in order to get the quoted rates for a primary loan, it is a requirement that the loan be in first position. If it's not in first position, they will not actually fund it. In short, no loan.

This is not necessarily an impasse. Many times, the holder of the second trust deed, because their loan was priced to be second in line anyway, may agree to subordinate their loan to the new loan, which is a fancy way of saying "stand in line behind the new trust deed holder".

They don't have to do this, and there is no way, other than paying off their loan in full, to force them to do so. Some companies never subordinate, while some others are never willing to stand second in line at all, and others are in both categories.

For those that will consider it, they are going to stipulate some conditions. First of all, the new loan is likely going to have to put the borrower into a position where it is easier, or at least no more difficult, to make payments and pay off the loan. So monthly payment usually cannot rise.

Second, they are going to want their trust deed to be in no worse of a position than it was when the loan was originally approved, as regards the value of the home being able to pay their loan off too if for some reason either loan is defaulted. They may even require than you agree to a higher rate, higher payments, or a different loan altogether - as I said, there is nothing you can do to force them to cooperate.

Assuming that they are willing to cooperate, they will require that the entire process on the prospective new loan be essentially complete - that is, ready to draw documents and fund when the Right of Recission expires after three days, before they will even look at it. Some lenders take 48 hours to look at a subordination request, others take up to six weeks, and it can be even longer. For any given lender, it takes as long as it takes.

There is also going to be a fee involved. They have to pay their people to look at the loan situation and make certain it still falls within guidelines. They're the ones doing you the favor, they certainly are not going to do the favor for free. Whether the subordination request is eventually approved or not, the subordination fee is likely to be non-refundable, a sunk cost that you are not going to get back even if it's not approved.

Even more important than that, however, subordination takes time. When I first wrote this, I locked every loan as soon as I could. It's more complicated now, but I still prefer to lock early rather than later. No loan quote is real unless locked, all locks are for a specified period of time, no lock is good past the original period of time unless you pay an extension fee, and if you need to lock for a longer period of time in order to subordinate, either the rate, the cost, or possibly both will be higher. Since this can add anywhere from two days under idea conditions to six weeks or more for a refinance that takes three weeks to get approved and get funded in the best of times, this means a longer lock period becomes advisable. Most often, the extra costs mean that it's more cost effective to just pay off both loans rather than subordinating the second to the new loan.

Since Home Equity Lines of Credit are always secured by a trust deed, they count as any other second mortgage would. You'd be amazed how often people do not disclose Home Equity Lines of Credit even when directly asked about them. They are only hurting themselves, but they often get angry to no good purpose when, if they had been upfront about them, the loan officer could have designed around any difficulties. Furthermore, people are often resistant to the idea of paying off and closing Home Equity Lines, despite the fact that they are easy to get. I've had people stonewall, utterly in denial that this is a Deed of Trust upon their residence until I have the title company fax me a copy of the Trust Deed, and reference it with the Preliminary Report, and ask to see the Reconveyance (which is a fancy way of saying the piece of paper proving that the trust deed has been paid off). If it's a legitimate lien, we have to deal with it. Actually, we have to deal with it if it's not a legitimate lien as well, just in a different manner. On the other hand, some time ago I had some seasonal resident clients whose ex-caretaker had managed to take out a loan against the property. It does happen, and it's a mess, but most times it's just the people themselves who weren't told - and didn't figure out - that this financing agreement they signed for the pool or air conditioner or roof was a second trust deed on their house.

To summarize then, second loan means second trust deed, if you refinance they must be paid off or subordinated, and subordination takes time such that it may be better to pay it off than go through the rigamarole of subordination.

Caveat Emptor

Original here

Every so often I run across a reference to a "rate buydown" I don't like to use them because they don't benefit the client, but I should explain them, what they are, and how they work.

A rate buydown is where for an upfront price, the lender agrees to give you a temporarily lowered interest rate on what is usually a fixed rate loan. 2/1/0 buydowns, where the rate is two percent lower the first year, one percent lower the second year, and then at the loan rate the third year, are the most common, but I've seen one year buydowns of two percent, two year buydowns of one percent for those first two years period, and any number of other tricks.

This isn't free. A 2/1/0 buydown usually costs three points. In fact, what usually happens is the three points go into an escrow account somewhere where they pay out the money to make up the difference in interest to the lenders as the loan goes along. When the buydown period is over, the lender who originally funded your loan then gets to keep what's left over.

Here's what this means to you. Let's make this easy. Say you would have had a $291,000 loan, fixed at 7 percent, without a buydown. But with the buydown, you have a $300,000 loan at 5 percent the first year, six percent the second, and 7 percent from there on out. In order to really understand this, let's first take a look at your loan without a buydown:

Now let's look at it with the buydown:

It is also to be noted that in the very next month, your payments go to $1982.23, as opposed to the $1936.03 they would have been in the first place, and that they will stay there the rest of the loan, all 336 months should you keep it the rest of that time. Why? Because your balance is larger than it otherwise would have been, so the payment is higher, in this case by $46.20, due to the higher loan amount.

Finally, let's look at the differences:

What this means is that your lender's escrow account ends up with $1850 that they get to keep, on top of everything else they made from the loan. The final column is the net cost to you, what you paid to get it less the interest it saved you. Hey, look at this! In month 21 it goes negative! You must be saving money if you keep it that long, right?

Nope. This is a temporary and illusory savings phenomenon, and I don't know of any way to make it permanent. You see, the benefits stop in month 24. They are over. Kaput. Gone. That's all, folks. But you owe $6798.14 more (at the start of month 25, not illustrated above) than you would have without the buydown. There are exactly three possibilities as to what happens. First, that you keep the loan. Due to the extra interest you're paying every month, you are in the red again in month 56, and it keeps getting worse the longer you keep the loan. After 120 months of the loan, you are $1755 down. This particular example actually peaks in month 242 at $3351 negative, then starts decreasing, but you don't get it back before the loan is paid off.

The second possibility is if you refinance the loan. Let's say you get a really fantastic deal and refinance at 5 percent on a 30 year fixed rate loan, and I'll even give you that your higher balance doesn't cost you any more in fees. Your payment is $85.35 per month higher than it would otherwise have been, your interest charges $28.32 higher (and the difference represents you paying the principal off faster if you don't pay for a buydown). Your savings is gone in less than three years, and there's nothing you can do about it.

The third and final possibility is that you sell the house. You get $6798.14 less in your pocket. This means that you don't have $6798.14 earning money for you in the stock market. At ten percent your benefit is gone in less than a year and a half. If you take the money and buy another property, that's $6798.14 higher your loan balance will have to be. Let's say you get that same fantastic 5% loan we talked about two paragraphs ago on the new property. Guess what? The same math applies here also. There is no way to win in the end with a buydown, unless someone else pays for it (for example, seller paid closing costs).

So they are a piece of garbage. Why are buydowns attractive, and why do otherwise rational people sign up for them?

The answer is "Because they lower the payment for a while". People choose loans based upon the payment. In particular, they choose loans based upon the payment in the first check they are going to have to write. Most people figure that the check they are going to have to write two or five years out isn't important. Unscrupulous lenders and loan officers know this. That's why the (censored) negative amortization loans were so popular, despite them being time-delayed financial poison. So don't shop for loans based upon the payment, and if someone starts talking about ways to cut the payment as opposed to the interest rate, put your hand on your wallet and leave. If they persist, drag them out into the sunlight and put a wooden stake through their heart. It's the only way to be sure.

Before I go, I want to mention one specific group that gets targeted for these things, and that is veterans. The Veterans Administration loan, aka VA loan, has the ability to roll (not coincidentally) three points closing cost over and above the cost of the home into the loan. Most military folks are busy learning their trade, which is usually not something having to do with finance. Indeed, I've never heard of any MOS that included this type of financial training. So when the loan officer whispers sweet nothings into their ear about cutting the payments for the first couple of years, they don't know any better and they sign right up. They could have used those three points for something potentially useful, like discount points that buy you a lower rate for the entire term of a VA loan. If you keep it long enough, they will eventually net you money. The veterans could just not pay those three points, and not start out with what is basically negative equity. But rate buydowns make a loan appear attractive on the surface to someone with insufficient financial training, while costing them money in the long term and allowing the initial lender to make more money than they otherwise would.

Caveat Emptor

Original here

I got a question about what the number one obstacle is to most people qualifying for the loan on the property they want.

The answer is "existing debt." Credit cards, student loans, car payments, etcetera. It seems like more people than not have a reasonable idea of the property people making what they are making might be able to afford. Whereas I do get people who want a four bedroom house despite only making enough to be able to afford a two bedroom condo, it seems that more folks than you'd think really do have an idea what people making what they do should be able to afford. They can be lured down the primrose path of negative amortization (or the latest scam that has taken its place), but even most folks who fall for it, know on some level that it's not real. They may not realize exactly how nasty it is, but they know it's not the whole truth.

The real hurdle faced by most buyers is that they owe too much money to too many other people for too many other reasons. Every dollar you have in existing monthly obligations is another dollar you can't afford on your house payment. People don't think about this until they want to buy a house, at which point they probably already have tens of thousands of dollars of debt, costing them hundreds or even thousands of dollars per month.

Let's say that Mr. and Ms. Homebuyer make $120,000 per year between them - $60,000 each. They are making $10,000 per month. By the calculations for A paper fixed rate loans, they can afford total monthly payments of $4500 per month. This is a forty five percent debt to income ratio. If housing is their only debt, they easily qualified for a $500,000 property with zero down payment. As of the time I'm writing this, $2367 first at 5.875% with one point, thirty year fixed rate first mortgage, $752 second at 8.25% 30 year due in 15, $521 per month prorated property taxes, and $120 per month for a good policy for home owner's insurance. Total: $3760. They're $740 under their limit. They would actually qualify for a significantly larger loan if they had no other debt.

(When I originally wrote this, that was true. At the update, rates are lower but 100% conventional financing is not available, but this is still a valid illustration of the principle of debt to income ratio, which is what we're looking at).

However, Mr. and Ms. Homebuyer still have student loans, because everyone knows you don't pay your student loans off. Right? But because Mr. and Ms. Homebuyer owe $50,000 between them, and they're paying $180 each, for a total of $360 per month, that's $360 in housing costs they can't afford.

Now Mr. and Ms. Homebuyer both have $30,000 automobiles they're making payments on. On five year loans, Mr. and Ms. Homebuyer are paying $600 each. He has four years to go, she has two. That's still $1200 more in housing costs they can't afford.

Ms. Homebuyer charged their vacation trip to the Bahamas that cost $10,000 to their credit card, and Mr. Homebuyer put the furniture he bought Ms. Homebuyer on an installment plan. The credit card is $500 per month, the furniture is $400. Net result: $900 more that they can't afford for housing payments, because they have to pay it out for existing consumer debt.

By the time Mr. and Ms. Homebuyer have paid all of the monthly payments they already owe, the lender calculates that they can only afford $2040 per month in housing payments. Now, instead of easily affording a $500,000 house, they don't even qualify for a $300,000 condo. $240,000 first at 5.875 is $1420, $466 for the second at 8.625% (below a price break), $313 property taxes and $240 in association dues. Total: $2439! They're $400 per month short!

For people who have a down payment, often the only way they are going to qualify is by spending it on their pre-existing debt. If they don't have a down payment to pay existing debts off, they are not going to qualify "full documentation," which is a fancy way of saying that the income they can prove isn't enough to qualify them for that loan. Furthermore, the manner in which you pay that debt off can be restricted. Sub-prime lenders don't really care as long you can show where you got the money and the debt gets verifiably paid off. "A paper," however, has to deal with Fannie Mae and Freddie Mac guidelines, which are less forgiving. A paper guidelines are that you cannot pay off revolving debt to qualify, and even installment debt is at the discretion of the underwriter. In short, once your credit has been run, what you can pay off to qualify "A paper" is limited. A lot of folks end up stuck with sub-prime loans because of this. Higher rates, shorter term fixed period, pre-payment penalty. This was one of the big reasons "stated income," was abused so much, at least when stated income loans were available. This always was one of the markets that was tempting for homebuyers to go "stated income" for precisely that reason, but there are real reasons why it is, and always has been, a better idea to buy a less expensive home than go stated income on the loan if you don't really make the money. Lots of folks been getting a concrete real world education in that lately.

However, this is probably the most common reason why people did stated income loans. However, stated income loans mean that your rate is higher, and you might not be able to use all of the money you were intending to as a down payment, because you've got to have reserves for a stated income loan. Finally, and most importantly, stated income loans are dangerous. The debt to income ratio is not just there for the lender's protection - it is also there for your protection. Stating more income so that you can get around the limits on the debt to income ratio is intentionally disabling an important safety measure, meant to keep borrowers from getting in over their heads with loans and payments they cannot really afford. You make $X, which equates to being able to afford total monthly payments of forty five percent of $X. You state that you make an additional $Y per month so that you qualify for higher payments, and you are intentionally defeating that safety precaution. You are going to have to make those payments. The people who loaned you the money want their payments every month! Where is the money going to come from? I would be very certain I could really afford the payments before I agreed to a stated income loan!

So you should be able to see some of the issues that existing debt can cause. Existing debt quite often means that you do not qualify for a property you would easily be able to afford - if only you didn't have those pesky consumer loan payments every month. It can force you to undertake a less desirable loan type, it can force you to accept a pre-payment penalty, and it can prevent you from being able to qualify for the property you want. Alternatively, it can force you to choose between not buying at all, and intentionally defeating one of the most important safeguards consumers have, the debt to income ratio. The smartest thing to do is probably to buy the less expensive property that you can afford now, but all too many people refused to do that, and are finding out right now the reasons why it would have been smarter.

Caveat Emptor

Original article here

The first thing you need to understand in reading any property advertisements is that agents write them to get people to call. They are trolling for clients, not sales. Except in the case of someone who doesn't accept dual agency advertising a listing they actually have, they are written purely with the idea of dangling something out there that clients want. Since most agents like dual agency just fine because it means they get paid twice for the same transaction, understand that only a tiny percentage of the ads that are written out there are written for any purpose other that to get potential clients to call.

Keeping this fact firmly in mind, there are two sorts of places where people go to search for property: Some that are based on MLS, and others that are not.

If it's in MLS or coming from MLS, it better be good information. I can (and do) file violations on liars in MLS. So do others - every time somebody wastes our time by saying the property has something that it doesn't. Filing violations in MLS is simple, it's effective, and after a certain low number of violations, the offender's input access gets restricted. They can't put properties in MLS and they might as well be out of business. Note that they can still "puff" a property significantly; but number of bedrooms, square footage, anything with a number or a yes/no associated with it had better be right. The big violation I'm finding most of recently is advertising it in MLS as "fee simple" when it should be either "PUD" or "Condominium". If it's got homeowner's association dues, it's not fee simple - end of discussion. It may be single family detached, but it's not fee simple ownership, as that homeowner's association has rights with respect to the property.

Everywhere else, everything that is not based on MLS, take all advertisements with a respectful amount of caution - Like at least equal in weight to the building. Once you get outside the domain of MLS, there are few sanctions possible for even the most outrageous puffery - or even advertising a property that does not, in fact, exist. Or anything remotely similar. Some agents won't put anything out there that isn't as close to gospel truth as they can make it, but others are not nearly so fussy, and you really want to avoid the latter sort.

Non-MLS based property advertisements may now be pending, it may be sold, or it may in fact never have existed. The agent put that ad in trolling for buyers. What they want is your signature on an exclusive buyer broker agreement, so they can lock your business up. Readers here know you shouldn't sign exclusive buyer's agency agreements, because that's a poor way to get a good buyer's agent, but most people don't know that and most agents are laying in wait for the ignorant.

A good buyer's agent can help you debunk the nonsense. Quite often, I have clients who should know better, as I've explained this to them - often more than once - ask me about this fantastic possibility they see from site not sourced in MLS. About as surprising as gravity, they turn out to be in some way non-factual. Claiming 2 bedrooms when it's really one, or four bedrooms when it's really two. 1 bedroom when it's really a studio or loft. And sometimes, they actually had it, at that price, six or ten years ago. And then I call the agent listed on the ad, look it up on MLS, and voila! the deception becomes apparent.

There's nothing wrong with responding to such ads, and there's nothing wrong with working with the agents who advertise them, so long as you limit yourself to a nonexclusive agreement, so you can get rid of them when it become apparent they're not guarding your interests. But even with a non-exclusive agency agreement, I'd be asking myself "If they lied to get get me to call, what else are they going to lie to me about?"

I just had a client send me three prospects from one of the non-MLS based search services. All three of them were non-existent, posted by a lead generating service as bait so they could sell everyone who responded as a lead to agents. They didn't have such a property, they never did have it, it wasn't even for sale, and hadn't been for over 10 years. But that's how they get leads, which they then sell to several agents.

Here's another sneaky trick: Services advertising themselves as "foreclosure specialists" go around to all the properties that have a trustee's sale happen. They illegally put a sign in the yard, relying upon the fact that the property is vacant, directing passersby to a phone number. On the phone number, they put the puff description from whatever the last time was that it was in MLS, whatever they can see, or something they can pull from assessor records. They say they have an exclusive listing. What they really have is nothing. I've tried contacting lenders before their new lender owned property gets listed. Even if I have a buyer willing to make an offer, they usually don't want to hear about it. What the places who claim they've got "foreclosures before they're listed" are doing is trying to get suckers to call - in other words, trolling for clients. They simply know that the lenders are eventually going to put 99.999999 percent of these on the market within a few weeks, and they can fend you off until then. They aren't offering anything real. They don't have anything real. They are doing nothing beyond trolling for clients who will generate easy commission checks. They don't have to even sell you that one. If they had anything real, when I call for a client they should be falling all over me, like the agents that really do have foreclosures. Those agents who really do have lender owned listings are falling all over themselves to get back with me. The troll services take my information and say, "We'll have to call you back," and they just don't. I call again, they do the same thing. I ask who's the listing agent responsible for a property and what number to call to contact them, they don't have an answer. Then it comes up on the MLS, and the agency that's been advertising it is nowhere in sight. This is different from people who are buyer's agents who have legitimately gone out and found bargains - because they'll tell you they want to act as buyer's agents. In the first case, they are claiming to have a listing that they do not, in fact, have. In the second case, they are claiming to have found a bargain, and are telling you quite straightforwardly that they are looking to represent buyers. that's what I do. But when you're acting as the agent for the seller, you're not supposed to say anything that violates a fiduciary relationship - in other words, a listing agent is supposed to pretend this property is the greatest bargain since the Dutch bought Manhattan, or at least as close as you can realistically get. It's in the job description, not to mention the contract.

So be aware before you respond to property advertisements that quite often, the property advertised doesn't exist. To avoid leads services, look for specific names of the agent in the advertisement. To avoid problem agents who require an exclusive agency agreement before showing, simply refuse to sign exclusive agreements. Dual Agency is a very bad idea for buyers (and it's not good for sellers, either). If they have the listing, they're going to get paid when the property sells regardless of whether you signed that agreement. If they don't have the listing, they still risk nothing with a non-exclusive buyer's agency agreement.

Caveat Emptor

Original article here

Listing Agents say they hate it when prospective buyers (of their listings) make offers on multiple properties, but they keep doing things to encourage it.

It is both legal and simple for buyers to make multiple offers. All I have to do is include some phraseology about this offer will be withdrawn in the event of the acceptance of another offer. Listing agents do the equivalent thing every time they negotiate multiple offers. At least they do it if they are hardworking and smart, rather than asking everyone for their "best and highest offer," a lame, weak technique that has precisely one advantage - minimal labor for the listing agent - and a laundry list of disadvantages. But it should not surprise anyone that if listing agents can do one thing, buyer's agents can respond by executing multiple offers, especially where sellers and listing agents miss deadlines to counter, take weeks to make up their mind, don't respond to requests for information, and have to be goaded into responding at all.

A single offer is stronger for both buyers and sellers. For buyers, it says that you have singled out this one property to make an offer on. You want this one, at least if the seller can be dealt with on a reasonable basis. It says you aren't going to flake out or abandon them mid-negotiation because you have found something you like better, and if you come to an agreement, you're not going to abandon that agreement without reason. Someone making multiple offers cannot claim any of this. For sellers, all of these are valuable features of an offer - perhaps more valuable than an extra $10,000 on the offer. If your agent doesn't understand this, that's a problem.

Furthermore, encouraging multiple offers encourages both lowballing and uncommitted buyers who don't care whether they buy your property or not. There's not much emotional buy-in, but many buyers will throw out a low-ball for marginal properties just to see if they get a response. But even if you do respond to such offers, they're not going to turn into the kind of offer that makes sellers happy.

For all the complaints about multiple offers I hear, though, listing agents seem to keep doing things to encourage them. Sitting on offers for weeks is a bad idea because buyers will move on. Sitting on purchase offers without response for six weeks or more. When the sellers finally respond, the buyers are already in escrow on something else. About a month ago, I got a response three weeks after the offer, two weeks after deadline to respond, during which time the clients decided they wouldn't be happy in the property after all. Agents who delegate unlicensed assistants to check boxes on offers are a definite turn off, as well - those assistants have no idea what is a good offer and what is not. They have never seen the property, they have no idea of the market it sits in, no real clue as to general market activity - and if the agent doesn't have their hands on the situation pretty constantly themselves, neither does the agent. When I call an agent phone number in the listing, and there is literally no way of talking to the agent, or for that matter, any actual living person, that's a situation for a throwaway multiple offer, if anything at all. They're not taking prospective buyers seriously. Put in a lowball multiple offer, if they respond in a timely fashion, great. Otherwise, let's move on with our lives.

If you want buyers to make single offers, you need to respond to them promptly and individually. You need to take the time to understand the offer and the strong and weak points, and you have to understand how it matches up with your clients needs. This takes time, and it takes an agent who knows what they are doing - not a clueless unlicensed part time receptionist who is filling in boxes. This means that in order to get the most mileage out of the offers you get, you have to have a listing agent who has the time to spare for this particular listing. The corporate transaction mills are not the way to get that. There are many reasons I advise people against so-called "top producers," and that is only one of them. If you want the best possible price, you need an agent with the ability to invest enough time in your property to make a difference. Yes, I use loan processors and transaction coordinators. They're not allowed to interact with my clients, and they don't even enter into the picture until and unless we've got a full loan package ready for submission or a fully negotiated purchase contract. They're there to dot the i's and cross the t's - taking care of the routine fine detail work that most clients never know about - not so I can disengage myself from the transaction.

If the agency real estate office is doing everything they can to take as many listings as they can, to the point where the agents cannot properly service those listings, that's a situation where you're begging for multiple, weak offers. I put deadlines to respond on every offer I type. Reasonable deadlines, minimum of three business days, perhaps five, to give the other side plenty of time to respond. Most of my buyer clients have time pressures. They don't have three weeks to wait and see if one offer responds, after which they wait three more weeks to see if another offer responds, when they're operating under any kind of a deadline. I'm working with a client who's being posted here from elsewhere a couple months from now. When we started looking , even a short sale was a legitimate possibility, which should surprise you given my general opinion that buyers should avoid short sales. Inconsiderate listing agents trying to service too many listings have eaten most of the time we had to play with, causing us to now be in the situation of needing to make multiple offers on multiple properties. Buyer degree of attachment to any given property: small. Buyer willingness to negotiate on any given offer: small. Buyer willingness to offer an attractive price in such circumstances: small. And these "top producer" megaoffices listing these properties are wondering why, despite the incredible numbers of offers being made, they're not getting the kind of increases in value we saw a few years ago? Why the offers are all petering out at a low level? Why prospective buyers who do get accepted offers are so likely to bail out on the deal? Why actual sales prices aren't increasing?

Many listings want to accumulate offers for weeks. I've read several listings that say things like "no offers will be evaluated until (two weeks from now)." Okay, if we like the property, and nothing else catches our eye, we'll consider making an offer just before then. Keep in mind, it'll be ten days between when my client saw the property and when they make their offer, it won't be a hot "right now" offer or even a lukewarm "next day" offer. It'll be a multiple offer - only fair, since that's what the seller is asking for. And if my buyers find something else in the meantime, well, there won't be any offer made at all.

Let me ask: what happens when your best offer - most often the first, almost always one of your early ones - has moved on with their life? For that matter, what happens when all the good offers have moved on with their life? You're stuck with the low-ball offer from a flipper, that's what. I'd hate to be in a situation where I told my listing client there were 8 offers - but only the two lowballs were still interested because I had my head you-know-where. But that's what these agents are setting themselves up for.

If there are competing offers and one of them isn't nearly as attractive as another, there is no harm in saying so, and saying so quickly. Either they will drop out of contention or they will increase the attractiveness of their offer. If they increase their offer, my client is happy. If they drop out, my work with them is done, and they're now out there looking at other properties. The quicker I answer, the more likely it is that this prospective buyer will respond with a better offer. I'm perfectly willing to fax over (slightly redacted) critical pages of competing offers in such situations where their offer isn't even close.

Every offer needs to get a timely response, whether it's a rejection, a counter, or an acceptance. This is not only common courtesy, but good business, and the best way to end up with a good price on the final contract, one that the buyer is both willing to and capable of meeting promptly.

Negotiate with each offer individually. Asking everyone for a "Best and Highest" offer is very weak. Any buyer's agents that are worth a damn know how to respond to that one. Individual negotiations (if you happen to actually have multiple offers) works wonders. Put the multiple offer disclaimer on it if it's appropriate, and slap it back to them same day if you can. Keep the negotiations hot. Keep the buyer's memory fresh. Increase the buyer's mental buy-in if you can. This is labor intensive, but it leads to happy clients, bigger paychecks, and more clients. I don't see how anything else can be more important than those three things for an agent. I don't see how anything can be more important than just creating happy clients.

Encouraging multiple offers by acting like you don't care about prospective buyers is a good way to be forced to settle for less money than you could have gotten. I don't encourage it, I don't recommend it, and I very definitely do not practice it. I don't understand those agents and sellers who do. You get the buyers you deserve - the desirable buyers you earn by treating them correctly. Give them respect, give them attention, negotiate with them as individuals, and one good, seriously interested buyer is all that you need to get a good price for the property.

Caveat Emptor

Original article here

This is one of the hardest things to get across to many people - agents included. A property with a fully negotiated purchase contract is not one you can buy. They have a legal agreement binding them to sell it to someone else. If they sold it to you, they could be sued for what is called "specific performance" - in other words, do what you agreed that you would do - and I am given to understand that you don't want to be on the losing end of such a suit.

You are wasting your time making an offer that the owner is not free to accept. I would actually argue it's worse than that: You're effectively trying to bribe someone into not meeting their contractual obligations. If your terms are worse than what they have now it's not a very effective bribe, but you're still making the attempt. If you were in the position of the accepted offer, how much would you like it?

Nor is a so-called "back-up offer" likely to get you the property on any kind of advantageous terms. Watch the property in MLS and see if it drops back to "available" rather than pending, but making a back-up offer will do nothing but weaken your negotiating position if that property should become available again.

There are ways to get out of accepted contracts. The classic one in non-performance of the other party. The other side doesn't do what they said they would do - they go past the agreed upon escrow period, they can't qualify for the loan, whatever. There are as many ways to fail in contractual obligations as there are contractual obligations. Neither side is required to cut the other side one iota of additional slack beyond what is spelled out in the contract.

With that said, if the contract isn't one you want to honor, why in the heck did you agree to it? If it doesn't put you into a better position, why did you agree to it? The only reasonable response to this that I'm aware of is "It is better than no deal, but then someone came along and offered a better one" To which the person on the other end of the negotiated contract will reply, "too late." They have now spent significant resources towards honoring their end of the deal you agreed to. If you hadn't made the agreement, they wouldn't have spent the money for appraisal, inspection, etcetera. None of these transfer to another property.

As a final word on the subject, it is possible that some agents will tell you a property is under contract when it is not in fact under contract. Perhaps they're finalizing the last few details and it's really essentially true. Sometimes, there isn't an offer at all and the agent is simply filtering out offers they see as undesirable - usually from the point of view of a bad agent rather than that of their client, the seller. Unfortunately, what all of these possibilities have in common is it's rarely worth paying a lawyer to fight about. Let it go - there are other properties just as good out there, where nobody is playing these counter-productive games.

Caveat Emptor

This is a right given to buyers agents by my local MLS, and it's a good one, that I like to take advantage of whenever it is practical. The actual property owner - not the listing agent - does have the right to refuse in writing, a copy of which must be provided to that buyer's agent.

This presentation is not intended to be an argument, and the buyer's agent is not permitted to stay for discussion of the offer between the owner and their agent. Think of it as a prepared speech. What I make is very akin to a corporate Power-Point presentation - in fact, it is a Power Point presentation on my laptop when I have the opportunity to put one together. Chances are good that you have seen dozens or hundreds of presentations basically like mine, except that I can guarantee to get done in fifteen minutes or less, providing nobody interrupts and starts arguing. The presentation is not intended to be an argument. It's a sales pitch. It's intended to make a calm, rational case why this offer that my client is making is one that should be accepted. I make my case, thank them for listening, and leave. I am not allowed to be present for the discussion of the offer, so it wouldn't be very smart of me to design my presentation as an argument. Also, it would be pretty silly of me to expect an immediate response. It would be stupid to demand one.

Many people seem to feel threatened by such presentations. My best understanding is that most of these are afraid of conflict. As I said before, however, it's not an occasion for an argument. I am not allowed to hang around for the discussion, and my presentation is geared towards being perceived as the rational thing to do when the discussion starts without me there to defend it. I don't like it when presentations turn into an argument. A presentation is an opportunity for me to speak my piece directly to the seller, unfiltered by any outside influences, so that both parties have an opportunity to gauge the mental state of each other. If the listing agent has done their job correctly, we're going to be saying the same things, albeit from a different perspective. On the other hand, if the listing agent is a problem personality who "bought" the listing, wants both halves of the commission, has their hand out behind their client's back, or any number of other unsavory problems, then a seller should be grateful to that buyer's agent for providing them with evidence to suspect such. Not to mention that presenting an offer in person is the only way I know of to guarantee that said offer doesn't go straight from the fax machine to the trash can without intersecting the seller in-between. Yes, I do know agents that I suspect of this. I could name agents I more than suspect of this - and the only way I can ensure it doesn't happen is request to present offers in person. I'm calm, I'm professional, and if I get a signed note saying the client doesn't want me to present in person, they at least know about the offer. And even if you've known your agent your entire life, "trust but verify" is never bad advice.

This isn't to say bad conduct on the part of a buyer's agent during presentations should be tolerated. If the presentation is made at the listing office or at the owner's home, they have a right to insist that I leave. If we're out in public somewhere, they have the ability to pick up and leave at any moment. It is incumbent upon me to give them reasons to keep listening.

Many listing agents feel threatened by this request. If they have done their job correctly, there is no reason for them to be, because what I'm going to say is going to reinforce the critical parts of what they should have said, thereby bringing them additional credibility in the eyes of their client. If it doesn't, well then the client has to judge the situation on its merits. That listing agent has unlimited access to the client. I have this short prepared presentation limited to one subject - my client's offer and why they should accept it. If the listing agent can't make a better case that their interpretation is better than mine, something is wrong. I'm not trying to steal their client - I want to make certain we're all on the same page. And if the listing agent has done their job correctly and I'm a bozo, well, the comparison isn't going to flatter me. So I'm motivated to get it right.

I do not agree to disclose the presentation or the offer beforehand, however. I am responsible to my client to make the presentation as strong as possible, and tipping my hand short-circuits the entire purpose of the presentation. It isn't like the seller has to come up with an immediate verbal response, as if we were in court. When I'm done, I thank them for listening and walk out. They have until offer expiration to respond - so it's in their best interest to schedule me as soon as possible. I just had a request where the listing agent refused unless I faxed over the offer first - which defeats the entire purpose of making the presentation. No. There is no reason you need to see it beforehand - unless you're trying to cover for your own lack of competence. You've got the same data I do. You can figure out precisely which comparable properties I'm going to use, and propose your own. I similarly, have to anticipate this and tell why the comparables I pick are the correct ones, and make the comparisons make sense in the real world. I have a short presentation time to make my case. You have unlimited time to disagree with me, in free format. I'm not allowed to be present for discussions unless you intentionally start those discussions with me present. If I do say something you disagree with and you can't out-argue me before your own client with all of those advantages, something is rotten in your State of Denmark. Not that the presentation is intended to be an argument - but if the listing agent insists on making it one, all of the advantages are in their corner. I can't fight either a listing agent or an owner who doesn't want to be reasonable. I can't force anyone to agree with me, to sign a contract they don't want to sign, or anything else. Actually, if someone on the other side is not going to be reasonable, both me and my client are better off finding out right away. What I can do is build a coherent rational case why it is in the seller's interest to accept our offer.

Nor will I agree to limit the subject of my presentation, at least not any further than presenting the case I need to make. I'm not going to talk politics, I'm not going to display any of the internet's famous prurient material, and I'm not going to do anything else that's irrelevant. I will cover the state of the market, I will cover which properties are and are not comparables, and I will cover why this is a good offer that should rationally be accepted. I recently had a listing agent tell me that they would only agree to let me make a presentation if I limited myself to one section of the presentation I usually give - the "my clients are good people" spiel. I could have lied and told them I'd do it. Instead I told them that their condition was not acceptable. This right was intentionally granted to buyer's agents precisely because there should be checks upon the agent on both sides, and in many cases, clients trust agents in defiance of all reason because they don't understand that the agent is telling them garbage because nobody else gets to talk to them. Whether a buyer's agent makes an in person presentation isn't the listing agent's call. They can certainly counsel the client on the subject, but the decision as to whether to accept the presentation is the client's - precisely because the agents we're all trying to get rid of are going to be the ones trying to prevent anyone else from talking to their client.

I haven't really done all that many of these yet. But the format of the presentation is pretty simple: Show them I'm a good guy, show them my clients are good people, talk about their situation. Then I segue into what the market conditions are, and the property and its position in the market. I show why the property is a good match for the client and why the client is a good match for the property by market position. I show why this offer makes sense in light of market and market position. I talk about the benefits of accepting the offer. Then I close by talking about how my client really wants this property, how well my clients qualify and evidence that they will be able to consummate the transaction - why it's a good fit all around. Finally, I thank them for listening and, assuming there are no questions, leave.

If nobody starts interrupting and arguing, it all takes ten to fifteen minutes. As I said, I'm not looking to attack anybody. Attacking doesn't get me a fully negotiated purchase contract, so it doesn't make my clients happy. What I am looking for is the opportunity to make my case in person, and present all of the evidence I want presented. The reasons it's advantageous to do so are obvious, but let me add one more: You would not believe all how often listing agents (or their clueless assistants!) do not read material that is in the offer, do not understand it, or don't understand even the most obvious implications of what is there. Some fraction of this is intentional filtering - not wanting their client to see information that client is entitled to see because it is part of the offer (this is called "intentional breach of fiduciary duty" in court filings) - while some is unintentional negligence, in that they're going through motions and making checks in boxes, and they don't pull their noses off the grindstone long enough to realize what's there in the offer and why it is important. But it is in the interest of both principals that this evidence be presented, and if the listing agent is too busy to take the time to understand the offer, they've got too many listings to properly discharge their fiduciary responsibilities to them. This is what is called prima facie evidence - "on the face of it", it is obvious that they're not properly discharging those duties. By allowing a buyer's agent to make a presentation, they are relieving themselves of a lot of potential for legal difficulty down the line, because the buyer's agent should talk about all of this stuff. That's the whole point of the presentation.

It's also an opportunity that everyone should welcome: to put human faces on the transaction, instead of just these mysteriously appearing pieces of paper and voices on the phone. It gets the buyer and seller thinking of each other in terms of being real people. It very much tends to lessen the tendency of people to draw lines in the sand and issue ultimatums, it increases the probability that this will become a fully negotiated purchase contract, and it becomes very helpful later on if we need subsequent negotiations because something new happens or is discovered about the property.

Here's one final benefit of the presentation: the listing agent has this same right to present counter-offers. I have to admit to encouraging tit-for-tat in my clients for this - if the listing agent allowed me to present, I think it's a good idea to reciprocate. If they didn't, that's not a good sign for the counter presentation or the transaction for that matter, and maybe we need to find another property not represented by such an problem personality. Whatever my attitude, it's my client's call. In the final analysis, you can't win a fight with a listing agent who is determined to be a problem personality. All you can do is avoid the fight by going elsewhere. To be fair, the same applies from the other side as well.

Caveat Emptor

Original article here

A while ago now, I saw a rather clever video someone did called, "That Last Dip's a Doozy!" Someone took housing prices 1890 to present and graphed them to a roller coaster ride. Just before the end, he turned the track around so that you could see where you had been and saw how high up you were. The thing was a work of genius; and yet it is still both misleading and wrong, in that a sense of "what goes up, must come down" permeates and becomes the basis for thinking.

In the physical world, this is correct. Gravity is a force to be reckoned with. Everything that does go up has to come back down to some sort of supported, stable resting position before it breaks down, runs out of gas, etcetera. Furthermore, roller coasters have to go all the way back to their exact starting point, or used coaster cars are going to start piling up somewhere!

The problem with this thinking is that the graph of housing prices takes place in a mathematical construct world, not on Planet Earth. It's a Cartesian Plane, not a jet plane. Indeed, if you'll remember all the way back to beginning algebra, we can choose any origin and any orientation we like, and the representations are still equally valid. There is absolutely no mathematical reason we can't choose today's prices as our origin. Are there then some sort of magical restorative forces then created that bring us back to our new origin of today's relatively high prices? Not likely! Or we could choose 1000% of today's median price as our origin. Would that cause prices to be inexorably drawn upwards by a factor of ten? Absolutely not. The concept of the origin is a useful one, but don't take it for more than it is. The prices of 1890 were the prices of 1890 because that's where supply and demand were in equilibrium under conditions pertaining at that time. The equilibrium that prices would attain today has precisely nothing to do with those conditions. Do you think we're going back to the days of the federal government selling land at $1.25 per acre under the Homestead Act of 1862? I don't, not even adjusted for inflation or cost of living. Those market conditions no longer apply, therefore there is no rational reason to expect housing prices to return to that state.

Nor are housing prices determined nationwide. We do not have one nationwide housing market. We have a mathematical amalgamation of hundreds of local housing markets. The amalgamation has its virtues and gives us some information, but don't exaggerate their usefulness. Just because some clever person draws us a mathematical picture of a roller coaster that's going to have to fall further than any material known to man can rescue it from and retain structural integrity, does not mean it has any relationship to the amalgamated real estate market in the United States of America, Planet Earth, or any of its component local markets. National prices are so high because people effectively bid up the price of living in desirable areas, and that happens because those areas are where people want to live. The flow of desire flows out of low demand areas like Freeze-to-Death, Minnesota and into high demand areas like San Diego because in a high mobility society, people will choose to live where things are pleasant if they can.

This is not to say that housing prices cannot slip further or go down. Some places have obviously started to recover, but other areas are years behind them in the economic cycle. The forces which decide that are purely economic ones (mostly bad loans, at this point). The only role gravity plays in housing prices is in physical structure requirements, a comparatively minor component. There is no requirement to return to the mathematical origin, nor are there restorative forces pushing us in that direction.

The big factors are, as always, supply and demand. When somebody tries to tell you something questionable that has to do with economics, go back to the basics of supply and demand and it is unlikely that you will go wrong.

Supply and Demand. We've done just about everything conceivable to stimulate the demand for housing, and just about everything conceivable to constrict the supply of housing, and people wonder why houses are so expensive?

I'm trying not to be one of their folks with their heads You-Know-Where considering the consequences of people being unable to afford housing, or just barely being able to afford it. I originally wrote The Economics of Housing Development back in 2005, and I've updated it since. But blithely assuming that this whole high housing prices thing is just some kind of bad dream and that it'll all go back to some 1950s version of normal soon, is not likely to be correct and is not likely to be of benefit to those folks who are getting priced out of housing. Indeed, basically everyone is likely to get priced out of housing at some point if we keep our collective heads You-Know-Where long enough, and that will have major unfortunate consequences.

Supply and demand. Let's go over the major factors that make up supply and demand, and see the effects they are likely to have.

Consider demand first. What are the major components of demand? Population, how desirable an area is, and how wealthy the population is. Our population is growing. We just hit 200 million in 1967, and less than 40 years later, we've got another 100 million net. That's a fifty percent gain in a generation, and most have them have been added in high demand densely populated urban areas. This is a good thing for the most part, but every time we gain a person without a corresponding dwelling being built, we price someone out of the housing market by driving the price beyond what they are willing and able to pay, and the population is growing considerably wealthier in the aggregate. The average house of the 1930s was about 700 square feet. The average house being built today is over 2000. The family of the 1930s might or might not have one automobile, while the average number per family now is over two - and for smaller size average families. Clothes, dishes, appliances, vacation time, average distance from home on vacation, every standard of living has increased, faster in the last twenty-odd years than previously. A time traveler from the 1920s would have recognized more of the lifestyle in the late 1970s than a time traveler from the seventies would recognize now. In the aggregate, we can afford to pay more for a place to live, and most of us are doing so, particularly in the more desirable areas. In fact, those areas seen as desirable or scarce have led the charge up in values. Manhattan Island most of all, but southern California, Florida, southern Arizona, the San Francisco Bay area, the Sun Belt and the coastal areas in general, and of course anywhere especially handy to some popular form of recreation. The population crowds into these places especially and demands housing, as a result of which, the average price of housing in those areas rises faster, while it has more effect on the average citizen simply because an ever larger proportion of the citizenry lives in these places. If going surfing 365 days of the year is the most important thing to someone, they'll do what it takes to live where they can go surfing 365 days a year. If you haven't noticed, a very large proportion of the population seems to want to live within an easy commute of the ocean, and seems to be willing to pay whatever it takes, both in terms of smaller less desirable housing and in terms of spending more to get it. The effect causes prices to increase far more than linearly.

Now let's talk about constrictions on supply.

Sheer room. If every available square foot has already been built on, there isn't any more housing coming without demolishing some other existing building first. There aren't many areas yet where this is a real issue. We've still got lots of open space in this country, but let's consider Manhattan Island, which is completely built over. Every buildable square foot of Manhattan is covered, almost all of it more than one story deep. Prices of Manhattan real estate have been legendary for decades. You think they're coming down to what average everyday folks can afford any time soon? I'll bet you any amount you care to name that's not going to happen. The average folks get pushed out to Brooklyn and the Bronx and Staten Island and the rest of New Jersey. The well off who control or are valued by the cream of the Corporate headquarters, and get paid hundreds of thousands or even millions per year, can afford to pay, will pay, and have been paying for decades. Because those who are financially powerful congregate there, others who are wealthy want to be in the same location. It's worth the extra money to them, and they have it to pay. The demand is not only there, supply is so highly constricted despite everything that can be done that the prices are and will remain sky high by the standards of the rest of the world.

Ability to acquire regulatory approval. If the city, the county, or the state aren't going to allow it to happen, it's not going to happen. Period. It's pointless and expensive to try and force it, and very few people try any more, while every year the hurdles to get permits are higher, tougher, more expensive.

Environmental regulations have taken on a whole new life of their own since 1973. Tests, reports, studies. It can take over a decade to get approvals to build new housing, and if it fails any of the tests, studies reveal any likely issues, or people use environmental issues as a cover for NIMBY or BANANA behavior and sue in court, the whole thing goes down the drain. I happen to agree that we need environmental regulations, but they need to be re-written with more consideration that all economic choices are trade-offs, because the way they are written right now, they form an excellent basis for anyone who wants to stop any development at all to do so legally. Every time we stop a new development, the people who would have lived there need to find some other housing somewhere else. Going along the chain of A prices B out, who then prices C who is lower income than B out of lesser housing, and so on. Every time we have a new American without building new dwelling space for them, somebody is going to end up homeless, and the price of housing goes up incrementally.

Open space requirements are a big thing in California and around here specifically. Not just open space, either, but maximum building densities. A large part of San Diego County has a maximum building density of 1 building for 40 acres. Well, if you have a maximum building density of 1 building for 40 acres, the only people who can afford to buy that property are those who can afford to buy 40 acres of land. Those who could barely afford a condo - if there were condos there - don't have that option. At some point, if you have too many people competing for too few condos, the price of condos goes up to where those people cannot afford them. And if there's no buildings at all, well it doesn't take a genius to see that nobody can afford to live there, unless it's under a bush or in a tent.

Many building materials have become much more scarce of late, as it's getting harder to obtain them. Lumber, Drywall, etcetera. Every time the materials get more expensive because they're harder to obtain, the price the builders need to charge for the same number of the final product also rises. If they can't make that much, fewer dwellings get built until they can. Nobody is going to build if they know they're going to lose money in advance. If they can make more than that, more dwellings get built. The reason nobody is building anything now, greatly discomfiting the building trade, is because there is no money to be made. When prices start going back up, things will start getting built, apartments will be converting to condos again, and if we try to stop it, there will be worse consequences than that.

Last and most importantly, Cost, which most of the others also contribute to. The more it costs to build a dwelling, the fewer that will get built. The cost of the permits isn't just the money the city charges so they can do the inspection. It's the cost of having someone fill out all the paperwork, having someone else make certain that all the requirements are adhered to before that, and of designing the requirements into the construction before that, which not only costs money for the architect, but also for the reduced benefits to the builder. All of this takes time, which means it has what economists call opportunity costs, as well as actual costs. If I can get a better return on the money doing something else, I'm not going to build housing. If I have a hundred acre parcel for dwellings, and the regulations say I have to set aside half of it for other uses besides actual dwellings, then I can only build dwellings for half as many people. If I try to cut the size of the individual dwellings in half, the plans don't get approved, people don't want them, and they don't buy. What this means is that I can only get half as much revenue as I might otherwise get. What the decreased potential revenue means is that projects which would be profitable at full density would lose money at half density - and therefore don't get built. What that means is that there is less supply, so prices are higher, so price rises until enough people voluntarily drop out of the market that there is a one-to-one match between buyers and sellers.

I've already touched upon Manhattan real estate. Coastal Southern California isn't there yet, but you can see the trend if you watch. In San Diego, there is essentially no more dirt to build on. Open space requirements, minimum lot size requirements, maximum density regulations, and we're hemmed in on about 330 degrees of the circle by four obstructions: Mexico, the Pacific Ocean, Camp Pendleton, and Cleveland National Forest. The I-15 Corridor is one of the few places new development can go, and it's solidly populated all the way to Riverside now - over 100 miles. But people still want to live here, and there are still jobs here, some of them highly paid. We can build higher density housing or we can price people out of ownership and into apartment buildings - and rent is going to get more expensive as well, to cover the increased costs to the landlords as well as their desire to make as much as practical. The highly paid professional doesn't particularly suffer - it's the $15 dollar per hour worker who gets stuck unable to buy, even a condominium, with an ever larger percentage of the paycheck going towards rent.

No matter what market you are in, prices are not going to come crashing back down because that is what will enable you to buy a house. Prices did get over-inflated in a lot of places for reasons I went over in Fear and Greed, or How Did The Housing Bubble Get So Big?. But just because they're higher than they should be now doesn't mean they are going to come crashing back down any further than the place were demand meets supply, and that place is higher than most bubble proponents are willing to admit. The pricing support is there for $350,000 to $400,000 starter homes in San Diego - a family earning two median incomes can afford it. A family earning less than two median incomes can afford it. Furthermore, unless our local housing policy develops a sudden massive attack of rationality, houses are going to start getting less affordable once again as soon as the excess inventory has cleared. Thirty years from now, tiny 1 and 2 bedroom condos will be going for more than that, even adjusted for inflation and standard of living, simply because nobody can build and the demand keeps going up. "Low income housing" and similar things are nice for the beneficiaries, but they are basically a band-aid on a severed carotid artery. The only effective way to fix the problem is to build more housing. There are three ways to motivate someone to leave or not to live here: love, money, and force. As long as San Diego has sun and beaches, people are going to love it here. The only way to change that is to ruin it for everyone. The second way is pricing them out of the market, which is what I'm talking about and what has been happening: People decide that their standard of living would be so much higher elsewhere that they are leaving for economic reasons. The third way is force, and unless you want to see the United States ordering people to move at gunpoint the way Arab countries kicked their Jewish populations out in 1948 (I don't), pricing is by far the preferable way to do it. Pricing people out is ugly, but it's a lot less ugly than the alternatives. Unless we decide to reverse out policies of the last thirty-odd years, we're going to get more of it, and it's going to get ugly. Until we do start building more dwellings, steadily inflating housing prices are here to stay. Especially in the highly popular, highly populated areas where everybody seems to want to live.

Caveat Emptor

Original article here

(Rates were much higher when I originally wrote this)

Recently, a couple of mortgage places have been advertising "30 year fixed rate loan at 5.65%" like that's the lowest rate out there and it's some kind of great loan. It's not. I have 5.375% available to me. If you read my site, you may be wondering why I'm not pushing 5.375 for all I'm worth. The reason I'm not is that it's a rotten loan. It costs 3.7 total points retail in addition to closing costs. If you came to me with a $300,000 loan balance and demanded that loan, just to pay closing costs and points would bring you up to a balance of about $315,200. It costs $15,200 to do that loan. As opposed to the 6.25% loan I can do without points (based upon the same assumptions) which ends up with a balance of $303,500. It takes 69 months - almost 6 years - before the total of what you paid plus what you owe on the high cost but low rate 5.375% loan is as low as what it is for the higher rate but lower cost 6.25% loan, and you still haven't broken even then, because you still owe a higher balance. That higher balance is going to cost you either more money on your next loan, or mean you don't earn as much on the proceeds of selling when you invest them. According to my loan comparison spreadsheet, you have to keep your new loan 93 months - almost 8 years - just to break even on the additional costs of the loan with the lower rate. Most people will never keep one loan that long in their life.

I called one of the companies advertising that 5.65% to find out about the terms of that 5.65% loan. They admitted to it costing 3 points discount and it having a pre-payment penalty, which my loan doesn't have. They didn't want to admit how much origination they were going to charge, but they're bumping up against California's Predatory Lending Law's ceiling on total costs of a loan, because a $300,000 loan with 3 points of discount has already cost over 4.25% of the base loan amount (they're allowed no more than 6% maximum), assuming that their closing costs are no more than mine. I can look at it and tell you it isn't as good as that 5.375% loan that I'm not pushing because the costs are so high that it isn't as good as a 6.25% loan for most folks.

The most common mortgage advertisements when I first wrote this were negative amortization loan payments. When I originally wrote this, those were ubiquitous. Now, of course, the regulators have essentially banned them because of all the foreclosures. The first advertisement I found when I originally wrote this (I actually had to look at two web pages completely at random, too, not just one) said "$430,000 loan for $1399 per month." It says nothing about the rate, which was about 8.25% as opposed to the low 6s of a good 30 year fixed rate loan with reasonable costs at the time. It says nothing about the fact that if you make that payment, next month you will owe over $1550 more than you owe today. That's not what most people think of as a real payment, and every time I look at one, I'm thinking, "I really hope they're practicing bait and switch on that," because anything else is better for their client's financial future.

Stop yourself and ask a minute: Is the sort of loan provider who uses either of these advertisements the sort of loan provider who is likely to have good loans? To compare the real costs and virtues of one loan with another? To help you similarly weigh the costs? Do either of the loan advertisements I've talked about seem like beneficial loans that you should want, or should you be running away as fast as you can? Even if they are practicing bait and switch, that practice is bad enough when you're not talking about half a million dollars, as you are with a mortgage.

Mortgage advertisements aren't honest about rate, mortgage advertisements aren't honest about cost, and mortgage advertisements definitely aren't honest about what that company intends to actually deliver. In short, the vast majority of all mortgage advertisements aren't advertising anything that an informed consumer would even be interested in. All that most mortgage advertisements are doing is trying to get you to call with a "bigger, better deal" pitch. Why? Because a loan is a loan is a loan. There is no Ford versus Chevy versus Honda versus Toyota, and few people feel any particular need to trade their loans in every three years just because they're tired of driving that loan. There is only the type of loan, the rate, and what the costs are in order to get it. If the rate isn't better, and the costs aren't paid by the interest savings, there just any point to actually getting a new loan, is there? And if you don't get a new loan, lenders and their loan officers don't get paid. But if they make it look like they're offering something better (even if they are not) you might get them paid.

Low rate, by itself, means nothing, as I have demonstrated. Rate and cost are ALWAYS a tradeoff. Every lender in every loan market has a range of available trade-offs for every loan type they offer. You're not going to get the lowest rate for anything like the lowest cost. For the vast majority of people out there, they will never recover the additional costs of high cost loans before they need to sell or decide to refinance. This is real money! If you had invested thousands of dollars with an investment firm, and upon every occasion you did so, you had failed to get back as much money as you gave them, pretty soon you would stop investing with that firm, right? Nobody brags that their investment got them a negative 20 percent return over a five year period. Why in the nine billion names of god would you want to invest in such a loan?

What the people advertising mortgages have learned works are the advertisements that offer the illusion of something free or something extra. There is no such thing, but that hasn't (and never will) stop them from pretending that there is. Since Negative Amortization loans went out the window and they can't advertise a ridiculously low payment, biweekly payment schemes have largely taken their place - neither of which is worth paying for, and both of which play "hide the salami" with hidden assumptions of extra money you're going to use to pay your mortgage down.

Nonetheless, the financial rapists continue the same old advertisements. They continue these fairy tales, and increase their next ad buy, because these advertisements work. The suckers will call in droves - or sign up on the internet, which is even worse than the same thing. If you merely call, only one company gets your phone number. If you sign up on the internet, you're going to be inundated by dozens, if not hundreds of companies, calling, mailing, and e-mailing, then selling your information when you tell them not to bother you any more. All of this makes advertising these abominations quite lucrative.

Nonetheless, now that you've read this article, you know better. You're going to understand some of what isn't being said in the advertisement, and if you do decide to respond, you're going to go in with your eyes open rather than naively believing something that might as well begin, "Once Upon A Time..." If there's one thing I can guarantee about the loan business, it's that those who go into a situation believing such stories do not end up living "Happily Ever After."

Caveat Emptor

Original article here

The bottom line on this question is always, "Whatever the courts say." Divorce law is complex, and different from state to state, and even when you think you've got a clear message in the law as written, the courts may interpret it differently, or there may be precedent that says otherwise, or even just some overarching concern you are not aware of. Even if the law is clear, it can usually be gotten around by the agreement of the parties. Consult your attorney.

With that said, there are a few rules of thumb to go over, valid in broad for most states in most situations.

Real Estate is usually owned by both partners in a marriage equally, even if one spouse acquired title prior to the marriage the second will be added by default when the marriage happens. The only thing that is usually held separate are inheritances - things that were inherited by one spouse or the other from relatives, and even those can often become joint property. Sometimes gifts to one spouse can also be held separate. One of the phrasings your learn from reading title reports are is "John Smith, who acquired title as a single man, and Jane Smith, husband and wife as joint tenants." This tells you John bought it before they were married, and Jane got added to title upon marriage by the effects of the law.

There are trusts and the like to frustrate this from happening, and most states have rules and law permitting them, but you have to talk to the lawyer, get the trust created, and most importantly, as it's the step that is most often omitted, transfer the assets to the trust in a timely fashion. I don't know how many folks I've seen who spent a couple of thousand dollars creating a trust and then didn't transfer the assets to it. Every penny they spent on that trust was wasted money.

Now, if Jane does not wish to be added to the property title, she may quitclaim it back to "John Smith, a married man as his sole and separate property." However, quitclaim deeds have this curious limitation in many states (California among them) that they only function with respect to the interest you have in the property as of the time you sign them. Since the new spouse has not yet been given the claim upon the property until the marriage takes place, the quitclaim cannot be signed until after the marriage in order to accomplish the desired goal, as Jane has not yet acquired the interest in the property. Jane can say she'll sign it after she's married, but if she changes her mind, that's a whole different legal struggle. If she signs it before the marriage, then since she subsequently acquired a claim to the property through the marriage, she now has an interest in the property through the eyes of the law. Let's even say John and Jane are ninth cousins, the only surviving family inheritors, but for whatever reason Jane quitclaims the property to John, but then they later get married. Jane now has a married woman's legal interest in the property. The quitclaim only applies to Jane's interest in the property at the time of the quitclaim, and has no effect upon any claims she may acquire later. The only way I am aware, in general, to deed away any rights you may acquire in the future is with a Grant Deed, and each state has its own laws as to how this may and may not be accomplished. On the other hand, a Quitclaim is a handy document if you may have the intention of acquiring some interest in the property back at a later time, as it generally doesn't make, for instance, buying the historic family homestead back from your wastrel brother problematic.

Now suppose John and Jane Smith get divorced, and the property was held jointly. Both John and Jane still have an interest in the property, and continue to hold an interest, even if the court orders them to sign a quitclaim, until they actually have done so. This is why it is better to get a court award of actual title rather than a court order for the other spouse to sign a quitclaim. Unfortunately, for some reason, most divorce courts are unwilling to award actual title rather than order the ex-spouse to sign the quitclaim. So whoever gets the title or possession is not able to do anything with the property without the ex-spouse's approval, unless and until that ex-spouse signs the quitclaim or the court awards the spouse in possession with clear title. I could tell stories of ex-spouses that disappeared, or pretended to disappear for years leaving the ex-spouse in possession unable to sell, unable to refinance, even unable in some circumstances to sign a valid lease. Not infrequently, the ex-spouse pops up years later wanting a better deal (that is, more money) as inducement to sign the quitclaim deed.

Until the ex-spouse signs the quitclaim, title companies will not insure either loans, whther in support of refinancing or a sale, or actual sales transactions. No lenders policy of title insurance, no loan (in most states), and that kills the refinance, or the loan financing any sale. No policy of owner's title insurance either, and I certainly won't pay my money for such a property, and advise my clients in most stringent terms not to do so.

Now, let's say that the ex-spouse has signed the quitclaim but is still on the existing loan, which was taken out while you were still married. This isn't really a problem for sales. In order to refinance, or deliver clear title on a sale, that loan needs to be paid off. The lender doesn't care how it gets the money, or from whom. That ex-spouse can drop off the face of the earth once the quitclaim is signed, and it really doesn't make any difference. Once they are out of the legal picture, they might as well be dead as far as title to the property is concerned.

On the other hand, if both people signed for the loan, they are both still responsible if they get a divorce. It's not like some is His and some is Hers - it's all Theirs. Because this is true, sometimes ex-spouses also get their credit hit when things like a short sale subsequently happen, or foreclosures. To guard the ex-spouse who is giving up the rights to the property from this happening, many times the divorce court will order the ex-spouse who is retaining possession to refinance in order to remove the spouse who no longer has a legal interest in the property from future liability on the debt. Furthermore, until this happens, it hits the ex-spouse in the debt to income ratio, as they are still obligated to make those payments and they show up on the credit report. This often makes it impossible for them to buy a property for themselves, even if they can otherwise afford to do so.

Many times, the court will order the ex-spouse retaining the property to buy the relinquishing ex-spouse out of the property, to give them some money or other goods in exchange for their interest in the property.

Often, especially if both spouse's incomes were used in order to qualify for the loan on the property, the remaining ex-spouse will not be able to qualify for the necessary loan on their own. In this case, the smart thing to do is usually sell the property. It is a real issue that because many former spouses are delinquent in their payment of alimony and child support, the lenders want to see a certain history (usually three months) of these items being paid before they will allow the income so generated to be used to help qualify the remaining ex-spouse for the new loan.

Keep in mind that all of the above are simply common concerns and happenings, and may have nothing to do with the situation you find yourself in in a divorce. I'm just covering the major basics that any layperson should be aware of. Consult your attorney for real feedback of how the law and legal precedent in your area apply to your situation.

Caveat Emptor

Original here

It may surprise you to learn that there is a way to lose part of your property without selling it, against your will, and without the government condemning it for public use. This is the doctrine of adverse possession, and it has a history that is literally older than the United States, going back to English common law. Adverse possession flows from the Doctrine of Laches (equity), where a party, which would be the previous legal owner in this case, has lost its rights by failing to defend them. And this failing really is a pretty extensive failing, as you'll see in a moment - basically going to sleep like Rip Van Winkle for a goodly number of years. It isn't like today you've got a valuable property that you're using, and tomorrow you're dispossessed by some thief who snuck in during the night.

There are five elements to a successful adverse possession suit:

1) Open and notorious: You have to have openly used the property in question, in a manner observable to the general public, and in particular, the previous owner.

2) Actual possession: You must have occupied and used the property in question. Raised crops on it, improved it by building or improving something artificial on it, lived there, etcetera. Paying taxes on the property can be helpful to your case, but it isn't proof, and it doesn't prove you were in possession - actual physical control of the property concerned. You may have believed it was yours, which is why you paid taxes, but the legal owner had an equally reasonable belief: legal title. You have to show that you were in physical possession of that property.

3) Exclusive: You have to use it to the exclusion of the theoretical owner. No sneaking in only when they are not there. They must be absent - they cannot have been in possession, in control, or have been using the property themselves. If they come back and use the property, evict you for a while, etcetera, the time period starts all over.

4) Hostile and Adverse: You can't be using it by permission, otherwise all landlords would periodically have to evict every tenant. If you're paying rent, or just have permission to use the property, it all goes out the window, as that shows that the legal owner wasn't neglecting their rights. Someone using it by permission might get an easement by right of long use; they won't get fee title to the property.

5) Continuous holding period for a given number of years. This period varies from state to state, and can vary even within the same jurisdiction with differing circumstances. I've heard of times as short as seven years, and as long as twenty. Check with a lawyer in your area for what period applies to your situation. For that matter, check with a lawyer in your area on anything in this whole article. I'm not an attorney - I'm just alerting the public to the existence of adverse possession and its general characteristics.

Adverse possession applies only to land actually taken. Just because the legal owner ceded use of some small piece of the property doesn't mean you get the whole thing. Just because you have a successful adverse possession for a fence three feet from where the prior legal property line was, does not mean that you're going to get possession of an entire parcel.

Fence lines are the most common adverse possession suits. Either the owner of the property puts the fence inside their own property line, and the owner of the adjacent parcel takes over the land outside the fence, or the owner of the other property puts the fence line within the neighbors property in the first place. In either case, there's a pretty easy visual case to be made for who was in control of that land, who had possession, and that it was exclusive. That it was hostile and adverse is fairly easy, unless there's some written documentation that the legal owner gave permission. This leaves only the fifth condition, continuous possession, for the required number of years.

This has implications for buying property. If what you see on that fence line doesn't match the legal boundary, then there may be a legal case to be made that the fence line is what you get. Whether this is a good thing in that you can attach more property to what you are legally buying, or a bad thing in that you're not getting as much as you might think, the case can be made. In any case, consult an attorney.

It also has implications for selling a property. If you advertise that the property is a quarter acre, and someone legally removes some amount from that within some period after the property sells, they may have recourse upon you if they bought partially based upon your representation that the property was a quarter acre. It wasn't, really. I find it difficult to believe anyone really would sue over a fence line making their 10,890 square foot property into a 10,700 square foot one, especially when the fence line was clearly visible the entire time, but it doesn't have to be the real reason they want to do such. It might merely gives them a legal excuse for whatever their real issue is.

Another thing that adverse possession does not apply to is use of force. You cannot gain title by holding the owners captive at gunpoint, no matter how long it is. This includes armed invasion. Were the territory gained in the Mexican-American War ever reattached to Mexico, it is my understanding that according to this doctrine, the landholdings then extant would be re-asserted, even under US law, unless they were actually sold, either by the government (i.e. Gadsden Purchase) or the private entity that held title. If Antonio López de Santa Anna personally owned your property once upon a time, and the US Government took it over after the war as spoils, his heirs might still own it if they ever found out about it and filed suit. One hopes you get the idea.

Winning or losing an adverse possession case can also have property tax implications. If years ago, you bought an 8000 square foot property, and lose 2000 square feet to adverse possession, at least you'll probably get some property tax relief out of it. If you attach that 2000 square feet to your existing property through successful adverse possession, you might well get a tax bill for it.

Adverse possession is a detailed legal field with complex rules I don't pretend to understand in full, and those rules change from state to state. But it is real, and it is successfully used to take legal title to land pretty much every day.

Caveat Emptor

Original article here

(I have noticed a fair number of hits to this article that, judging by their search query, probably want the article on What Happens When You Can't Make Your Real Estate Loan Payment instead)

I got a question about legal late payments in California.

Unfortunately, there really is no such thing as a legal late payment. You borrowed the money, signed a contract, and it accrues interest according to that contract. You owe this money, and it only gets worse if you don't pay it. There is some wiggle room so you don't get unduly hit for a day or two late, or if the right to receive payments is sold, but that's about it.

The law gives you some wiggle room in the timing of the payments. First off, the laws of California and most other states give you fifteen days after the due date to pay the mortgage before a penalty can be assessed. I know of a lot of people who make consistent use of this. If it's due on the first, it's supposed to be there on the first, but many people take advantage of the fact that there is no penalty as long as it's paid within fifteen days of due date (i.e. before the sixteenth), and consistently mail their payment on the tenth or twelfth.

Now if you miss the extended deadline by even one day, the penalty is up to six percent of the amount due here in California. As you might guess, most lenders charge the maximum penalty, or close to it. When you compute it out, four percent times 360 divide by 15 is ninety-six percent annualized, and six percent is 144% when annualized. I had my check get lost in the mail once and the lender waived the penalty when they called me on the eighteenth because I always paid on the first or before, but they didn't have to do that. I got the distinct impression that if I were the kind of person who pays on the twelfth or fourteenth every month, they would not have waived the penalty.

There is also some wiggle room on when the new lender receives your payment if your contract is transferred between lenders. Because once upon a time some unscrupulous lenders would sell notes back and forth between their own subsidiaries because it made them more likely to get late fees, or even able to foreclose on appreciated property when there were relatively few protections for borrowers in law. Mind you, you still have to send it on time, but if it gets hung up in forwarding between lenders, that's not your issue. Within sixty days, the old lender must forward the payment promptly, and it counts as received when the old or the new lender receives it, whichever is first. It's still better to send to the new lender at the new address if you have it or know it.

In short, although there are some small period where payment is allowed to be delayed due to one factor or another, it is never to your advantage to do so. Make your payments on time.

Caveat Emptor

Original here