Dan Melson: June 2014 Archives

One of the things I'm seeing more of in MLS listings and developer advertising, among other places, is the phrase "$X in closing cost credit (or "$X in free builder upgrades") given for using preferred lender"

Sounds like a bargain, right? Just use their lender and you get this multi-thousand dollar credit. After all, "All Mortgage Money Comes From The Same Place!" Free money, right?

Well possibly, but not very likely. What most companies are looking to do with this advertising is give people a reason not to shop around. They hope that because most people think that "All Mortgage Money Comes From The Same Place", the average customer will just stay there to apply for a loan. Many builders and conversion companies will throw roadblocks in your way if you try to use another lender. They cannot legally require you to use their loan company (at least not in California), but they can make it exceedingly difficult to go elsewhere. I've been told by builder's representatives on two occasions that I was wasting my time with a loan, because "If they don't use our lender, they won't get the property!" despite already having a signed purchase agreement. Roadblocks take all sorts of turns. They won't let the appraiser in. They won't cooperate with requests for information, without which the other loan is going nowhere. And so on and so forth. By the way, this behavior is illegal under RESPA. They're just betting you won't do what it takes to complain, not to mention that even if you do complain you're still not likely to get the house you wanted - the genesis for all of this.

I should mention that the concept of giving you incentives (metaphorical carrots) instead of metaphorical sticks is legal, ethical, and highly desirable as opposed to the behavior in the previous paragraph. Just remember they've got to pay for those incentives somehow. Builders are not charities. You still want to shop your loan around based upon the bottom line to you.

The builders wouldn't give those incentives to use their lender, or throw roadblocks in your way when they're trying to sell you a property, if they weren't making more money with the loan. Quite often, they're making more money on the loan than they are from the sale. Put you into a loan half a percent or more above market, stick a three year prepayment penalty on it, and voila, anywhere from a 6 percent premium to perhaps 10 percent. To give you a comparison, around here an agent makes 2.5 to 3 percent from a transaction, and I do my loans on a margin that varies from under half a point to a point and a half, depending upon difficulty and size, and discounted from that if I'm also getting an agency commission on a purchase. But the average consumer is distracted by these "free" upgrades or closing costs that they don't realize how badly they've been raked over the coals. If I can get you that $400,000 loan half a percent cheaper and with no prepayment penalty, I'm saving you $2000 per year for certain, and very likely about $12,000 on the prepayment penalty.

Furthermore, on some of the builder's loans I've analyzed, they're getting you a rate that would carry a point and a half retail rebate or more, even without the prepayment penalty. This means on a $400,000 loan at that rate, the lender would be paying you a $6000 incentive to do that loan, more than covering normal closing costs. But this is comparatively rare. Usually, they're earning some or all of the secondary market premium directly. Have no fear, that builder is doing quite well for having loaned you that money.

What can an average person do about this sort of thing? As I've said before, builders often throw roadblocks in the way of outside lenders, and there's not a lot that you or anyone else can do about this fact.

There is a bill in the California legislature that wants to ban developers from being the lender also. This is a "quick fix" that won't fix anything; in fact, it will hurt. They can bring in outside lenders who agree to pay them under the table, or even on out in the open for certain services. Net benefit: Zero. However, this bill would also make it more difficult for buyers to order custom upgrades and finance them into the cost of the purchase, as often happens now and can be highly beneficial to the consumer who goes in with their eyes open. I wouldn't be surprised if it was the developers themselves pushing the ban.

Many people want brand new homes if they can get them. Given the realities about Mello-Roos and how prevalent homeowner's associations are in more recent developments, I'm not certain I understand this. It's one thing to deal with Mrs. Grundy when you're all cheek by jowl in a condominium high rise. It quite another thing to deal with her complaints because you left your garage door open ten minutes longer than the rules say, you want to paint your detached home a couple shades darker or lighter than everyone else, or whatever's got her dander up today.

I do have a trick or two up my sleeve for when I'm a buyer's agent in new developments. It's my job to outmaneuver the selling agents the builder has on staff (who tend to be heavy hitting salesfolk, which is not the same thing as the stronger agent). But they are dependent on some things that change from transaction to transaction, so I can't really describe them in any kind of universal terms. Writing an offer contingent upon an outside loan has its limits. Builders who throw roadblocks have that one wired; they wait for the contingency to expire at which point they've either got your deposit or your loan business as you are so desperate not to lose your deposit you'll do almost anything, particularly since most folks don't understand how much that loan is really likely to cost them.

Caveat Emptor

Original here

(This was originally published March 18th, 2006. I've added a couple updates, but otherwise it's as published. It's still very relevant, and if there's anyone that wants to tell me I didn't nail it, please speak up)

Somebody wrote a comment about going upside-down on their mortgage:

What happens if the property value falls and becomes far less than the loan ammount? (POP) Lets say you get a loan for $280,000 on a home that was $330,00 and then three years later is is only worth $150,000, but you still owe $250,000 on it?

Now "upside-down" in the context of a mortgage is just slang for owing more than the property is theoretically worth. This is a tough situation to be in, and there's not much that can be done while you're in it except get through it. Before, yes. After, yes. During, no.

I've predicted that this is going to be a widespread phenomenon over the next few years, and it's going to cause a world of hurt, but it doesn't need to include YOU, unless this has already happened, and I thought Sandy Eggo, where I live, to be on the bleeding edge of bubble problems, and appraisers are still able to justify near peak values even here.

Surviving being upside down is actually pretty easy if you have the correct loan. I bought near the peak of the last cycle, and was upside down myself for little while. If you take nothing else away from this article, understand that the only time your current home value is important is when you sell or when you refinance. If you don't need to either sell or refinance, it does not matter what the value of your home is. It could be twenty-nine cents. It's still a good place to live. You've still got the loan you always did. You should be able to keep on keeping on until the situation corrects. Prices will come back sooner or later.

The key is to have a sustainable loan. I did. I had a five year fixed period, during which time the market recovered and I paid down my loan. By the time I went to refinance, five years later, things were better.

This is the real sin of the local real estate and mortgage industry. Yeah, the bubble's going to pop, and everybody knows it. Actually, it's already had significant price deflation. But if they had been putting folks into longer term sustainable loans, they'd be fine. Instead we've had about forty percent of purchase money loans being negative amortization and another forty percent being two year fixed interest only loans. The period of low payments for the former, and the fixed, interest only periods for the latter, are going to expire while prices are still down. That would be tolerable if the people could make the new payment, but if they could have made the new payment, they would have been in longer term fixed rate fully amortizing loans in the first place. What's going to happen next is kind of like when Wile E. Coyote looks down.

I've been telling people there are no magic solutions to the problem for over three years now. If you borrow the money, you're going to have to pay it back. Make the payments now or make them later, and the later it gets the worse it will be. There is no such thing as free lunch, and those who pretend that there is are not your friends. The Universe knows how much more money I could have made by keeping my mouth shut and screwing the customer. $200,000 is a conservative estimate. Instead of struggling to convince people to do the smart thing these last eighteen months, I could have been glad-handing everyone in sight and making a mint off of ignorant people. But then there would be court dates looming in my future (those in my profession who were not so careful are going to be in for a hard time, and I hope you'll forgive my schadenfreude when it happens. Those con artists masquerading as professionals stole a lot of money from me and from the people who became their clients by convincing them they could afford more house than they could, or by not admitting to the tremendous downside of what they were offering the client. "No, he just wants you to do business with him and he can't do what I'm doing." I could have gotten the loans, as I informed more than one of the clients I lost, and on better terms, but I wanted them to know the downsides. So I lost the business to the con artist who pretended there wasn't one. There were downsides, but people want to believe the con artist).

What to do if it has become obvious you're headed for the canyon? Figure out what your payment is going to do for the next several years. Determine if you're going to be able to make that payment before it happens to you. If not, refinance now if you can, sell if you can't. Pay the prepayment penalty if you have to, because given a choice between a prepayment penalty and foreclosure, the former is much better.

If you want to refinance, find a long term fixed rate loan. Minimum of five years fixed, fully amortized. Since thirty year fixed rate loans are actually about the same rate as 5/1 ARMS right now, I've been recommending the thirty year fixed for almost everyone. This is a loan that never changes, and you never have to refinance because the payment is going to jump.

(UPDATE: 5/1s are now significantly cheaper than thirty year fixed rate loans again)

The critical factor for refinancing is the appraisal. The critical factor for the appraisal is how much value can be justified by the appraiser. In order to justify the value, there have to be comparable recent sales (not more than one year old) in your neighborhood. The appraisers don't always have to choose the most recent; they have the option of choosing better matches for your home. May the universe help you if there are model matches selling for less in your condominium complex, because there the lender is going to insist on the most recent sales. All the more reason to act now, while you can, rather than wait and hope.

(UPDATE: With Home Valuation Code of Conduct the appraisal has become the source of more problems than any other aspect of a real estate or mortgage transaction)

If you're already over the chasm and prices have fallen, consult some local agents about selling. Short payoffs are no fun, but in the vast majority of cases, they're better than foreclosure if you're not going to be able to make your payments. At least when they're done, they're done. Foreclosure is a hole that keeps on draining you long after you've lost the house, and after it's cost you thousands of dollars more than a short sale (and if sale prices continue down, that 1099 love note from the lender after the foreclosure is going to be worse). As for waiting, well, if it's an honest consensus that things are coming right back, but here in San Diego the Association of Realtors had not yet admitted there's price deflation despite it going on for almost a full year. They've been playing games with reported figures to make it seem like things are rosy. There are obvious motivations for this, not all of which are explained by self-interested greed, but it's not something you can paper over and ignore indefinitely.

Who's to blame for the impending train wreck? I'm not really into blame, but here are several targets. Unscrupulous lenders and agents bear a lot of blame, but not the exclusive burden. Panic and greed on behalf of the buyers is certainly a significant part. And if several folks are telling you that the best loan they have is five and a half or six percent or even six and a half, shouldn't a normal, rational adult be suspicious of an offer that's theoretically at one percent? I can maybe believe somebody who offers something a quarter of a percent better than the competition. Half a percent might be just barely possible at the same price. Somebody who offers money, of all things, that's less expensive by an interest rate factor of five isn't telling you the whole truth. (Unfortunately, in this case, these loans are so easy to sell on the basis of minimum payment and nominal rate, it got to the point where these loans were what the vast majority of agents and loan officers were talking about)

As a final note, 125% loans do exist (UPDATE: Not really, anymore, but for a while, there was a 125% refi in place program enacted by Fannie and Freddie, if your loan was backed by them), but they are ugly. Very ugly. Not as ugly as Negative Amortization, but ugly, and the payments and interest rates aren't any more stable than the real terms on those Negative Amortization loans. They don't do stated income, either, or non-recourse loans. You stiff those folks, they will get the money out of you.

Prices are going to come back up. It's as predictable as the fact that they were going to fall. Can't tell you when, anymore than I could tell you when exactly they would start falling. (UPDATE: Housing recovery is ready to happen, whenever the government pulls it's head out of where it is right now) Doesn't mean it won't happen. The trick is to have a sustainable situation in the meantime, and this means a loan with payments you can make every month, month after month, indefinitely until the loan is paid off or you have the ability to refinance or sell. If you've got this, someday you'll be telling yourself how happy you are that you bought that property. If you don't have it, get it. If you can't get it, get out.

Caveat Emptor

(I originally published this March 18, 2006, but most of it is still highly relevant.)

from an email:

First let me say that I really learned a lot from your postings/articles/website; its awesome that a resource like yourself exists.

Now to the problem. I recently refinanced and the mortgage broker lied to me about many, many things. I was sold a negative amortization mortgage. The broker provided me a chart showing my payment schedule for 30 yrs; it showed my payment split between interest & principal. I was told that my rate was fixed for 5 yrs and that it would go up to as high as 9% after the 5 yr period. When the closing came and I inquired about the 9% highlights in the docs and the negative amortization disclosures he stated that they didn't apply to me or this loan. He pointed to the section of the doc that stated that my payments would be fixed for 5 years and that my interest rate would also be fixed for that 5 year period. After closing I received the docs from the lender which outlined the fact that I had 4 choices for payments and when I called for the explanation I almost died. The broker apparently didn't really understand the loan at all; he has now offered to refinance me without any fees...but I am supposedly stuck with the prepayment penalty. When the broker and I originally discussed the penalty he explained that I would probably want to refinance at the end of the 5 yr period anyways so I shouldn't worry about it. The broker also took my lead from a mortgage company he was working with when I originally inquired about the refinance. About 2 weeks into the process he told me that he had quit his job @ the mortgage company and was now out on his own as a broker (emphasis mine DM). Only now did I just realize that he really didn't have the ownership of my lead as his original employer paid for it & provided it to him during his employment. I'm sure that his original employer would be very disappointed to learn that he had taken the business with him when he resigned.

Now that the problems been explained my questions are as follows; Can I sue the broker to recover the refinance fees and the prepayment penalty?

Can the broker that lied to me and provided all the false info be sued or charged; can he lose his mortgage brokers license?

Any advice as to what I can do/what I should do at this point? Thanks in advance for any info you can provide. Please let me know if you respond directly to emails or if I need to go to a specific website to look for a reply.

There are several issues raised here. The largest major red flag is about the Negative Amortization Loan Disclosures. If it didn't apply to your loan, why did they present them to you? There isn't a good answer to that question. If something does not apply to your loan, you are within your rights to not sign. If they don't apply to your loan, then the lender doesn't need it. I don't have my clients sign negative amortization disclosures for thirty year fixed rate loans, or anything else to which they don't apply. There are any number of disclosures that legally have to be filled out for every loan and sometimes multiple disclosures for basically the same purpose. I had to do four "equal opportunity" disclosures for my most recent loan. But those are utterly harmless, simply informing you of your rights. A negative amortization disclosure isn't. With that, they can prove that you were told that your loan was negative amortization, and you must have been expecting it, because you signed it, didn't you? That's the lawyer's logic.

I am rapidly becoming more aware of a trend with unscrupulous mortgage lenders: Instead of putting bad stuff in the actual Note, they are adding it on as part of the all the disclosures people have to sign, hiding it in packs of supplemental stuff along with all of the standard stuff that everyone knows have to get signed. Sometimes, they are even coming back to people after funding and asking them to sign horrible things, prepayment penalties and negative amortization disclosures, among others, "for compliance." I want to see a standard booklet or checklist of forms that actually are required by law for every loan, so that innocent consumers who are trying to do the best they can know what is and isn't required by law.

If disclosures do not apply to your loan, do not sign them. They don't need it to fund your loan. There is no reason why someone who's getting an amortized, or even interest only loan, needs to sign a negative amortization disclosure. Just refuse to sign. If it doesn't apply to your loan, then they don't need it to fund your loan. If they then fund your loan and it is negative amortization, you have a good case, so they're not likely to fund it. Refusing to sign stuff that does not apply to your loan protects you.

Now, as to the broker not understanding that the loan was negative amortization: I suppose it's possible. There are people out there in my industry who are mind-numbingly stupid. But the odds are overwhelmingly in favor of the likelihood that they lied to you. There are required submission forms on every loan that most consumers will never see, but it's a requirement for the loan officer to fill them out. They are filled out and submitted with your loan package, and they quite clearly indicate all the relevant facts of your loan.

Now, as to your options going forward. There's nothing wrong with people quitting their employers and going into business for themselves, if they provide good loans at a good cost. Yes, his former employer may want to sue him for the commission he earned, and such might be one way of extracting vengeance, if such is your mindset, but it's not going to help you at all. Nor should you care about who "owned" the lead. You as a consumer are not obligated to anyone except the provider who delivered the best loan at the lowest real cost. And of course the broker who did your loan wants to get paid again with a new loan. Since they are claiming to be stupid enough to drop your state's average IQ by twenty points, you may have to give him directions as to exactly which tall building or cliff you want him to jump off of. They have proven that they are not worthy of your business or anyone else's. Please do make a formal written complaint to your state department that regulates mortgages. In most states it's the Department of Real Estate, but if it's not, they will know who to direct you to. This person should lose their license and be barred from the industry for life over this. Unfortunately, your complaint alone probably won't do it, but people who get multiple complaints do lose their licenses, and sometimes, one is enough, if it's egregious enough.

The next issue is what can the writer of this email sue for? I'm not a lawyer, but every adult in the United States should know the answer to that question is "anything at all," or even "nothing." The better question is where are you likely to recover money, and how much? Once again, I'm not a lawyer and you should talk to one, but I strongly doubt that you've got a good case for anything in civil court. He's got all of those documents you signed ("the weight of the evidence"), and even if you get some jury to agree that you are owed money, it's likely to be overturned upon appeal. This is why unscrupulous folks want you to sign all those documents.

What do you want to do? You indicate your interest rate is fixed, and it must have been low enough to be attractive. If this is the case, make your monthly payments on time, and make the fully amortized payment, usually the third payment option on Negative Amortization ("Pick A Pay") loans. However, I don't believe that is likely to really be the case. I have never once seen one of these abominations where the real interest rate was fixed, or where the real interest rate was competitive with amortized loans. The attraction of these loans is low payment, and the real interest rate is usually at least 1.5% more than I could get the same person on a fully amortized 5/1 ARM, and right now thirty year fixed rate loans are about the same as the 5/1 ARM. People who don't know any better get the low payment, the bank gets your signature on a loan that's 1.5 percent higher than you could have gotten, and people who don't know any better will line up and fight for these loans! They are easier to sell than free beer to people who don't know any better! The hard thing is selling them something else when other providers are telling them about Option ARMs. So you're probably going to want to refinance, as over a three year period, 1.5 percent rate differential will save you a lot more than the pre-payment penalty.

I answer question emails directly. It may take me a few days, but I do answer them, provided they don't get lost in the spam filter. If it's an issue I haven't covered before, or only tangentially, I do like to use questions as the basis for new articles, but I answer questions asked via email by return email. If there are already good answers on my site, I'll send you the link, because it was obviously too hard to find it. If there aren't, you'll get your question answered before any article appears.

Please ask if this does not answer all of your questions!

Caveat Emptor

Original here

I went out previewing properties a couple days ago. That particular client's situation being what it is, I was concentrating on vacant properties. But over half the vacant properties in that area had restricted showing instructions. "Call agent first," or "call for appointment to see."

When the property is vacant, there just aren't any common reasons to restrict showing. It's not like the buyer's agent is going to surprise grandma in the shower or even could make off with the big screen TV. If you're really trying to sell it, if it's vacant, it's empty, at least of your stuff, and the stager's (if there is one) had better be insured. If there really is some reason to restrict showings, it should be somewhere on that listing report. But I'm seeing this schlock on lender-owned properties, where there is exactly zero reason for it, at least as far as the owner is concerned.

What the listing agent is trying to do is control access, so that people like my clients have a gatekeeper. Why? So that the listing agent has the ability to block other agents from showing the property, therefore forcing people who want to view the property to become their clients also, and keep both halves of the commission (as well as forcing people to sign exclusive buyer's agency contracts just to see it). If the offer they bring in isn't as good, or isn't as quick (thereby costing the owner money), they still made twice as much or more in commission if they represent the buyer as well.

I strongly suspect that many agents - and yes, I'm keeping track of who, even though I'll never share it - play gatekeeper with offers as well. I send over an offer, and I never hear back. I call the agent, and am informed my offer was rejected, but I never see anything with the client's signature or even initials. I don't list many, but when I do, every single offer gets a written response, even if it's just "Offer rejected!" signed by the owner. It's illegal for me (as a prospective Buyer's Agent) to contact the owner directly to confirm that they know about an offer, or I would. I could really get behind a law that said I could send a postcard to the owner that says: "Dear Mr./Mrs. X. My client made an offer on your property recently at 1234 Name Street. If you are already aware of this, please disregard this notice. If you are not, please contact your listing agent about the details. If they cannot satisfy you as to whether you previously saw it, please direct all complaints to the California Department of Real Estate at XXX-XXX-XXXX." Boy would that be a good use for postage. Agents who did their job would have nothing to fear; agents who failed would be out of the business fast.

The motivations of the seller are to show that property as often as possible, to as many people as possible. No showing means no offer. No offer means no sale. Therefore, anything which is a nonessential impediment to showing that property should be dealt with, and agent restrictions are one of these. Believe me, I understand about not wanting client phone numbers in MLS databases, because the last time I had a listing decide they wanted to postpone the listing (therefore withdrawing it from MLS), they told me they got over a hundred solicitations from agents who ignored both the "do not call" list and the fact that I still had a valid listing contract at the time, which they didn't bother to ask about. It's illegal to solicit another agent's listing in California. If it wasn't, people who list their properties would be getting phone solicitations from 8 AM until 9 PM every day, and the junk mail would kill entire forests.

But the seller, whether they realize it or not, wants their property shown as often as possible, to as many people as possible. That's how you get get good offers, or even better, multiple offers that you can play off one another. Anytime you make it more difficult for anyone to view your property, you make it less likely they will view it, less likely they will make an offer, and less likely that it will be a good offer. The sharks out there don't care about viewing restrictions. They're willing to make their low-ball offers sight unseen, albeit with inspection contingencies. And even a shark's offer is better than no offer if you need to sell.

So how does a Buyer's Agent deal with problem personality listing agents? About the only thing I can do is not waste my time and most especially that of my clients on their nonsense. The only one with the power to deal with such antics is owner of the property. Just insisting that you want to see all offers isn't enough. How are you going to know? You can ask that instructions go into MLS for making certain that you get duplicates of all offers. E-mail, fax number, address, or even a PO Box if you have one. Buyer's Agents can't bypass the Listing Agent, but they can send duplicates if the MLS instructs them to.

Even better is to insist that the Listing Agent forswear the possibility of Dual Agency, or they don't get the listing. In other words, no matter what, they will not get the Buyer's Agent's part of the commission. As I have said many times, make them pick a side of the transaction - yours - and stick to it. The listing agent can refer buyers to another agent, or the buyers can go without representation - it's not your problem. Actually, as a seller, you would prefer that the buyer go unrepresented. Not only will you get a better price from the poor fool, you get to keep the Buyer's Agent Commission. But this way, the listing agent has no motivation to not present offers from other agents, and you can give them a flat $1000 to handle the paperwork so they won't shoo suckers away. You are perfectly within your rights, by the way, to make whether you are going to pay a buyer's agent commission part of your decision making process on offers, but it isn't a good idea to make too big a deal out of it. Most of the reasonable offers you get will be represented by a Buyer's Agent of some stripe.

Nor does it demotivate them from open houses and all that. It is more likely that the people I meet at open houses will want to buy something else anyway. Oh, I do sell listings through open houses - but the one who actually buys that house due to the open house is usually a contact of the neighbor who comes in with no possibility of buying themselves. Curious neighbors at open houses may be the most likely source of the kind of sale price that makes clients happy - if you treat them correctly. Internet marketing is cheap and easy and effective enough that it's worth doing just to get the listing commission. And when the property goes into escrow and people call about the ad in the monthly magazine I put an ad in, well I just find something similar if not better to sell them. Remember that I'm always looking for bargains, and I've usually got several properties in mind where the sellers are more desperate than I ever allow my listings to get.

This isn't all of the games that listing agents play to try and get themselves a larger commission. Many try to require a pre-qualification letter from a particular lender, which is over the border into illegality, or even requiring that you use their loan brokerage, which a dead center violation of RESPA - no borderline about it. I ignore either of these requests, and I'm not above bringing the latter to the attention of the Department of Real Estate. The vast majority of all pre-qualifications are worthless. Nonetheless, the tactics I've suggested cover you against them pretty thoroughly. One more worthwhile tactic if you don't follow my advice about disallowing Dual Agency is to walk into their office at random intervals, and insist that they pull an agent report - as opposed to client report that is all the general public is usually allowed to see - for your property in your presence and give it to you. You are allowed to see agent reports on your own property (and only on your own property), as the privacy reasons that restrict agents from showing agent reports to the general public do not apply. Look at the showing instructions. Does it say what you want it to? Are the requests for making offers restrictive? If not, you may have legal grounds to terminate the listing, and you should want to, because the reason MLS evolved the way it has is to encourage the widest possible interest in your property. A listing agent who wants to restrict that so that they can receive both parts of the commission is moving you back into the days of the single listing half a century ago, and that is not in your best interest, not for price, not for timeliness of sale, and not for the ability of prospective buyers to actually qualify.

Caveat Emptor

Original here

Here's the real issue about commissions: They need to be structured to incentivize good results - rewarding those agents who do good work, penalizing those who don't. The current structure, where the brokerage gets a flat percentage of official sales price - doesn't really motivate agents to perform. It really doesn't make a huge difference to the brokerage whether a property sells for $500,000 or $400,000. Assuming a 3% commission, they get $15,000 in the first case, while getting $12,000 in the second, despite that any monkey should be able to sell a $500k property for $400k. Basically, they get 80% of the reward for doing nothing, but that failure makes a huge difference for the property owners. If they owe $400,000, that's the difference between going on to their next property with about $60,000 in their pocket or coming up short about $30,000 and having to do a Short Payoff, with all of the resultant consequences to that family's future. Nonetheless, at 3% commission, all this means is the difference between $12,000 to the brokerage and $15,000. There is a dissonance between the interests of the owner, who this makes a $90,000 plus difference to, versus the agent who will still get 80% of the same paycheck if they do nothing but persuade the owner to accept the first lowball offer that comes along.

This dichotomy of interests encourages all sorts of games, from "buying a listing" (leading a homeowner to believe the property will sell for more than it will in order to secure the listing) to failing to negotiate hard to accepting too many listings to be properly serviced. If I can really service six listings, and I take ten, the individual selling prices will suffer while I make more money - ten times $12,000 is more than six times $15,000. Most agents - just like most people - will do what aligns with their personal interests.

The major alternatives - "net listing", where the consumer "nets" a certain amount and money over that goes to the brokerage, and "Flat fee listing" don't really float my boat either. The first has the advantage of pay for performance and severely discourages agents from over-promising on price; nonetheless the homeowner isn't motivated to maintain the property, and the agent is a little too motivated to wait for a better offer that isn't likely to come. As for the "flat fee listing", all that motivates the listing agent to do is get it sold - never mind the price. Whether the owner makes $60,000 by selling for a great price, or loses $30,000 by not getting so great of a price, that's all the same to the agent with a "flat fee" contract. But the owner wants it to make a difference to the agent, because they want that agent to get the best possible price, not just the first offer. As for the "flat fee in advance" listing, why should that brokerage want the property to sell at all? They've made their money already! If the property sells, now they have to do all that work and assume all that additional liability!

What we really want is a fee structure where the agent is motivated to get the highest possible price as soon as possible, the latter being more important than is generally recognized, as carrying costs eat profits very quickly, especially if the family vacates so as to show the property to best advantage and get the best price, or if they've already moved to their new home for whatever reason.

There should be several terms in this equation. It should take the form a+b+c+... For every factor the owner and the agent can agree upon having an effect upon consumer benefit, there should be a term in the compensation equation. Note that if the agent doesn't measure up in some way, any of these terms (except the one for doing the base paperwork) should be able to go negative. It's likely that good agents should be making more for listings than they are, while ineffective bozos quickly go bankrupt.

I'm not concerned with getting paid for a listing that fails to sell. In fact, I consider the concept anathema to a good agent - or any other business. If I do not get the job done, I do not deserve to be paid. Nor does any other agent or any other business. The world doesn't pay off on a good try (let alone a bad one), and my experience is that listings that don't sell aren't likely to have been a good try. I just visited a listing yesterday, a preview for a prospective client. Showing instructions said "vacant -go" Got there, it's a combo lockbox, but no combo anywhere. Spend half an hour in the front yard on the cellphone trying to get a combo from agent, listing office, the number the listing office referred me to, the number I was referred to from that, and so on. Finally gave up. How many others like me have there done that? Sounds like an agent who wants both halves of the commission to me, discouraging prospective buyers represented by other agents. Sound like someone you want to work with? Sound like someone you want to reward if you do inadvertently sign up with them?

This doesn't change the fact that if it does sell, there's a given amount of work no matter what the price is, and a given amount of liability. That's just part of being in this business. No matter how careful you are, no matter how good you are, eventually something is going to bite you. It's just a fact of life, and is the reason for E&O insurance. Just because I haven't been bitten yet doesn't mean it won't ever happen. The commission structure needs to recognize this fact of life, or it will fail. But this is not how agents should earn most of their money, and most agents don't do this paperwork themselves, but have assistants paid as little as they can get away with to do it. A flat fee of $1000 is probably about right in California. Enough to pay the rent, the utilities, and the receptionist who actually generates the paperwork off WinForms.

Performance pay is a separate issue, and should be a separate term in the equation. I'll happily pay $20 to make $100 ("here's another $20 if you bring me another $100!"). The most central idea of engaging an agent is to get a better price for the property. My client shouldn't be expected to pay me if I'm not performing services of value - enabling them to get higher price for a quicker sale and less. Any twit should be able to get $300,000 for a property that's worth $400,000. That's not a valuable service, and that's not something an agent should get paid for. If the agent can't get a good enough sale price to meet even a minimum test of benefit for the client, they should lose money. If the sale price is low enough, it should eat up even the base transaction fee, or even send the commission negative - the agent pays the consumer for so badly bungling the transaction. This is nothing unusual in other businesses. Even doing mortgages, I'm perfectly prepared to pay money out of my own pocket if I can't deliver a loan on the terms I quote (for reasons other than client not telling me the whole truth, that is!). The goal is complete consumer satisfaction, and taking money when my client doesn't benefit doesn't help my business in the long term either.

This performance pay should be steeper than current standards. Between ten and twenty percent is about what I think will do the most good. Give the agent a good solid incentive to want a higher price if they think its coming, while still reserving the lion's share of the benefit to the client. If I get Joe a price $20,000 higher than he would have gotten without me, Joe should be quite happy paying me a portion of that money by prior negotiated agreement. I would be ecstatically happy to do so in the reverse situation. And if you wouldn't happily pay it, I suggest you need a financial guardian because you're not economically sane. You want the agent to have a personal incentive to make that money for you. But it should be 10-20% of the excess or shortage relative to a base amount - whatever the seller and their listing agent think it could be sold without the agent benefit. It should also be based upon the sale price net of all negotiated "seller givebacks" not related to specific later discoveries (i.e. inspections and requests for repairs based upon them). I am talking about the NET sales price, not gross. If you have to give a buyer back $15,000 on a $300,000 sale, it's really a $285,000 sale, not a $300,000 sale. On the other hand, If an inspection shows unsuspected repairs costing $20,000 are needed, the seller would have to pay that anyway, and it's not the agent's fault that need exists. But the idea is that client benefit should translate into agent commission, and client detriment should translate into money out of that agent's pocket.

There should also be a healthy term built into the equation to reward or penalize the agent for a quicker sale or a slower one. This can be based upon a flat duration, or upon average days on market for properties in the same class. More expensive properties take longer to move - that's just a fact. But this component term should be based upon date of sale, and should be based upon a very high percentage of carrying costs for the property - about thirty to fifty percent, maybe even sixty. I'll happily pay fifty bucks if it means I don't have to pay a hundred - that is real savings! Say average days on market in a given market are roughly 120 from listing to close of escrow, and it costs $4000 per month to carry the property. So for every month above or below four months, at fifty percent carrying costs, the agent gets $2000 more or pays $2000. If it's a six month listing with no offers, the agent pays $4000 at the conclusion. This would force agents to learn what are and are not qualified offers, and force agents to live with the same kinds of tradeoffs that our clients do. No more, "Sorry that escrow didn't close. It happens," when it should be part of our business to know that that offer was pie in the sky in the first place. When it's their own pay being docked, agents will learn to do real investigation.

So far, the structure the ideal listing commission formula looks like this. $X basic commission, plus or minus $Y price performance (based upon 10-20% commission for over- or under-performing a certain price mark, plus or minus $Z time performance. Note that all of these are based upon demonstrable good for the client, and the client ends up with more money in their pocket as a result of every penny that agent is paid in incentive.

There should be one more flat component built in, contingent upon events. You don't want agents discouraging other offers, but you don't want them turning away foolish buyers who don't want a buyer's agent either. If someone is foolish enough to come in unrepresented by an agent, you don't want to shoo them away. So a fee for handling the buyer's end of the transaction is in order if there's no buyer's agent is a good idea - roughly half a percent of the sales price seems about right. Not enough that your agent is turning away offers made through other agents or pretending they don't exist, but enough so that they won't shoo any unrepresented buyers away, either.

None of this has any bearing upon the buyer's agency commission. That's a completely separate issue, and a separate article. But there are two issues you don't want happening to you. You don't want the listing agent discouraging buyer's agents so they can get both halves of the commission, and you don't want them shooing away an unrepresented sucker because it's extra work and liability that they won't get paid for.

Here's the really fun part: all of these terms need to get negotiated with every listing. Furthermore, it would tell a consumer quite a bit about whether they can really expect to get that listing price. I certainly wouldn't take a listing on terms which I wouldn't expect to get paid for, and neither would most agents (unless it's a "Hail Mary" to save their business).

As I've said, good agents would probably make more on this scheme, while poor ones will make considerably less, if they don't end up actually paying the client. You'd have agents advertising their average commission - paying a higher commission would do clients demonstrable good, rather than the standard "statistical studies show" argument NAR wants us to make. "Yes, I happily paid Joe $16,000 because because we agreed anyone could sell it for $250,000 in six months, and he closed a sale for $300,000 in thirty-two days." That's a five percent plus listing commission if the agent can pull it off - far more than any percentage I've ever heard of - that the seller was happy to pay because they demonstrably made more money and spent about $10,000 less in carrying costs! If an agent is that good, they can make that kind of money on every listing, and the clients won't be asking "What do you do to earn that money?" They'll be lining up to pay it! But to earn it, the has to deliver something good for the client, and if he can't help the client, he's going to end up owing the client money. Performance becomes the reason why agents are paid, individual performance for individual clients. It completely kills "buying listings", it completely kills "do nothing" agents as well as clueless ones, it discourages accepting more listings than you can service, it discourages working with more clients than you can handle, and it rewards agents who can actually get the job done better by the only universal measures - more money actually in the client's pockets sooner, with fewer carrying costs. The client benefit always leads to the agent reward - and client detriment always leads to agent penalty.

(the obstacles to it becoming standard practice are immense, because it would completely kill the idea and utility of National Brand Real Estate, or any branding above the individual agent level, and it's the big chains control the industry and lobbying - but that doesn't stop you from negotiating it for your own sale with an individual agent)

This does appear to be legal in California at least. It doesn't require any systemic changes - it all can be written into the listing contract, and it has no effect upon anyone other than seller and listing agent, meaning that if it's legal, there are no other interested parties, and a rational consumer would be as happy as a good agent to sign that listing contract, and happy to pay that commission, because it means they made even more money!

Isn't that what clients want? Isn't that what agents should get paid for? Don't you want an agent that's motivated for your benefit?

Caveat Emptor

Original article here

Found this on a public forum

I need help to stop foreclosure on my home. I need to sell quickly? I am a couple months behind on my payments and want to sell now. I am not looking to make a profit just need to get what i owe.

Boy, did the sharks swarm over that one! There were at least a dozen offers to purchase before I saw it.

Anybody will buy your house for half the market value. The mere prospect of a seller who is desperate and doesn't know any better sends these folks into paroxysms of lust - lust for the profit they're going to make on the property.

Contact an agent about selling at quick sale prices. Offer 2% or 2.5% to the listing agent, 3% or whatever is average or slightly above in your area to the buyers agent. Even a quick sale price should get you at least 80% of value. Yes, that will cost you 5%. But you'll come out with 75% of value net, instead of the fifty you'll get doing business with the sharks. If your loan balance is anywhere under 75% of the value, this puts more money in your pocket. If your loan balance is more than that, it means you'll owe less in taxes when the lender hits you with a 1099. Not to mention that trying to sell a short payoff without a good agent is an exercise in futility.

Now this is not to say that you should list it for 80% of your most fevered imagination of what it is worth. You need to sell, as in have someone offer a price that they can actually pay you, and quickly. You need offers. Ideally, you want multiple offers fast. You do this by not over-pricing the market value of your property, so that you will attract people who want to look, and they think it's a good price so they make an offer. The offer will not be full asking price, and don't waste your time hoping that you will get such an offer. Once that Notice of Default hits, everybody knows that you need to sell. To use one example I'm going through with a buyer client right now, if your property is a two bedroom place that basically looks like wild animals have been living there, and your list price is 99% of the three bedroom down the street, you are not going to get it, and you have a deadline, while your prospective buyers do not. You need to figure out what it is really worth by sales of comparable property happening right now, and then you need to discount that price by enough to make a difference. How much? Depends upon what your local market is like. That's part of what good agents get paid for.

Toss any concept of "negotiating room" or "getting what the property is worth" out of your head. Get your attitude completely out of the seller's market we had a few years ago. In this situation, all of the power is in the hands of the prospective buyers. If you won't sell for what they offer, the one down the street who is a little bit smarter, or a little bit more desperate, will. Sellers have little enough power right now without the deadline of foreclosure. People who need to sell have only the power to say no, and what happens if they don't say yes to someone? I'll tell you what happens: You get nothing. The chances are better of flying to the moon by flapping your arms than of getting some of your equity back out of a foreclosed property, even in the strongest of markets. Since your best alternative is lose everything you have in the property, that's not a strong negotiating position. This buyer does not have to have your property. They can go find a more attractive property, cheaper, from someone else. Their best alternative in negotiations is that they go find some other seller who will sell for what they want to offer. Negotiating position: Very strong. Net result, the buyer offers what the property is worth to them. If you won't take it, they only need a bit of patience to find something else that will. If you didn't need to sell, you could just hold on to the property, of course, but we've already determined that you don't have that option, and time is not your friend. A very large proportion of agents still have their heads in seller's market mode. Indeed, most of the major chains are still telling their agents to think like it's a seller's market. This kind of thinking is of no use in the present market, as residential property owners are re-discovering in San Diego County now that the things that drove the feeding frenzy have cooled off. Even during that feeding frenzy, there were properties that didn't sell. which is a warning now that the market has cooled again. When you consider the time constraints of selling under pending foreclosure, it behooves you to understand your position.

The only power a seller in this situation can get is by pricing it attractively enough that there are multiple offers that a good agent who's willing to work hard and really negotiate with all of them can leverage into something reasonable. Playing them off one against another is all you've got - and please note that the buyer who is willing to give the most is still going to get a better deal than they would have otherwise, because the thing that attracts them is that the property is a distress sale.

The sharks who buy properties for cash won't match the prices you get by selling through the normal marketplace. Ever. But even the normal marketplace does not reward you for being in a situation where you must sell.

Caveat Emptor

Original article here

I am continually horrified how many people shop their loans by APR, just as I am by people shopping their loan based upon payment. Why? Because in either case, you're setting yourself up to spend a lot of money in closing costs that most people will never recover. But you shouldn't choose a loan based upon APR, just like you should never choose a loan based upon payment.

There is always a tradeoff between rate and cost in real estate loans. If you want a lower rate, you're going to spend more in up-front costs to get it. This is a law of finance on the same order as the law of gravity, or Newton's laws of movement. Some lenders and originators have different tradeoffs, for better or worse, but they are always present. The question of rate should never be asked or answered on its own, but always in conjunction with the costs it takes to get that rate. If you keep a loan long enough, yes, you will eventually get back your upfront investment, but most people don't keep their loans nearly long enough.

Let's illustrate by example. Picking a random rate sheet from one lender as I wrote the original article (rates are much lower now), I had one thirty year fixed rate loan with a rate of 5.00 percent, and assuming an existing loan payoff of $350,000, and rolling costs only into the balance, an APR of 5.484, and payment of $1993. Looks better at first glance than a loan at 5.625%, with a payment of $2056 and an APR of 5.764. As other alternatives, 6.00 percent is available with a payment of $2119 and an APR of 6.048, or 6.375% with a payment of $2184 and APR of 6.375.

But here's what may not be apparent. As a matter of fact, it isn't apparent to most consumers. That 5.00 percent loan cost 4.8 points to get, and involved paying over $21,300 in total costs to buy the rate down that far. You're almost up against California rules limiting the total costs of a loan to 6% of total loan amount. The loan at 5.625% is done with a single point, and costs a grand total of $7070 to get done. The loan at 6.00% requires no points, and costs a grand total of $3500. Finally, the loan at 6.375% is a true zero cost loan.

What this means is that that getting that 5.00 percent rate is a nonrefundable $21,300 bet that you will keep that property and that loan long enough that the money you save in interest every month will be more than that upfront cost. It takes 141 months for that loan to do that as opposed to the 5.625% loan - almost twelve years - when you consider time value of money. It takes 108 months - nine years - before it pulls even with the no points loan at 6.00, and 92 months - over seven and a half years - before it pulls even with the zero cost loan at 6.375%. The 5.625% loan (a $7000 bet) doesn't start in first place either, but it does get there a lot more quickly. It takes 55 months - four and a half years to pull in front of the 6.00% loan, and 53 months to pull in front of the zero cost 6.375% loan. That poor 6.00 percent loan for no points is the only one that's never the absolute best choice - it takes the exact same 55 months to pull in front of the zero cost loan as the 5.625 takes to catch it, but since you're only betting $3500, at least you've lost less if you refinance or sell before break even, which most people do. Last time I checked (a few months ago), the median age of mortgages in the United States was 28 months - just about half the time that any of the other loans takes to pull even with the 6.375% loan that doesn't cost a penny, either out of pocket or rolled into the balance.

Let's consider how much money you'll be out if you refinance after 28 months with that 5.00 percent loan (or sell the property), like approximately half the population will. Your balance is $18,860 higher than the zero cost 6.375% loan, while on the plus side you have saved $1288 in payments. On the minus side, however, if you get another loan, you still have to pay interest on that $18,860. Whether it's because you sold that property and bought another, or a refinance loan comes along that you like better, it means a loan balance $18,860 higher even if you don't pay points on the new loan. You're still paying for your old loan, while all of your benefits stopped on the day you let your old lender off the hook by selling or refinancing. Admittedly, the chance of this happening is lower as you get to lower and lower rates, but it's still a bad bet, in my estimation. People not only sell, they want cash out, they want debt consolidation, the list goes on and on. If you get another 5% loan, you're paying $943 extra per year because of that higher balance. Alternatively, if you kept the extra in your pocket and invested it elsewhere, a 9% rate of return would mean it would cost you $1697 that first additional year. So far, I haven't worried about tax deductibility, but it works against the higher cost loan, making the picture even less favorable.

I need to note that these were honest calculations. The ones you encounter won't always be. Sometimes, they're based upon the payoff balance - in other words, calculate the payment for that 5% loan as if you were going to pay all of the costs in cash, even though the loan officer probably knows that's not going to happen. This would allow them to quote a payment of $1879. It also assumes they're giving you an honest quote on your MLDS (California) or Good Faith Estimate (the other 49 states) is accurate, as the APR is calculated given that information. If the underlying document is inaccurate, and I've covered how badly lenders can legally lowball, then the resulting payment and APR calculations will therefore be too low.

Now the difference between the two numbers, APR and APY, can give you a certain amount of information if you know how to use it, assuming that the loan officer tells you the truth, unlikely though that may be in some cases. I'm going to assume you've got a financial calculator or can do the calculations yourself, because none of the ones I've seen on the web are up to this task. Furthermore, this is only an approximation of the actual computation method, so there will be a small amount of slop in the calculations, but much smaller than the eighth of a percent fixed rate loans quotes are permitted to be erroneous. Using the term of the loan, the payment, and the contractual note rate (APY), tell your calculator to compute principal value of the loan - in other words, the new balance. This may not be accurate in and of itself, and that will tell you there's something funny going on with the numbers. Then repeat the calculation with APR substituted, which should give you the balance less the cost of loan, albeit with third party fees (appraisal, escrow, title) still in the amount as those are excludable from APR calculations under Federal Reserve Regulation Z. The difference in the two numbers tells you the fees the lender is charging - or the ones they're willing to tell you about, anyway.

Note that the "spread" or difference between APY and APR gets larger as costs get higher or the term of the loan being contemplated gets shorter. The reason is that these costs have to be paid off over a shorter period of time. It also increases for smaller loans and decreases for larger ones. If you have to pay them off over fifteen years instead of thirty, the difference gets much larger. That 5.00 percent loan that had an APR of 5.484 with a thirty year loan term goes to 5.834 with a fifteen year loan term - not quite twice the difference, but nasty enough!

Despite the fact that the person refinances about every three years, APR is always calculated upon the consumer keeping the loan for the full term, which isn't likely. Ninety-five percent of everyone has sold or refinanced within about seven years, and this number climbs towards an effective 100% for loans that begin adjusting before that. Sure, you could theoretically keep a hybrid ARM (although not a Balloon) after the adjustment, but nobody does.

With that in mind, let's calculate APRs of each of these loans assuming you'll refinance after 36 months - significantly longer than the fifty percent mark where half of the country has refinanced or sold the property. The 6.375% zero cost loan still has an APR of 6.375 - because it has no costs to recover. The The APR on the 6.00 percent "no points" loan, which only has $1800 of non-excludable costs (see Regulation Z), doesn't go up much - to 6.391. The 5.625% loan you can have for one point jumps up to 6.643 APR, and the APR on that loan that the people shopping by APR or payment will choose - the one with a 5.00 percent contractual interest rate - skyrockets to 8.663%! If you only end up keeping it three years - beating out median age of loans in the country by better than 25% - this loan is the worst of the choices I have presented, not just by calculation of money spent, but even by calculating APR honestly.

If I had to pick a few things I could pack into a sixty second public service announcement to tell all 300 million people in this country about real estate loans, the fact that they're severely unlikely to keep the loan for anything like the full term would be one of those things. People just assume that they're going to keep a loan for the full term, but then they don't actually do it. Meanwhile, all of the calculations that are made presume that they will, even though that presumption is nonsense, and making those calculations on that basis will actually cause many consumers to make erroneous decisions, because they paint the facts as something other than what they are. If gravity was a tenth of what it is, we could all fly in the manner of Daedalus as described by myth. But those pesky facts keep getting in the way, and over half the people who take out thirty year financing don't keep it for even one tenth of the full term. If you're wasting nearly nineteen thousand dollars of your money every three years, as the people here did once, those facts will have an ugly tendency to bite you just as hard as they will any modern day imitator of Icarus.

Caveat Emptor

Original article here

I've written a lot here about how to manage your mortgage so that you control it instead of it controlling you.

Let's consider what happens when that project fails.

If you don't pay your mortgage, on time, no big deal at first. The lenders don't like it, but there's a grace period built in. Make your payment within the grace period and you're golden. Fifteen days later, the first consequence is that you owe the lender a late payment penalty. It's a doozy, typically four to six percent, depending upon where you live. Here in California, it's four percent. Doesn't sound like so much, but four percent for fifteen days is the equivalent of ninety-six percent annualized interest, over three times the most horrible credit card I'm aware of. I don't like paying ninety-six percent interest, and neither should you. Don't get fifteen days late if you can help it. But once you've paid the penalty and brought yourself current, nobody knows and nobody cares.

Suppose you get to thirty days delinquent - one full month. At this point longer term consequences set in. First off, your lender marks your credit as being thirty days late on your mortgage. This is a big negative as far as everyone goes, and can easily make a difference of 100 points or more on your credit score. Additionally, if you are applying for a mortgage loan (or plan to), you just got a "1x30". For A paper, this means that if your credit is otherwise perfect, you barely slide through. For subprime, this makes a difference on your rate. It takes two years for this to work its way out of affecting your mortgage application, even if your credit score recovers.

Most people end up being thirty days late for several months in a row, each month hurting their credit score, before it goes to sixty days late. They missed one payment and struggle but manage to make several more before they miss another. Occasionally, they go straight to two months late. Either way, it's a Bad Thing. A single "1x60" might scrape through A paper if there's no cash out and your credit is otherwise perfect. Otherwise you are subprime for at least two years. In the subprime world, a "rolling 30" is generally not as bad as a 60 day late, but both are steps down from even a "1x30" and a "rolling 60" is worse. It gets worse yet if you pay your way current and then backslide again. And of course, you are paying penalties and interest is accruing on your loan and you're falling further behind every time you are late. This amounts to a notable chunk of change very quickly. So none of this is good.

On the other hand, depending upon the state you live in, until you get to ninety or 120 days late the situation doesn't become dire. Each state's foreclosure law is different, but once the lender has the option of marking you in default, the situation gets uglier. It is a common misconception that lenders like foreclosing. In actuality, only so-called "hard money" lenders will usually start foreclosure immediately upon eligibility, especially if you've been talking to them about your situation. If they have some real reason to believe yours will eventually become a performing loan again, regulated lenders will cut you significant slack, by and large. It costs lenders a lot of money to foreclose and there's always the risk they end up stuck with the property, so they'll usually give you as much leeway as they reasonably can. One thing I keep telling people who want a loan approved based upon the equity in the property alone is "The lender doesn't want your house. They want to make loans that are going to be repaid. The lender is not in the business of foreclosure. They don't make any money on it."

Nonetheless, even the most forgiving lender is going to eventually hit you with a Notice of Default. At this stage, things are starting to move towards a resolution that nobody likes, you least of all. At this stage, you are now liable for a large amount in extra fees that was written into your contract to cover the lender's cost of going through the foreclosure process. At this point, the lender has the right to require you to pay the loan all the way current, with all fees, in order to get them to rescind the notice. Refinancing becomes almost impossible, except with a hard money lender, and unless something about your situation has suddenly changed from what caused it to get to this point, that is only delaying the inevitable and making it worse.

As soon as that Notice of Default is recorded, your situation becomes part of public record. You are going to get calls and letters and everything else coming out of the woodwork. One category is going to be lawyers, who will typically tell you they can keep you in the house a long time without payments by declaring bankruptcy. Well, this is true as far as it goes, but it's not going to make the situation any better. As a matter of fact, it will steadily get worse. Just because you go into bankruptcy doesn't mean that the penalties and fees and interest go away or stop accruing. They are still there, and they keep coming. I'm not a lawyer, and you should consult both a lawyer and an accountant if you are in this situation. Nonetheless, bankruptcy is not something I would even consider in this situation without something highly unusual going on.

The second group that will contact you are the "hard money" lenders, looking to lend you money at 15% with five points upfront and a hefty pre-payment penalty, to buy your way out of the situation. Once again, unless something about your situation has suddenly changed, not a long term solution, and it only makes it worse.

Another group that's going to call is investors looking for a distress sale. They want you to sell it to them for less than it would otherwise be worth. This is actually something I might consider. Yes, I lose some money, but that's better than going through denial with the lawyer for a year and a half while any equity I might have left gets frittered away in interest and fees and penalties, not to mention paying the lawyer.

The final category, and one with a significant overlap from the previous, is real estate agents looking to sell the property for you. Assuming you're not deep in denial, this is probably the best option as to least unfavorable resolution. The drawback is that it depends upon whether somebody will make an offer in a timely fashion, a factor which is not under your control. No matter how great the price, no matter how hard my agent works, there might not be an offer. It happens.

Of course, you also have the option of doing nothing. It's not a good option, and if you don't do something it pretty much guarantees that you're going to suffer the worst possible fate. But it is an option. Better is to take action before it gets even this far. What the best action is depends upon your situation and whether whatever caused your inability to pay is transient and in the past, continuing, or permanent.

If you do nothing, eventually a Notice of Trustee's Sale will follow the Notice of Default. In California, there are a minimum of sixty days between Notice of Default and Notice of Trustee's Sale, and it easily be more. Seventeen days after the Notice of Trustee's Sale, the property gets sold at auction (unless you've somehow brought it current or sold the property). There are some protections in place here in California. The lender must perform an appraisal, and for the property to sell at auction, the minimum bid is ninety percent of this amount. Nonetheless, these are typically very conservative appraisals by design. At this point, the lender wants the property sold at auction, because if it doesn't sell, they own it, and they don't want to own the house. They are in the loan business, not the real estate business. So a house that may be actually worth $500,000 on the open market gets appraised at $400,000, and sold for $360,000. If the loan was for $250,000, that's $140,000 of equity you allowed to be taken from you because you were in denial, when you probably could have saved most of it. And if the loan with penalties and fees and interest was $450,000, that's worse, and not only because you forfeited $50,000 you could have gotten, and not only because they may be able to go after you in court for their loss in some situations.

You see, because the lender took a $90,000 loss, they want to write it off on their taxes. And in order for them to do this, they have to hit you with a form that says you got away with $90,000 from them. This is taxable income!. As of this writing, there's a temporary tax law repealing it, but that repeal will expire, and your state may get in on the action as well. So normally, the IRS comes after you for the tax on the $90,000. IRS liens are one of the things that is not discharged by bankruptcy, and it stays with you forever. Ten years absolute minimum for any purpose. Sometimes your lawyer, CPA or Enrolled Agent will get you an "offer and compromise" that cuts your liability, but that's technically taxable income also and may be subject to another round of this crud. It it seems like to you the system is rigged so you can't win, you're right. The loan was an obligation you agreed to, and took the money for, and taxes are on obligation of anyone who is a citizen or resident.

The smart thing to do? As soon as you realize that you can't make your payment, take a long look at your situation and decide if this is something that's going to get enough better to make a difference, or not. Then figure out how much equity in the property you have.

If the situation is likely to improve, and you'll start making your payments in thirty days because hey, you just started your new job, that's one thing. Most of the time, however, most folks lie to themselves on this issue, for a variety of reasons. Remember: Denial Digs Deeper, and makes the situation worse.

Even if selling the property isn't going to net you anything, it's still worth doing as it gets you out from under the situation. Your credit score stops dropping, you quit getting marked late by your lender, you quit getting socked with penalties and interest and fees you can't pay. The IRS obligations you are incurring stop.

Particularly if you have significant equity built up, the sooner you contact a real estate agent to sell, the better off you will usually be. You are going to lose the house if you don't sell. The sooner you sell, the lower the penalties and fees and extra interest you are charged by the lender will be. This translates into dollars in your pocket - dollars you are likely to need. If you can sell before the Notice of Default is filed, so much the better, as that's thousands of dollars right there. You don't have the luxury of taking your time about it, though. Taking the first reasonable offer is highly advised, and you have more time to get a reasonable offer if you start sooner. Once a Notice of Default is filed, it's a matter of public record and so your bargaining situation gets a lot worse because the buyer should know that you are over a barrel, metaphorically speaking, assuming their agent does their homework. Considering that it's two or three clicks of the mouse, it's easy homework to do and even the greenest new agent is going to catch it more often than not.

Trying the various delaying tactics with a lawyer is likely to end up costing you more than a quick sale. Even if you remain in bankruptcy for five years or more, within about a year and a half at most, the lender will almost certainly persuade the court to cut the home and loan out of the bankruptcy as a secured debt, and sell it. Since the loans and penalties and fees and interest kept accruing all this time, you end up with less money - or none, along with a little love note from the IRS that says "You owe us thousands of dollars! Pay up NOW!"

Every situation is different. At a minimum, consult a loan officer, lawyer, accountant, and real estate agent in your area. But when all is said and done, what I've talked about is the way most of these end up.

Caveat Emptor

Original here

Related article on "Short Payoffs".

We aren't married. How do we buy a house together?

It is highly advisable that you consult an attorney as to how you want to hold title, but that advice holds true even for a married couple. To protect partners acting in good faith from those acting in bad, some kind of partnership agreement that gives the other parties rights to recover any extra they paid to keep the partnership out of trouble, if one or more of the partners can not or do not make their share of the payments on time. But that's extra, not a part of the purchase or finance processes, and you can certainly buy a property with basically anyone. It's one of the most basic of rights here in the United States. Convicted felons, jail inmates, illegal aliens, and people who have never set foot in the United States can all buy property here, as long as they have the money or can persuade someone to lend it to them.

The fact that people are not married means basically nothing to the loan qualification process, either. The guidelines are exactly the same either way. Yes, there are complex variables as to how you qualify, and what loan you qualify for. But people who are married but aren't going to be living together are treated the same as two random business partners, except that married people can put all of their joint information on one application. You can have any number of people on title to a property, or responsible for a mortgage. The major thing to watch out for is that they must qualify as a group, and almost always under the same set of qualifications. If one person has to do stated income, they all might as well be stated income, because they're not going to get full documentation rates anyway - or at least that was the case when we had stated income. The same thing still applies to credit: the weakest partner determines the loan qualifications you use and whether you qualify - exactly the same as if they were married.

Caveat Emptor

Original here

One of the consumer attitudes I encounter constantly is the feeling that if you cannot afford the loan, the lender will not loan you the money. This safety zone common sense sort of reliance upon lender policy as a backstop is not only false, but one of the best ways to get in trouble with real estate there is. Even with lender meltdown going on, the only thing you're safe in assuming is that the lenders want their loan to be repaid in the event of default.

Once upon a time it may have been true. Back in the dim times fifty years ago, lenders required down payments, and retained their loans for the full duration. This provided at least two levels of protection for the lender. First, if people did default upon their loan, that down payment was a cushion for the lender in that the property was genuinely worth more than the lender had at risk. All real estate loans were done "full documentation", where the borrower proved they made enough money to make the payments and repay the loan. Underwriting rules were designed to filter out those whose employment was not stable enough, those who couldn't afford the loans, and those whose creditworthiness was marginal. Of course, back then most folks worked for The Company their whole lives, too.

At the same time, however, real estate was far more affordable. The inability to get a loan on good terms meant that you were a little further away from the middle class house of your dreams, that you were going to have to save a little more, work a little harder, and perhaps settle for something less than you really wanted, but you could still have a good property. 800 square feet on a fifth of an acre, instead of 1200 square feet on half an acre. These really were typical property choices available then. You saved until you had forty or fifty percent down, instead of twenty, and then you maybe had to look a little bit harder, but it could be done, and people paid cash for their properties all the time. A three or five thousand dollar property was something that people could save the money to pay cash for, even at seventy five cents per hour.

That's not the case now. Even though people may make $40,000 per year, and the family has two incomes, they are not content with the lifestyle of fifty years ago that enabled people to save a down payment within a couple of years. Nor is employment as stable. People don't work forty years for The Company any longer.

The changes on the lender end have been even more profound. Lenders discovered making stock valuations rise as a primary method of becoming wealthy. Where once the most important thing to the stockholders was to have every single loan repaid in full, now it becomes more important to have portfolio growth, which makes potential investors willing to pay more for existing stock. Then it became unnecessary to actually hold loans until they ran their course, as investors were willing to pay more than the face value of the loan for the rights to receive payment! Those nice dependable mortgage bonds were good as gold! Matter of fact, the money the lenders received by selling the loans was (and is) several times higher than they made by holding the loans. True, they might only make three to four percent from selling the obligation, as opposed to seven percent for the obligation itself, but they could do it in two to three months, as opposed to the entire year. In fact, they could go through the process four, five, or even six times per year: Receive a loan application, provide the funds on a short term basis, and then sell to investors for a three to four percent markup. Instead of earning seven to eight percent on their money per year, they were now earning twenty or twenty five. They could even retain servicing rights and make money there, as the investors had no idea how to run the loans, and make even more money. Stock prices would show the effects of growth, as investors expected them to be able to keep in up, and current stockholders could cash out for huge gains by selling part or all of their holdings.

However, you now have a new group of stockholders, who bought - or held existing investments - in the belief that this growth curve could be maintained. They want that growth to keep going - however are they going to sell for a big profit if it doesn't? If the growth doesn't continue, how are performance awards to management going to be paid?

And so it goes. Growth begets a need for more growth. Now there's nothing wrong with growth - quite the contrary - but when the expectations shift over time from a two or three percent annualized growth curve, to eight or ten or even thirteen percent, it creates an expectation that no one wants to fall short on. Furthermore, other people with money, seeing the rewards, join in the lending business. Joe made fifty percent in two years with Bank of Nowhere in Particular! Let's all invest in that bank! They'll double our money in three years!

The fact of the matter is that there is only so much revenue growth that can be had in any given set of economic conditions. When you try to overshoot that amount, it can come from very few places. First, it can come at the expense of the competition. Unfortunately for that hope, the lending market grew ever more competitive, not less, until the last few years. Second, it can come from places that weren't a part of the market previously - in other words, people who were not good credit risks or who would not have applied in previous markets. The reason most of those would not have applied is that they are less credit worthy, and they know it as well as the lenders do. Third, growth can come through individual loans being larger, being willing to loan more money per property. This has also happened, but you cannot loan more per property without subsequently having more at risk, although the lenders have learned how to solve this. Remember that we discussed them selling the loans? Well, that's how the lenders limit their risks - by selling to someone else for cash. Let them assume the risks!

So we have increased competition for borrowers, including those who may not have been as solidly credit worthy as a previous day's client. There are more lenders competing for limited pools of borrowers, and pressure to qualify the borrowers for increased loan amounts, because, after all, that's how the bank makes money.

Furthermore, shifts in consumer habits played into this. People don't live in the same house for as long, and they don't keep loans nearly so long as they once did. Where they once lived in the same house from the time they bought it until they died, now the first house they buy in their twenties is a "starter," and then they sell that and buy a trade-up when the family expands a little, then another when they move up the corporate ladder, and this leaves out the effects of transfers and changing employers. Furthermore, they refinance and take cash out when they want a bigger SUV or a European vacation, and then they take more money out when the rates go down because they can afford a larger loan on the same payments.

The increased prevalence and availability of the stated income loan played right into this. Certainly, some people in your profession make that much, but what if you're not one of them? Simply say that you are! After all, you're in that profession, right? Furthermore, there is no payoff for telling people that they don't qualify. They've made up their mind that they want that three thousand square foot six bedroom house, and if you tell them they don't make enough, they're not going to give up their dream house! They'll just find another way to do it, so someone else will get that loan! That nice, wonderfully wonderfully large loan that means a huge commission check to the loan officer and a forty thousand dollar premium on the secondary market for the lender!

Traditionally, the check upon this was the fact that the borrower had to actually make the payments on the loan once they had it, which limits their ability and willingness to sign for more loan than they can handle. However, competition between lenders once again found a way: First, the interest only loan, and then the negative amortization loan solved that problem for a while, particularly as sub-prime lenders made their qualification for the loan based solely upon the initial minimum payment. Whereas when A paper lenders underwrite a hybrid ARM that's interest only for a given amount of time, they will base their computations upon a fully amortized loan payment, and even assume the rate will rise, that was not the case in the sub-prime world. Sure they've bought the property on a 2/28 interest only loan with a three year prepayment penalty, and they bought in a flat or declining market, and they are not going to pay the principal down any in two years, and the property isn't going to be worth any more, so it's unlikely they will be able to refinance, and they certainly won't be able to afford the payments when they adjust, so they're going to lose the house, but hey! You got a commission check and your lender sold the loan (at a fat markup due to the prepayment penalty), and your employer won't have any money at risk when they do default! What's not to like?

The Era of Make Believe Loans, as I call it, is now completely over. But how is a consumer going to protect themselves in that sort of environment? Obviously, you've got to start by figuring out a budget and sticking to it. This is hard. This is very unpopular, as far as real estate professionals go. When I sit down with people's finances and tell them what they can afford with a sustainable loan, the first words out of their mouths are usually, "I can't afford anything I want with that!" A certain percentage of them just walk out right there, sure that they can find someone else who will tell them they can afford more.

As I've just covered, they certainly can find someone who will tell them that they can afford more. However, the reason I sit down and go through the numbers, including today's rates, what they make, how much they spend, is to show them precisely what they can afford. When somebody shows you real numbers and you deny those numbers, and are certain you can afford more, you are essentially performing magical thinking. "I want it and I deserve it, and this other guy tells me I can just pull myself up by my bootstraps and fly up to get it!"

However, loans aren't magical. In fact, there is nothing magical about loans. You may get a negative amortization payment that you can afford for a while, but the money that you are not paying does not just vanish into thin air. It may be held in abeyance for a while, but it is there, and it will turn around and bite you. You wanted a $600,000 home for a $2000 monthly payment, and you got it for a little while. However, you now owe $680,000 and the property (which you put $50,000 down on) is now only worth $540,000. It doesn't take a genius to see what happens next. Even if the property increased in value by $100,000, it costs you $55,000 to sell the property and you have to pay $15,000 of their closing costs so that they can qualify for the loan, and that fifty thousand dollars you put down has turned into nothing.

A rapidly increasing market, such as we had for several years ending about the end of 2004, covers a multitude of sins and mistakes. If the property doubled in price over three years, you came away with $400,000 and you were very happy! Unfortunately, this is not the type of market we are in now, nor are we likely to have that sort of market any time again in the foreseeable future. It's always a bad idea to bet on it, because you never know it's going to happen ahead of time.

So what are you going to have to do? As I said earlier, figure out what your real budget is in terms of purchase price and stick to it. If you can't afford anything you want, then want less. Insist upon sustainable loans, and qualifying for them full documentation. Full documentation loans have better interest rates anyway. Fully amortized loans, where you are paying principal and interest, have lower interest rates, as well, and if you stick with A paper guidelines, you get better interest rates and can usually avoid pre-payment penalties.

"I just won't buy anything if I can't afford what I want!" some of you are saying. Right now, with prices retreating somewhat, it may even make a limited kind of sense for those with strong credit and stable prospects. However, the market here locally is not going to retreat that much more. Indeed, where prices are is currently being masked by a stubborn type of seller and a not very competent or honest stripe of real estate agent. It doesn't matter that three fourths of the sellers want $X for property of given characteristics, if the sales that are taking place are $100,000 lower. If this seller won't sell, someone else will, and it is the sale that actually happens that tells where the market is, not the hundred comparable properties where the asking price is $100,000 higher.

However, real estate, even in markets that are rising just slightly, is such a fantastic investment due the the effects of leverage, that I've been telling people that I do not anticipate the local market going much lower, . Indeed, very smart investors are swarming, intending to hold the property five years or so instead of flipping it. Yes, we've lost about thirty percent from peak prices, more in some niches. When things turn around a turn which has been delayed by our current government's economic mismanagement, they're going to turn hard - and the longer it takes the stronger it's going to be. People who decide to sit on the sidelines because they can't afford anything that they want will discover themselves to have been priced out of what they could have afforded then. If you've got a family of three and don't want a two bedroom condo even as a temporary situation, what are you going to do when you can't afford that?

Caveat Emptor

Original here

There's a lot that gets written on this subject, mostly by loan officers looking for business. Well, don't think I'm not looking for business, but not with this post. Or if anybody calls me because of this, at least I'll know they understand how to do it right.

The basic come-on is this: Your home has appreciated in value, and is worth more than you paid for it, so now you have equity on the one hand. On the other hand, you have loads of consumer debt, which is costing you hundreds or even thousands of dollars per month, which is impacting your lifestyle. So you borrow on the equity in your home and save money on your payments as well as causing them to be tax deductible in most cases, or at least so the traditional thinking goes. In actuality, it's only the actual purchase money where the debt is tax deductible, while cash out is not. My understanding is that the IRS has been starting to crack down on this.

Let's illustrate the situation with some numbers. Let's say Arnie and Annie have a $300,000 loan on a home that they bought in 1998, and comparable properties in the neighborhood are now selling for $600,000. This is 300,000 in equity.

On the other hand, because they are American consumers, Arnie and Annie have a hard time living within their means. They've got $15,000 in consumer credit, a $10,000 home improvement loan, and two new SUVs with associated debt of $20,000 and $30,000. These are fairly typical numbers.

Arnie and Annie's mortgage payments are currently $1720 per month, because they refinanced to 5.25% in 2003 when the rates hit bottom. Their monthly payments on the credit cards are $400. The payments on the SUVs are $500 and $600 per month, respectively. The payment on their $10,000 home improvement loan for landscaping is maybe $150. Arnie and Annie are forking out $3370 per month without taking into account stuff like property taxes, insurance, utilities, etcetera. It's really cramping their lifestyle.

Suppose they consolidate these loans into one payment on a thirty year home loan? All right, so it costs them anywhere from zero to $20,000 to get the loan done. Let's split the difference and say $10,000. That's about two points plus closing costs.

This adds up to a $385,000 loan. When I originally wrote this article, that was a jumbo loan amount, but that is no longer the case. With a 30 day lock, that would have gotten you 5.875% or thereabouts when I originally wrote this on a thirty year fixed rate loan. The new payment: $2277. Voila! Despite the higher interest rate, Arnie and Annie are saving almost $1100 per month!

Or are they? On the credit cards, their monthly interest was $225; their $400 payment would have paid the cards off in less than five years. The interest on the SUVs was $333 total on the two, and their payments would have had them done in about five years. The home improvement was a ten year loan but even so their monthly interest was only $75. Now these are all thirty year debts. The monthly interest on their old home loan was $1312. The interest charges on their home loan is now $1884, where total interest was $1945 previously. So they are actually saving money on interest.

The difference is that now they're not paying the old loans off as fast - they've spread the principal over thirty years. In the meantime, the bank is getting all this lovely money in the form of interest from them, and if they refinance about every two years as most people seem to do, this is $85,000 more that they owe on their home, and that Arnie and Annie will pay points and fees on every time they refinance! Meanwhile, Annie and Arnie are quite often out charging up more debt they'll consolidate into their home loan, and they'll keep doing this trick for as long as they can.

Let's assume Annie and Arnie beat the odds and don't refinance for five full years. This puts them ahead of 95 percent of the people out there. Let's look at where they'll be five years out if they make the minimum payment. They will owe $357,700 on their home. On the plus side, they will have had $66,000 to spend on other things (and they likely will, if they are typical Americans). Total debt: $357,700.

If they had continued making their previous payments, they would now owe $272,100. Plus they would be done with the SUV's and the credit cards and would only owe $6600 on the home improvement loan which they could now concentrate on. Total debts: 278,700.

Net difference: $79,000. Subtract that $66,000 they had real good time with (and nothing to show for), and they're still $13,000 in the hole.

They do have a $572 per month potential additional deduction, assuming they are willing to risk the wrath of the IRS as the "cash out" is not supposed to be deductible and the IRS is getting better at picking it up. Assuming they are in the 28% tax bracket and get to deduct the full amount, that gives them $9,600 less that they owe the government in taxes. Net amount Annie and Arnie are out are out: $3400, in addition to being set up for higher fees on future loans, and having a loan balance $77,100 higher. Additional interest they will pay because of the higher balance if they can get a loan at 5 percent even: $3855 per year.

Sounds like an awful bargain doesn't it? Many consumers have done this three and four times, or more. I run across people who bought their home in the early 1970s, and have mortgage balances ten to twelve times the original purchase price.

That's doing it wrong. Now I'm going to talk about doing it right. Suppose that instead of milking our equity for cash flow, where we're trying to minimize our monthly payments, we do it differently. Same situation, same numbers, but instead of spending that $993 per month, we use it to pay down our mortgage.

Actually, let's pay $3300 per month, so we still have $70 per month to spend elsewhere. After five years, we still owe $286,600. We got $4200 to spend elsewhere. And all of our other debts are gone. In addition, there's that illicit $9600 in tax reductions. Net amount to us versus the "do nothing" option: $5800, although we still owe $8000 more, and if we get a 7% loan, that'll cost us $560 per year. Notice that at this point, the benefits, while tangible, are still fairly small. Furthermore, if we refinanced or sold before this point, as ninety-five percent of everyone does, any benefits we may have gotten in the future disappear.

But: If we keep making that $3300 payment after those five years, and don't roll anything more into the loan, then the mortgage is paid off and we are debt free - the house is paid off, and the other debts are history - in less than ten more years! This relies upon us being thrifty and keeping those old SUV's going and not charging up any more credit and not doing anything else to make the debt worse. In short, not giving in to the marketing culture, not forking over money you don't have, not running up the payments on consumer stuff again. Many people say they won't. Few actually manage it.

So you see, even if you do it right, it takes years to show the benefits of this kind of refinance. This is years of doing something that they do not have to that most folks just won't do. If you have an unsustainable cash flow situation, by all means you've got to do something about it, but don't kid yourself that it's financially fantastic. On the other hand, if you're one of those who have to ability to make the scenario in the last paragraph (or something like it) happen, it's well worth doing.

Now this hypothesis is highly sensitive to initial assumptions. I previously assumed that Annie and Arnie are and always have been top of the line borrowers, able to qualify for anything. Suppose they weren't? Suppose they were in a C grade loan at 7.25%, but now they qualify A paper at 5.875. With a payment of $2070 per month formerly, of which $1812 was interest, the new loan saves them $1450 per month in minimum payments and $561 in actual interest while still saving about $1209 on their taxes over five years. You'd have owed $288,000 on the old program, now even if you put in only the same $3300 per month in payments, you're $1400 ahead of where you would have been on the balance, and you still had about $400 per month to spend. On the other hand, if Annie and Arnie were A paper but now they are applying for a C grade loan, it cannot be justified on anything except "the cash flow keeps us out of bankruptcy!" because it's financial disaster.

Some alert people will have noticed I didn't explicitly include the $10,000 cost of the loan in the computations of whether you're better off. That's because it is gone, sunk, included in the computations of where you ended up. It was part of your initial loan balance if you did it, included in the ending balance, and therefore included in the computations of whether you were better off. Now, if the cost of doing the loan were lower, there would be somewhat larger benefits a little bit faster, and indeed a lower cost loan is probably a better idea for most people, even though it means the rate and payment will be slightly higher. See my article on Why You Should Ignore APR for more.

The important thing to remember is to not get distracted by the fact that your minimum monthly payment goes down, and see if you (and your prospective loan officer) can come up with a loan and a plan that really makes you better off down the line, instead of one that sucks the life out of you financially, like the vast majority of these scenarios do.

Caveat Emptor

Original here

Don Henley has a fun song off his second solo album called "Driving With Your Eyes Closed". I can't find a video performance, but here are the lyrics. It's got a chorus that ends with the line, "You're gonna hit something /but that's the way it goes."

A lot of what I read about the real estate markets reminds me of that song. Mostly, people are looking in a rear view mirror myopically, and think that's going to tell them where the market is going. Not so.

Let me tell you the most important "secret" about the real estate market - or any other market. Short term results are mostly about mass psychology. People are so into what is happening right now that they will react to it the same way as everyone else without thinking, whether it's fear and greed driving the market up or fear and greed driving it down. The short term, in real estate, is this year, next year, and maybe the year after. But the actual real estate transaction is expensive. It can cost you a couple percent just for the transaction to buy real estate, seven to ten percent to sell, so you've got to clear ten to fifteen percent higher price just to break even on the costs. Those costs will more than pay for themselves, but they are there. An average year in my market is about 5% up, and 20% up in one year is one of the best years local real estate has ever had. Short term flippers work by different parameters than most consumers, but these are the market factors most people have to deal with. It takes about three average years to break even on the costs you have to pay for the transaction.

This is enough to take the majority of real estate investing out of the frame of the short term market, controlled by mass psychology, and into the realm of the medium to long term market, where psychology is a factor, but as time goes on, more and more of your investment results are controlled by pure economics. Supply versus demand. How much people who want housing make. What the interest rate environment is like. Oh, and don't forget the effects of government and public policy. When somebody says, "The market has dropped in the last three months, therefore it's going lower" that is no more correct than the opposite which we had four or five years ago: "The market has been going up - five percent in the last three months alone! Therefore it's going to keep going up!" In either case, making this sort of claim is functionally equivalent to blacking out your windshield and driving by the rear view mirror. "You're gonna hit something, but that's the way it goes!"

Furthermore, there is no such thing as a national market for real estate. It does not exist, and anybody who claims it does is either so clueless as to the nature of real estate markets that you should pat them on the head and say, "That's nice dear. Now run along and play with your Duplos," or they are actively lying. There are factors such as the interest rate environment that influence real estate markets nationally, but there is no national real estate market. In order for a given area to be considered one market, the properties within them must be functionally equivalent for the residents as to location. Let's look at the City of San Diego: No way is San Ysidro, right by the Mexican border, functionally equivalent to Del Mar Heights, twenty-five miles away along the coast on Interstate 5 just north of all the corporate buildings in the Golden Triangle, and neither is equivalent to Rancho Bernardo, which is about that same distance north inland along I-15. All three are part of the City of San Diego, and we haven't even gotten to the suburbs yet, they are three very different markets, with different demographics, different lifestyles, different building styles and all that that implies. For my real estate work, I specialize in and around the City of La Mesa, which borders San Diego on the east, and is different from all three previously described areas, and there are areas of La Mesa which are decidedly different from other areas of La Mesa. These markets are close enough physically to have market interactions, but different enough to constitute different markets - never mind Idaho, Georgia, or Vermont, which are not part of the local commuting area. Talking about a unified countywide market is occasionally a useful fiction, as there are interactions. People are able to commute from home to work and back again, no matter their respective locations within the county. Talking of a national real estate market is blatant nonsense. At most you can talk about a national amalgamation of local markets - a statistical hash of what is going on in all of the individual markets. Even right now with real estate markets in the tank in all the headlines, though, there are local real estate markets that are doing very well, and others that are poised to do so.

You can talk about national factors influencing all of the local real estate environments. Interest rates, lender requirements, legislation in Congress, federal rule-making in general, all of these have a national influence. The markets themselves remain local.

For longer term analysis, you've got to talk about the economics of an area. Current supply versus demand, and where that ratio is going. What do people in the area make? What is the regulatory environment? How difficult is it to build more housing? What are the population trends? What is the economy of the area doing? What are the factors influencing rental price and availability? How likely is any of this to change in the future? It doesn't matter whether people are getting "priced out" or even how many people are getting "priced out." People have been priced out of Manhattan for decades; it hasn't stopped Manhattan real estate from rising in value. What does matter is whether enough people with the economic ability to pay the current prices are available to buy up the new inventory that hits the market. It doesn't matter that people who bought twenty years ago could not afford to buy their properties at current prices. What does matter is that enough people who can afford it will buy to more than balance out the people who want to sell at current prices.

So while you can talk about national trends, any given property sits in a particular local market, and any discussion of whether to buy a given property has to be rooted in the local market situation. National trends may have an influence upon its value. If interest rates go to eight percent, people can only afford about seventy percent of the loan they can afford if interest rates go to five percent, so falling interest rates are a time of rising prices, other things being equal. Of course, interest rates now are lower than when the market was going gangbusters, and prices aren't rising. The explanation is that there are stronger factors at work.

Nonetheless, if a million people want to own property in an area (say, La Jolla) and only 40,000 people can, then the price will be determined by the 40,000 people willing and able to pay the most. If twenty million people want to live in San Diego County and only three million can, the prices will be determined by the three million people willing and to pay the highest prices. End of discussion. Not all properties in all locations are equally valuable of course, but the mix will be determined by what prospective buyers are willing to pay the most for. Note that not all costs are in dollars. Sometimes it's opportunity cost, sometimes it's any number of other costs, such as the risk of earthquake, the heat when the Santa Anas roll in, etcetera. Some people absolutely require living in a six bedroom 3000 square foot house, and if they can't afford the prices those command here, they'll go elsewhere despite the fact that they could easily afford something less expensive. Others will put up with living in a broom closet so long as they can go surfing every day.

Analysis focusing on a market's short term results are largely a study in mob psychology. A few years ago when property was overpriced locally, I couldn't slow people eager to follow the other lemmings with a locomotive. The last year or so, with available property prices well below historical trendlines locally, it's taken entire battalions of wild horses to pull people off the sidelines due to media coverage. But mob psychology is a changeable thing. A co-worker and I were talking about modifying an old T shirt just before I originally wrote this. The original version has two vultures sitting on a tree limb, discussing the negative utility of patience: "Patience MY ---! I'm going to KILL something!" (pardon the vulgarity.) We're going to change the second line to "I'm going to BUY SOMETHING!" That's the mood of the market we we're encountering then. The people who had been holding off seem to have realized that this is about as good as things were going to get for them. Maybe they're tired of waiting. Maybe they realized things were more affordable for them than they were in 2000, let alone 2004. Maybe they got "priced out" during the bubble and want to move before it happens again. Once you buy, it's not like the seller can come back and ask you for more money later because it turned out to be such a wonderful bargain - you're locking in your cost of housing. Putting it under your own control forever. The vultures were starting to swoop.

(Since then, of course, we've had the federal government ruining the economy and the machinery of lending, while pretending that things are getting better. They're not fooling anyone who's making major economic decisions - as evidenced by national housing statistics. We here in California have been hit by the double whammy of a state government that is also run by special interests and so pretends not to understand basic economics because the alternative is politically offending those special interests.)

Analysis on a local market's longer term prognosis have to ignore mob psychology. It's unpredictable on that scale, and nobody ever knows just when it will turn, or how. But there's only so long mob psychology can trump practical economics, which is the norm that any particular market will follow ever more closely the longer you run the experiment. With the recent decline in values, San Diego has dropped significantly below long term value trends and was still below them even with the aborted recovery, let alone since. This means that considering current supply and regulatory barriers to increasing it, demand of people who want to live here, the values that those people can afford to pay, and increasing demand for housing in San Diego, not to mention the changing dynamics of the rental situation (be prepared for rapid increases in rental rates), right now is an excellent time to buy, as prices are below where you would expect, given the longer term factors influencing the San Diego regional housing market.

Articles which consider only short term price fluctuations are looking backwards as we go into the future. They're looking at where we've been, not where we're going. And as always when you're effectively driving with your eyes closed: "You're gonna hit something, but that's the way it goes..."

Caveat Emptor

Original article here

First off, let me make something very plain. All a CBB (Cooperating Buyer's Broker compensation) can do is give good agent an incentive or disincentive to look at the property. A high one will not, by itself, sell the property. A low one will not completely prevent it from being sold. Buyers, being interested in their own bottom line, will persist in choosing the property that offers them the best property for their purposes at the lowest price, and agents with about an hour in the business should understand this. I not only cannot sell a buyer on a property that isn't at least as good a bargain for them as the competing properties, I won't try. It's contrary not only to my client's interest, which should be the ultimate consideration of any agent, but it's not in my interest either.

With that said, you really don't want to do is give agents a reason to sell the other property instead of yours. A cheap CBB does not motivate the agents to work. Suppose a boss told their workers "You will be paid $10 for every green widget you sell. You will be paid $15 for every purple widget you sell." Assume the widgets are identical in every way except color. How many green widgets do you think would get sold versus purple? Sure, they'll sell green if the customer wants it, but that's not going to be what they suggest first. If a customer came in the door wanting a green widget, they'd get a green widget. But if they walk in the door and aren't sure they want a green widget, the sales staff will quite predictably see if they can sell them the purple widget first. If they can, the green widget sits unseen, untried, and unsold.

In real estate, the person who sets that compensation is the owner of the property. There are lots of properties out there, even in a seller's market. Do you want your property to be treated like a green widget, or a purple one?

This isn't evil. Agents have to eat, pay the mortgage, pay expenses, etcetera, and we don't make as much money as people think. Even less so than most people, agents don't get to keep every dollar their company gets paid for their services, and they don't get paid instantly for waving a magic wand. It takes time, work, and expertise - I've spent six months, hundreds of hours, and over a thousand dollars just in immediate expenses working with clients to close a deal. If the company gets paid $10,000 and the agent has an 80% split (better than most), they get $8000 gross. Less monthly desk fees, less per transaction fees, and less fixed expenses of staying in business, that's maybe $6500, and social security eats twice as much of that as normal, leaving about $5400 - and we haven't even considered income taxes or advertising yet. For a solid month or more of work, and who knows how much time looking before the clients made the offer that was accepted. With practically unlimited liability, and requiring continuous training and work to keep their edge. If it takes 3 months in all, that's barely minimum wage, and most agents work sixty hours per week at a minimum. Quite often, we've got to reduce our commission to put some money back into the transaction so it can close. Sound like a cushy sinecure to you?

Of course, most agents are working with more than one set of clients at a time, but as you can see, a $10,000 commission doesn't translate into a huge windfall for the agent. If the company only gets paid $8000, that translates into maybe $4100 that the agent can use to pay their family's living expenses and taxes. Which do you think they'd rather have, the bigger check or the smaller? Ask yourself what you'd do in their place. If it's a question of the smaller check or nothing at all, there's no question, but there are a lot of properties competing with yours for the available buyers, and more coming onto the market all the time. Do you want to give agents a reason to try and sell your property, or a reason why they'd prefer to sell someone else's property?

With all of this in mind, a screaming deal will sell. You don't have to worry about whether or not the agent is going to be on your side. Buyers will beat a path to your door, with or without an agent. However, pricing your property as a screaming deal is not something most rational owners want to do. They want to get top dollar for that property, and it takes at least ten percent below the rest of the market - more likely twenty - to get attention as a screaming deal. I've said this before, most notably in How to Sell Your Home Quickly and For The Best Possible Price, but this is twenty percent off the correct asking price, not the owner's fevered dreams of greed. The average CBB around here is three percent. So, save three percent to lose twenty? Not something I'd do. Furthermore, you're not going to put up a CBB of zero, no matter how low it's priced. I've explained before why the seller pays the buyer's agent. Finally, if you end up needing to give the buyer an allowance for closing costs to get the property sold, you're quite likely giving out with the other hand the same money you withheld in the first place, as buyers paying their agent is a closing cost. Why not put it out there in the first place, where it is likely to do you some good?

The differences a higher CBB makes for the seller are three: You don't have to worry whether buyers needing to come up with cash to close to pay their agent will impact buyer cash to close, you get more attention for your property more quickly and more consistently, and you don't have to worry about buyer's agents creating reasons not to buy your property. Put yourself in this situation: Most buyers are reluctant to pull the trigger on a half million dollars. They need some good hand-holding and reasons to buy, and instead, their agent is looking for a reasons to help convince them why they want to buy some other property instead. Do you think it might take longer for the property to sell? With carrying costs of somewhere around two-thirds of a percent per month for most properties, if a CBB a half percent higher gets the property sold three weeks faster, you are ahead of the game. The time difference will almost certainly be more than that, and - statistical fact - the longer your property sits unsold, the lower the price it will sell for.

If you want to offer a low CBB, that's your prerogative. The property had better sell itself enough better than anything comparable to still the doubters - and practically every buyer is a doubter. The lower it is, the worse it will be, the longer you'll have to pay carrying costs, and the lower your final sales price. A low CBB, especially in conjunction with other factors about the listing can advertise to buyer's agents that you aren't ready to sell yet, warning them of a difficult transaction with lots of opportunity to fall apart due to seller issues. If I can find a model match with an obviously motivated seller around the corner, why should I take my buyer to yours? We're going to get a better price on the same thing with the property around the corner, there will be fewer issues with the transaction, and the fact that I'll make more money even though my client got a lower price is pure bonus for being a good agent. Call it karma.

On the other hand, offering a significantly higher than average CBB doesn't work as well as some people seem to think it does. It definitely won't sell the property for more than it's really worth. Furthermore, it raises all kinds of red flags in my mind, and, I imagine, in the eyes of most agents. "Why do they think they need to offer five percent when the average is three?" springs to mind pretty much unbidden. Most often, the property is overpriced. Almost as often, there's something wrong with it that only an experienced investor is going to be able to deal with - and experienced investors don't pay top dollar for a property. Ever. Quite often, there's something unrepairable detracting from the value of the property. It might get the property sold much more quickly - most agents have some investors I can call if we have reason to, and if you get our attention with a high CBB, both we and our clients are happy. So if you're stuck with a property that has something seriously wrong with it, a high CBB and a low price will cause it to see a lot more action. But they have to be coupled together. High CBB won't do it on its own. On its own, high CBB is pointlessly wasted money.

An average CBB or maybe slightly higher will quite likely accomplish what you want; a quicker sale and therefore a higher sales price. If you're a half percent above average, that's not enough to raise red flags, and it will get you attention. Good buyer's agents will still require that it be an above average value for the client, but they will look, where they might not otherwise. It also stands a good chance of motivating them to really take a good long look at the property.

Short Sales are worse than everything else, as far as CBB goes. Short sales usually take much longer, are more often than not overpriced, and there's a much higher chance of transaction falling apart and the agent losing the client as a result. In my area, over eighty percent of all short sales fall apart, and there's not much the buyer's agent can do to alter the odds - it's in the hands of the listing agent. The lender is going to require the agents involved to reduce their commissions. Agents know this, and they can't really fight it. If you're out there on the cheap end of CBB before the lender wants to grab money we've earned away from us, and statistically four out of five short sales self-destruct and lose the client without closing, what reason is there to show your property, as opposed to the one down the street that's not a short sale? Cost my client money and time to no good purpose, when I can usually find them something just as good at a better price that closes faster and without the eighty percent chance of fallout. But there's always a reason for a short sale. I've never seen one yet where the owner didn't need to sell for some reason or another. Why doesn't matter; If a short sale is the least bad thing that can possibly happen to you, the one thing you don't want is for the property to fail to sell, and a below average CBB on a short sale will practically insure that the property won't sell.

If I had my druthers as a buyer's agent, I'd rather buyer's agency commission be set as a flat amount, regardless of the actual sales price, so that the agent isn't shooting themselves in the foot if they can negotiate a better price. On the other hand, it's not a crime for the seller to structure it in a way that produces dissonance between the interests of the buyer and the interests of that buyer's agent. I may not like it, but I take shameless advantage of it when I'm listing property - I advise owners to make CBB a percentage when I'm the listing agent. Just because I understand a happier client is likelier to bring me more business doesn't mean every agent does. Maybe it's because I read Sun Tzu and von Clausewitz at an early age, and military history has always been an avocation with me. Maybe it's because I took almost enough probability and statistics courses in college for it to count as a major. Maybe I'm just competitive by nature. Whichever it is, I believe in taking every opportunity to load the dice in my client's favor before they get tossed. Anytime there are large amounts of money at stake, you're either in it to win or you are a sucker. There's a lot more money involved in real estate than almost anything else.

At higher valuations, reasonable agents expect CBBs to go down. There's not much difference in the actual work between a half million dollar property and a full million dollar one. Higher liability exposure and a little more hand holding and a little more service. Furthermore, the kind of people who buy million dollar properties tend to be better qualified to do so, leading to fewer escrows failing due to buyers failure to qualify.

One of the things I don't understand is that many agents are the worst about CBB. They should know the power, and yet when it comes to their own money they disregard the facts and try and to do it on the cheap. I make a special note when I notice those listings, because it's like they're shouting, "I'm just out for a quick buck! I don't really know what I'm doing!" to those with the ability to hear it. With that information, I keep a special eye on their listings for other clients. Just part of my desire to look for opportunities to depth charge fish in a barrel. When I find one, it always results in a happier client.

Caveat Emptor

Original article here

People sometimes ask, "Why should the lender care where I got the money for the down payment? I earned it, it's mine - cash is cash!"

They're right as far as they go. In general, the lender doesn't care whether you got your cash. For all they care, it could have been by selling off your first-born child, moonlighting as a drug dealer, or embezzling the funds from your employer. It's not usually a good idea to get a real estate loan if you're facing criminal charges (and you must disclose it if you are), but if you aren't facing charges, the lenders don't really care.

What they do care about is money appearing for no known reason just prior to purchasing real estate. They want to make certain that cash is really all yours. Quite often that money is an undisclosed loan, on which you are going to have to make payments, which are going to influence your debt to income ratio. Debt to income ratio is the most critical measure of loan qualification. If you're going to be making monthly payments of $400 to pay back the person who loaned you that money, the lender is required to consider whether the money you are making is going to enable you to pay back that loan as well as their own.

So the lender is going to want to know where any sudden influx of money in the last few months came from. This is called "sourcing" the money. They want to know where it came from. Did you sell another property? Then they want evidence, in the form of a HUD 1 that shows that money. Did you get a bonus? Let's see the remittance advisory. Did you sell stock? Did you sell your collection of rare Roman gold coins? Each of these has paperwork to attest to the fact, and the lender will want to see that paperwork.

If some friend or family member wants to make an actual gift, that's fine also. What the lender will require is a letter from that person stating that this money is a gift and comes with no strings attached. What they're looking for is an explanation that doesn't involve the money being obtained through a loan.

If you've had the money for a while, or have been building it up over time, your account statements will demonstrate that fact. Six months ago, you had $100,000. Since then, you've saved another $3000, earned another $5000, and your balance is now $108,000. This is called "seasoning" the funds. Nobody wants to have a loan sitting around longer than necessary - particularly not a loan for a significant amount of money. Seasoning the funds reassures the lender that this is not an undisclosed loan.

Suppose the money in your checking account that suddenly appeared two weeks ago is a loan? That isn't necessarily insurmountable. Let's get the loan paperwork out there where the lender can see it, examine the repayment schedule, figure out what it does to your ability to make the payments on this new real estate loan you want. If you qualify by debt to income ratio with these payments included, it's pretty likely your loan will be approved. There are exceptions, but I'm going to let those go uncovered, because I'm not real big on telling the general public how to get fraudulent loans accepted. There might be politicians reading this, and letting them know all the answers to that would be irresponsible of me.

The main reason why we have to source and season cash in every transaction is quite simply so people aren't able to hide the fact that they've recently gotten a loan. It seems paranoid at first, but it isn't paranoia if people are out to get you, and lenders have gotten burned many thousands of times over this point. People quite often don't even think it's wrong to keep silent, even though it is fraud. So if the lender doesn't require sourcing and seasoning of funds, the lender grants the loan based upon known information, only to later discover that the borrower is unable to make payments due to also needing to make payments on an undisclosed personal loan. Neither the lender nor the FBI fraud unit are very happy if that happens, and neither will you be.

Caveat Emptor

Original article here

I just picked a random ZIP code in my local MLS, and out of the first twenty listings I came to, ten had explicit violations of one or more of the sections of RESPA regarding steering right there in the listing. This did not include lender-owned real estate, which has its own set of issues in this regard. All I did was count two common violations.

The first was "Buyer must be prequalified by X", where X was some loan originator. In a way, I understand this. Forty percent plus of all escrows locally are falling out, and the vast majority of them because of unqualified buyers who cannot qualify for the loan. This wastes a minimum of about a month, plus when it goes Active again, it looks like it's been on the market for longer than it really has. Bad thing all around for the seller. The justification used is that for some reason, the agent trusts that particular loan officer to render a real opinion. Perhaps occasionally, a lender owned property will even try to require prospective buyers to prequalify through them. While it might seem reasonable, here's some relevant law from RESPA

Business referrals

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.

They mean that "any thing of value" bit, if you peruse down to the definitions. It's defined very literally by about a paragraph of text that boils down to four words: ANY thing of value. You refer business to them, they give you approvals you can count on. It doesn't matter if you require "only" a prequalification - they now have the prospective borrowers information, including credit information and home telephone number. This means that even if there's no application fee, no deposit, not even a credit report fee, you have still given that loan originator a "business relationship" with the borrower. That makes for legal consideration on both sides of the equation, and both the originator and agent are guilty. This is just as hard a violation of RESPA as a fraudulent HUD 1 form. It hasn't been enforced much of late, but I believe that the State of California could probably put over half the brokerages and lenders in the state out of business over loan steering. I only counted four out of twenty actual explicit requirements to pre-qualify with a specific lender this time, while the last time I conducted the exercise it was eight. Maybe it's getting better, maybe it's not, but twenty percent of a representative sample of listings having an explicit violation of the law right there for everyone to see is not something agents should be proud of. When it comes to holding someone responsible for their representations, pre-approval doesn't mean anything. If you're a real estate agent who doesn't do loans, talk to a lender you trust about necessary information to determine whether a loan is doable. I've created a special form that I send to agents making offers on my listings. Nothing in the way of personally identifiable information except the borrower's name - no social, no contact information - but it does have credit score, late payment history, income information, etcetera, to the point where I can tell whether or not I could do the loan on the terms necessary to make the transaction fly. Furthermore, it does require the loan officer to sign a representation that they aware that a decision as to whether or not to grant credit - in the form of agreeing to enter escrow - will be made based upon this information. They don't need to make representations of opinion - all I'm asking for is verified facts. Armed with those facts, I have a pretty darned good idea if this borrower is capable of consummating the transaction. Doesn't tell me whether they will or not, but that's not what wanting a prequalification or preapproval is about.

But when I'm a buyer's agent, which is most often, I simply ignore these requests that violate the law. Furthermore, this puts me in rather a strong negotiating position if the listing agent repeats the request or brings it to my attention. Now they've compromised their client's interests, by giving the other side (me) a concrete legal issue to aim at them. Game, set, match. As I said, four out of the first twenty listings in a random ZIP code explicitly violated RESPA right in the listing, without counting the ones that say "Contact us prior to making an offer," where that's usually what they want. Four out of twenty where there is precisely zero doubt that they're violating the law.

Actually, that wasn't the most common violation, either. That goes to "Seller to select all services," at six out of twenty - thirty percent. Also from RESPA:

Sec. 2608. Title companies; liability of seller

(a) No seller of property that will be purchased with the assistance of a federally related mortgage loan shall require directly or indirectly, as a condition to selling the property, that title insurance covering the property be purchased by the buyer from any particular title company.

(b) Any seller who violates the provisions of subsection (a) of this section shall be liable to the buyer in an amount equal to three times all charges made for such title insurance.

Even though in California the seller usually buys the title insurance for the buyer, I've had more than one lawyer tell me that failure to negotiate is construed as a violation of RESPA by the courts. It works like this: In the case of simultaneous owner's and lender's policies from the same company, there's a discount for the lender's policy, essentially requiring the lender's title insurer to be the same as the owner's title insurer. Since this happens on every purchase transaction where there's a loan, you have the requirement to negotiate. Seller and buyer negotiate until they come to a mutually acceptable compromise. Neither one of them gets to dictate to the other. Furthermore, failure to consider the best bargain for the client is a violation of fiduciary duty for the agent. It's not the sellers who want to choose services. Other than corporate owned property - lender owned and corporate relocation properties - there just isn't a reason for many sellers to care. The only reason is if they're employed by a title or escrow company, and their fringe benefits include free title or a free escrow. I've seen that once in the last four years.

What's really going on here is title insurance companies providing free farms, or subsidized mailings, or any number of other freebies they use to attract real estate agent business. Or the brokerage has a captive escrow company they're required by the broker to use, despite the fact that failing to negotiate this point is a violation of the law. I've had agents or their idiot assistants tell me that they get "discounted service" even when I've got a lower quote from the competition. Furthermore, the interplay of title company and escrow company is important. If there's no common ownership between the two, the title company will charge a "subescrow fee" that I've seen be anywhere from $100 to $450 (usually about $350) because they're the ones who are actually set up to accomplish some things that are legally the escrow company's responsibility. For instance, recording. What this means is that even if the actual quote is lower from unaffiliated companies, the clients are quite likely better off choosing escrow and title companies where there is common ownership, even if the quote is a little higher - because there won't be subescrow fees, and quite likely not messenger fees between title and escrow. To paraphrase an common saying, $350 is $350, even when there's a half million dollar deal happening. Make certain you get a guaranteed total fee for services quote based upon the actual escrow and title relationship to each other. I'm quite sorry for independent escrow companies - I have no reason to believe they're any less competent or charge anything more than title company affiliated ones - but they're competing at a disadvantage because the title company wants to charge more to work with them, and this is quite reasonable given that they will be performing services that are the escrow company's responsibility. They waive subescrow for their own affiliated companies simply because, one way or another, they're responsible for the work.

I've also heard all sorts of nonsense about competence of title and escrow officers. The fact is that most of them are perfectly up to your transaction. Even corporate owned relocation properties, where there may be some complex tax issues, aren't significantly more complex than your garden variety individual buyer - individual seller, and don't get me started about 1031 exchanges, which are perfectly straightforward from escrow's point of view. Any good agent's agenda is very simple - competent service providers for the lowest total price. The vast majority of the time, this means a title and escrow company with common ownership. Note that I don't care which title company and affiliated escrow company. I'll do business with anyone that hasn't hosed a client, and even if they have, I'll simply require a different title or escrow officer - just because John has a recto-cranial inversion doesn't mean Jane, another officer at the same company, does. Even lender-owned property will negotiate service providers if you approach it right - which is how it should be. Oh, you'll end up with their choice of providers most of the time, but you can get them to pay for subescrow and messenger fees, and quite likely an allowance to meet your lowest quote elsewhere - meaning your client doesn't really have a reason to care. Essentially the same product at the same price to them. Why would most clients raise a fuss about that? Indeed, the only thing worthy of most clients raising a fuss would be if you didn't negotiate for that. Explaining the whys and wherefores of the whole service provider quandry has gotten me a seller or two working at cross-purposes to their listing agent, who had someone all picked out without informing their seller. When this happens, my buyer wins. How could I not use every weapon at my disposal?

The intent of Congress on steering is quite clearly spelled out:

TITLE 12--BANKS AND BANKING
CHAPTER 27--REAL ESTATE SETTLEMENT PROCEDURES
Sec. 2601. Congressional findings and purpose
(a) The Congress finds that significant reforms in the real estate settlement process are needed to insure that consumers throughout the Nation are provided with greater and more timely information on the nature and costs of the settlement process and are protected from unnecessarily high settlement charges caused by certain abusive practices that have developed in some areas of the country. The Congress also finds that it has been over two years since the Secretary of Housing and Urban Development and the Administrator of Veterans' Affairs submitted their joint report to the Congress on ``Mortgage Settlement Costs'' and that the time has come for the recommendations for Federal legislative action made in that report to be implemented.
(b) It is the purpose of this chapter to effect certain changes in the settlement process for residential real estate that will result--
(1) in more effective advance disclosure to home buyers and sellers of settlement costs;
(2) in the elimination of kickbacks or referral fees that tend to increase unnecessarily the costs of certain settlement services...

Whatever forms those kickbacks and referral fees may take, if your agent is violating this, do you really want to do business with them?

Caveat Emptor

Original article here

Racial Gap in Loans Is High in California.

I can give a variety of reasons for this.

First off, especially in Los Angeles but to a lesser extent throughout the state, there is a huge "Spanish speaking only" community. When you limit yourself to speakers of a language which isn't the nation's primary business tongue, you limit your ability to find loan officers who will treat you honestly and fairly and find you the best possible loan. I speak reasonable Spanish myself, but not nearly enough to do a loan.

Second, those who speak Spanish only are ripe pickings for unscrupulous loan officers and real estate agents. Because they do not understand English, the language the regulations are written in, they have less understanding of what is a complicated and confusing process for anyone who is not a practicing professional. In fact, I can name a lot of alleged professionals who speak English and are nonetheless limited in the comprehension of the process to judge by the evidence.

Third, those who speak Spanish only have a lesser understanding of their rights under the law, and since the vast majority of all loan documents are in English (a few lenders are starting to generate a few documents in Spanish, but not every document, and it will never be the main copy of anything), they have a lesser understanding of what they are agreeing to.

(Gee, I hope the preceding helps the "Spanish only" lobby of separatists understand what they're setting up for the people whose benefit they are allegedly advocating.)

But more importantly than all of the preceding, real estate and loans are "sales connection" businesses. Because most people do not shop for homes or home loans in a rational fashion. "I can't be rational! This is far too important for that!" Seems silly, but it's true. People buy or do business with you because you have made them more comfortable, or because they think you can do something nobody else can or will for them. They do business because they connect with you on some level, not because what you're offering is the best thing out there.

Identity politics exacerbates this. There are agents out there (often but not always necessarily of the same ethnicity) whose niche market is "black folks", or "Spanish speakers" or "Koreans". Some people will do business just because you're the same, or because they feel some kind of cultural connection. Others will do business because that agent or loan officer helped their brother, or friend, whether said brother was the toughest deal in creation or the easiest thing they ever did. And if your brother had to do something, or had something happen, it's only normal it should happen to you, too - right? One of the standard phrases in the sales lexicon is "My you were tough, but we got it done! How about some referrals." This by itself is not evil. But if you've taken advantage of someone as if they were a tough loan when in fact they were not and could have gotten a better deal from someone else, you're lining your pocket at your client's expense. Everybody deserves to get paid for a job well done. But when my contacts in the escrow and title business tell me about people who only serve this ethnic market or that ethnic market who have six percent state of California limits on their compensation externally applied to every single loan they do, or how these people consistently have a sales compensation a full percent above the market, that tells me something: that these alleged professionals are taking undue advantage of their target market. Many of these people they are targeting literally have no way of knowing there is something better out there. Are their tactics illegal? No. Unethical? In at least some cases. Taking advantage of client ignorance? Definitely.

The process of purchasing, selling, or financing real estate is byzantine, with rules and regulations that get more complex every year. The average citizen has difficulty understanding the things that may be relevant to their particular transaction (I've had to explain to lawyers how they got taken in their previous transaction). To most people, the whole thing is like some immensely complicated magical ritual. Place the proper documents at the foot of the underwriting god, dance three time sunwise and four times widdershins round the appraisal every day for a fortnight, pray with the high priests of insurance, and you get your house.

It has elements in common, I will admit. But the processes of real estate sales and real estate loans are coldly, brutally, logical once you understand them. Unfortunately, the odds of understanding are stacked even further against those who are apart from the majority of society. Those who are concerned with minorities having inferior loans would have more success in connecting the people to the mainstream of society than in considering further burdensome anti-discrimination legislation.

Caveat Emptor

Original here

Banker loans are better deals - for the bank.

Ken Harney has an article Study Shows Loan Brokers' Better Side

But now a new, independent academic study has concluded the opposite: According to a team of researchers headed by Georgetown University's Gregory Elliehausen, home mortgage applicants with less-than-perfect credit pay lower financing costs when they obtain their mortgages through brokers rather than from loan officers directly employed by lenders. The same pattern holds true for African American, Hispanic and low-income borrowers.

The study was limited to subprime borrowers, but the results are not surprising:

Overall, broker loans cost 1.13 points less for first mortgages, 1.98 less for second mortgages

For borrowers in predominantly black areas, the difference was 1 point and 1.9 points, respectively.

For borrowers in predominantly hispanic areas, the difference was 2 points and 2.4 points. The explanation as to why this gap is larger is probably as simple as the fact that many of these folks limit themselves to dealing with Spanish speakers.

Skolnik added, though, that the data overall could reflect that "brokers in general operate in a much lower-cost structure" compared with banks and retail mortgage companies that carry heavy overhead and employee costs. Moreover, he said, "brokers are far more agile and nimble than retail" lenders, when pushed to compete on pricing and terms.

That and any given lender may have anywhere from a dozen loan programs to fifty, all intended to hit specific niches and priced for given underwriting assumptions. A 3/1 is different from a 7/1 is different from a 30 year fixed, stated income is different from full doc is different from NINA. That's nine programs right there, and this is A paper stuff. Subprime is even more varied. It doesn't matter if you barely meet guidelines or soar through them. If you find a program with tougher underwriting guidelines that you still qualify for, than that lender will give you a better rate on the loan, because they will have fewer of them go sour, and therefore get a better rate on the secondary market. You can go around to all the lenders yourself - or you can go to a broker.

Furthermore, even if you're one of those so slick that you fit into the top loan category of the toughest lender, brokers can typically get you a better price. Why? Two reasons. First, the lenders don't have to pay broker's overhead, making it more cost effective for the lender to do the same business through the broker. Second, and more importantly, when you walk into a lender's office, they regard you as a "captive" client. Brokers know better. Brokers are not captive to anyone, and they know that you're not captive to them. A good broker's loan officer will price with at least a dozen lenders. I had shopped fifty or more for tough loans, even before automatic pricing engines. Furthermore, there's an efficiency factor at work. After a while, a good loan officer learns which lenders are likely to have good rates for a given type of client. Which do you, as a client, think is likely to be the best use of your time and resources? Going to all those lenders yourself, or going to a few brokers?

This article of mine is also highly relevant to this article's subject matter.

Caveat Emptor

Original here

A mortgage or Deed of Trust (they're not the same!) is basically pledging an asset that you own as collateral for a debt. If you default on the debt, the lender takes your property. When you're talking about real estate in the state of California (and many others), this is generally accomplished by use of a Deed of Trust. There are three parties to a Deed of Trust: the trustor, trustee, and beneficiary.

The Trustor is the entity getting the loan.

The Beneficiary is the entity making the loan.

The Trustee is the entity which has the legal responsibility of standing in the middle and making sure the rules are followed. When the loan is paid off, they should make certain a Reconveyance is completed and sent to the trustor so they can prove it was paid off. If the beneficiary is not being paid, they are the ones who actually perform the work of the foreclosure.

One thing to keep in mind during all discussions of real estate and real estate loans is that the amounts of money involved are usually large - the equivalent of somebody's salary for several years on every transaction. The temptation to fudge the numbers or even outright lie to get a better deal, or to get a deal at all, is strong. Many people don't think they're really doing anything wrong by fudging things a bit, but this is FRAUD. Serious felony level FRAUD. Fraud, and attempted fraud are widespread. There are low-lifes out there who make a very high-class living at it (for a while). Every lender has to devote a large amount of resources to determining that each individual transaction is not being conducted fraudulently. To fail to do so would be to fail in their jobs to protect their stockholders and investors. I have told many stories about the most common sorts. But the reason everything in every real estate transaction is gone over with such a fine-toothed comb that adds thousands of dollars to the cost of the transaction is that people lie, cheat and steal with such large amounts under consideration. Every hoop that anybody is asked to jump through has a reason why it exists, and often that is because somebody, usually many somebodies, have committed FRAUD based upon that particular point.

One of the conditions I must attach, implicitly or explicitly, to every quote for services, is that this is based upon the condition that you are telling me the truth, the whole truth, nothing but the truth, and are being honest and forthright in your presentation of the facts without trying to hide anything and are specifically calling my attention to anything that you suspect may be a problem. And because the list of what is relevant information is long, complex, and conditional upon factors that are often opaque to non-professionals, sometimes, people quite honestly don't realize that something is a fly in the ointment so they don't mention it. I, or any other professional practitioner, have no way of knowing that said fly exists unless you, the client, tell me about it. Therefore what I tell you initially does not account for said fly. This is not unethical, it is just a due to the fact that I don't have all of the relevant information..

When you're talking about residential real estate loans there are basically two absolute requirements as to the nature of the collateral. The first is land - land as in real estate. A partial, fractional, or shared ownership of a common interest in land (as in a condominium) are each sufficient unto the task. A rented space to park your mobile home is not.

To that real estate, there must be permanently attached in a way so as to prohibit removal, or at least make it an extended project, a residence in which people can live. We're all familiar with you basic site-built house. Personally, I'm a big believer in the virtues of manufactured housing. To paraphrase Robert A. Heinlein in precisely this context, imagine a car for which all the parts are brought individually to your home and assembled on site with ordinary portable tools in an environment which was not specifically designed to facilitate said assembly. How much would you expect to pay, and how would you expect it to perform? The correct answers are "A LOT more than for your house", and "not very well, in terms of either reliability, speed, or economy."

Nonetheless, when a lender looks at a house that's been moved to the site, they see one that can be moved away from the site as well, and they are skeptical because many people have done precisely that. Furthermore, the way that residential real estate is valued is somewhat arcane. The lot itself may be worth $400,000 here in California because it has $150,000 of improvements on it in the form of a three-bedroom house on it, but take away that three-bedroom home, and the lot may be only worth a fraction of the amount. So they loan you money based upon a $550,000 value of the combination as it sits. Some time later, you back your truck up to the house and cart it off, and then default on the loan, leaving the bank a lot may only have a value at sale of $80,000. Now imagine yourself as the bank employee who made the loan. How do you explain this to your boss? Over the years, many bank employees have had to explain this to their bosses, all the way up the chain of command to CEOs explaining to investors and stockholders. Lenders know that most people are honest - but they've got a duty to make sure you are among the honest ones. And if you subsequently lose your job and can't pay your mortgage, might you not be tempted to back the truck up and haul the house off somewhere if you could so the bank can't take it? There are good substantial reasons why many lenders won't approach manufactured housing as residential real estate, and the ones who do treat it as such charge higher than standard rates, and place further limitations on lending.

When I originally wrote this, I was personally eying a beautiful manufactured home that more than meets my family's needs, was in the middle of the area I want to live in, and was priced more than $100,000 lower than comparable sized and lower quality site built homes on smaller lots. Yet there was a reason for that lower price. It's not like that owner just decided to list it for $150,000 less than he could get. The home carries many higher costs. If I had bought that home, I would be paying for it in the form of higher loan costs every month, and higher loan fees every time I refinance until I sold it, and fewer people able to buy the home when and if I do sell it as a result of loan constraints, and a I can expect lower eventual sales price as a consequence - which is the situation that owner was in when I was looking at it. I reluctantly decided that those costs outweigh the benefits. My decision was regretful, but until somebody comes up with a procedure that banks agree makes manufactured housing equal in every way to site built in their eyes, it is also firm.

Caveat Emptor

Original here

(And I must say that if somebody comes up with such a procedure, you will be a gazillionaire, and deserve every last penny and then some. I hereby publicly forswear all claims of compensation for the idea of such a procedure. If you can make it work and it makes you rich, I won't ask for a penny, although any contribution you care to make voluntarily will be happily accepted. I just want to be able to say you got the idea from me, as part of my contribution to a better world)

real estate mortgage manufactured housing

Mortgage Accelerators, or Money Merge Accounts, have become the thing that everyone's pushing of late. I have gotten so much junk mail about this from more originators (who don't know who I am) and wholesalers (who should) that I'm going to have another whole go at the entire concept. The claim most often advanced is "pay off your mortgage in a fraction of the time!" In fact, typical numbers say they're only going to do a fraction of the good done by biweekly payment programs, which effectively make one extra payment per year. Money merge accounts or Mortgage Accelerators (to use the term I originally learned years ago) have been pushed and over-promised so badly of late that I hope whoever manages to do an elementary search will be able to find a voice of sanity.

These wasteful loans that waste a homeowner's money are fast becoming the current market's negative amortization loan as far as marketing goes. These things are being pushed hard, consumers are being led to expect far greater results from them than they are likely to achieve, with the results being that those consumers who sign up for them are wasting their money. If they're not as bad as negative amortization loans, that's still damning with faint praise if ever there was such a thing. Not as bad as the loan that encouraged people to buy a more expensive property than they could afford, put them more deeply into debt with every passing month, ruined their credit ratings, and caused them to lose the property they over-extended to buy, as well as setting the United States as a whole up for the worst financial crisis we've experienced in the past eighty years. Well, it is kind of a high bar for lenders to get over, and they haven't done it here - but that's not due to concern for consumers.

(one way of looking at it with considerable merit was that the Era of Make Believe Loans was scamming investors, while these merely scam consumers)

What goes on with these accounts is complex, and they're not all identical. The basic idea is the same, however. You create a special account of some nature, where you deposit your entire paycheck in the mortgage account, where it lessens the amount of interest you pay on a day-to-day basis. Then you pay your other expenses of living out of the account, gradually increasing the amount back up until the next time you get paid. The idea is that by paying down the balance with your entire paycheck, less interest accumulates and people making the same regular payments will pay their balances down faster with the same balance.

Sounds like a cute idea, right? If it was free, they would be a pure gain for the consumer. Unfortunately, they're not free, and I've never yet seen one that wasn't more costly than it could possibly be worth.

Lenders like these things for a lot of reasons. Most obviously, they're getting pretty much all of a consumer's banking business. Checks come in, go out, clear or don't; all those lovely fees. In the vast majority of all cases, there's the initial cost and interest expense of an associated home equity line of credit. This also raises the bar to make it more difficult for a consumer to refinance away from their loan if someone offers them a better deal. Furthermore, there's usually an explicit charge of about $3500 to set the thing up. I'll show where this money would be better spent on a direct paydown of the mortgage.

Also, the people who sell these things have these beautifully intricate presentations. While people are watching the money whizzing about between one account and another, they're usually not considering whether those figures are reasonable, typical, or even anything like the numbers they personally experience.

Most importantly if consumers are shopping for a new loan, their attention is distracted from the most important part of shopping for a loan - getting the best possible tradeoff between rate and cost, focusing instead on this fascinatingly complex toy that doesn't make nearly the difference most of the people pushing it say it will. Taking the attention of consumers off the question of what rate they are getting, on what type of loan, at what cost, means that they don't have to compete nearly so hard to give you the most competitive rate-cost tradeoff. In plain English, their loans can charge a higher rate of interest. In fact, this difference will cost the typical borrower far more than they could ever hope to save via a money merge account. I'll go over that in this article, as well.

So, first off, let's consider what typical numbers are. Here in San Diego when I originally wrote this, the median property sale was $558,000. In order to qualify for the loan, consumers need a back end Debt to Income ratio of 45%. Front end will most typically be around 36%, with property tax, insurance, vehicle payments, credit cards, student loans etcetera. I'll be really nice and say 32% - chances are that if it's lower than that, the people would have bought a more expensive property. I'm going to assume 20% down payment or equity, which is, if anything, larger than typical. We'll postulate a rate of 6%, which is probably a hair higher than most folks with conforming loans have - and more favorable to the money merge account - and I'm going to put it all into one loan even though that's theoretically a jumbo loan amount, just to give the money merge/mortgage accelerator every possible benefit of the doubt. After all the smart thing to do is split the loan amount, which leaves roughly $30,000 out of this account in a higher interest rate loan, and so the scenario envisioned is more beneficial to the Money Merge than what happens in the real world.

This gives a loan of $446,400. At 6 percent, the payment would be $2676.40. Assuming 32% front end ratio, that's a gross monthly pay of $8365. I don't have withholding tables, so I'll use the actual tax rate for couples making slightly more than $100,000 per year with about $55,000 taxable, which is $7400, plus about $8700 in Social security taxes, plus state and local taxes which I will assume to be roughly $2000. This money gets withheld - it never comes to you in the form of a check. Since you don't get it, when your check goes into the money merge, it doesn't help you pay the interest. This leaves $81,900, or $6825 in take home pay. I'm not going to worry about other deductions like health care, or how your pay is structured, which further erode the benefit. I'm just going to assume it hits your account in full on the first day of the month, maximizing benefit, although I'm still going to assume all of the excess goes out every month. If nothing else, for investment accounts. It's pretty silly to have your money paying off a 6% tax deductible debt when you can have it earning about 10% elsewhere! The real point of this is it isolates the benefit gained from the actual Money Merge, and separates it from any benefit derived from making extra payments, which is in reality the primary way the people selling these play "hide the salami" with consumers, distracting them from what's really causing the benefit - the extra payment, which almost anyone can do, anytime they choose, for free. I'm even going to assume that you don't have an impound account, so the money you eventually spend for property taxes and homeowner's insurance goes to help the money merge as well.

So you get $6825, less the payment of $2676.40, leaves $4148.60. Over the course of the month, money goes out to pay for all of your expenses. The people who sell money merge accounts urge you to leave paying your monthly bills as late as possible to get the maximum benefit from these accounts, completely ignoring the costs of the occasional late payment this is going to cause, as well as detrimental effects upon your credit when it does happen. In fact, a certain amount of these bills are going to wrap into the next month, meaning that under the conditions we've agreed upon, you write that check to your investment account for this month and pay that bill out of your next month's pay if you're smart. Since you're going to write that particular check ASAP if you're smart, that's going to diminish the effects of the $4148.60. But I'm going to be nice and give you a $1000 "cushion" that you carry into the account from month to month (again, you won't do this if you're smart), while the $4148.60 is going to be paid out evenly over the course of the month, giving you a mean daily amount of $2074.30, plus $1000, or $3074.30 per month of temporary principal reduction. This reduces your interest paid by $10.37 that first month! I'm going to assume this is pure gain, every month, and that it continues to compound. If you do this every month for thirty years, you'll actually pay off that loan a grand total of three months early, and the last payment is reduced to a shade over $400! All of this hooting and hollering and shouting and frustration over three months of paying your mortgage off - in an absolutely optimized, perfectly favorable environment where the Money Merge account didn't cost you a penny in set up fees or monthly cost. And even in this ideal situation, with the maximum reasonable advantage compounding over the course of the entire mortgage, out of $963,000 in payments, the money merge saves you about $10,000 at the very end - just over 1% of total payments, heavily discounted for time value of money thirty years from now. That's not the "pay your mortgage off in twelve years for the same payment!" come on used by the most popular of these! Were I the regulatory authorities, I'd be looking very hard at their advertising! Yes, you can pay it off in 12 years by making massive extra payments, but people without a money merge can do exactly the same thing by simply sending in more money.

But most people don't pay their mortgage off in this fashion, and these accounts are not free - or at least I've never heard of one that was. Most people refinance or sell within three years. When they do that, the accounts have to be set up again - which requires new set-up fees. In the example given above, that $10.37 per month compounding for three years is worth $407.92 - and that's if there are no countervailing expenses.

In point of fact, most of these accounts charge a monthly fee that ranges from roughly $1 to whatever they think they can get away with. Plus, there's an upfront cost that ranges from $1995, the cheapest I've seen, up to nearly $6000 depending upon the plan, with most seeming to fall in about the $3500 range. Plus, most of them require you to use a special Home Equity Line Of Credit (HELOC), which costs money in and of itself. The rates on HELOCs are higher than for regular mortgages, forcing you to effectively pay a penalty in interest of having $2000 or $5000 or whatever it is at a higher rate of interest, by usually about 2%. Keep in mind that this is ongoing, and for the entire month. The $2.30 to $8.30 per month this costs directly soaks off a large percentage of the $10.37 putative gain you get. Not to mention whatever the initial costs of the HELOC are. Some are cheap - I've seen others that had thousands of dollars in upfront costs. The HELOC costs, both upfront and monthly, are not relevant to the few plans that don't require HELOCs, but most do.

So with a middle of the line account, you've spend $3500 just to set the money merge (or mortgage accelerator) up, versus $407.92 in benefits over three years, which is longer than most people keep a given loan. Would I do that? Not on your life or mine! Why should I expect one of my clients to do so?

Let's consider some alternatives. Remember I told you the money merge account saves you $10.37 per month in optimal conditions, which works out to just about $10,000 saved at the end of thirty years? Well, let's ask ourselves, "What would be my benefit if I just took the $2000 the cheapest one of these costs me and instead used it for direct principal reduction?" In other words, what if you added that $2000 to your regular mortgage payment once? The answer is, for the example above, that you pay off your mortgage four and a half months early, as opposed to about 3.8, saving an additional $1800! Using the upfront costs for a direct paydown instead pays the mortgage off sooner than the accelerator account, and that's for the cheapest of these that I'm aware of !

After the three years that's all most people keep their mortgage, the person who just uses a $2000 sign up fee is still $1985 and change ahead of the poor stupid schmoe who signed up for the accelerator account! For a middle of the line $3500 set up fee, the difference, mutatis mutandis, is $3780 and growing at the end of three years, to the point where that mortgage is paid off 6.7 months early, as opposed to the mortgage accelerator's 3.8, saving thousands of dollars more than the "accelerator"! This doesn't count the monthly fees most mortgage accelerators charge, HELOC set up fees, or additional HELOC interest charges that the vast majority of these accounts require, and which do siphon off the benefits as noted above.

Keep in mind that with all of this, I've been building a "best reasonable case" to maximize the money merge's advantages. I've mentioned several assumptions that I was making in the account's favor. If any of them changes, the putative benefits basically vanish entirely, or even go decidedly negative.

Now, let's ask ourselves if getting distracted by a mortgage accelerator caused us to not shop as aggressively, or not pay as much attention to the tradeoff between rate and cost as I should have, and as a result, I end up with a mortgage rate that is a mere 1/8th of a percent higher for the same cost. An eighth of one percent is the smallest rate bump in the "A paper" world, and quite often I see differences of a quarter to half a percent for the same loan at the same cost between various A paper lenders when I'm shopping a loan. What would that cost me if I could have had 5.875% for the same cost instead, even keeping the benefits of the accelerator?

The answer is $35.77 per month on the payment, but more importantly, $46.50 the first month on the interest, and this adds up to $1641.77 less interest paid over the three years most people keep the mortgage, while the $10.37 per month benefit of the money merge put the 6% loan as having a balance that's actually $20 lower. Not counting fees of the money merge account, or anything else - just pure difference on the actual cost of that loan, in the form of interest you paid that you wouldn't have had to. How does that sound: Even if everything about the money merge was free, you'd be getting a $20 lower balance over three years in exchange for having spent $1600 more on interest. If you offered people $1600 for $20, what proportion do you think would take you up on it? If you offered them $20 for $1600, how many suckers do you think would go for it, even if you personally begged ten million people?

For those of you who may be loan officers - or real estate agents - reading this, can you point to one single putative benefit that you would think worth the cost that lenders charge to sign up for these programs yourself? As I've said, I can't. There is nothing here that justifies the wild ways in which these are being marketed, and the ridiculous promises that are being made about them. In point of fact, I can think of only a few possible reasons to sell these:

• Eyes only for a commission check (probably number one in terms of the overall market)


• You don't understand what's going on, took some marketers word, and haven't done the numbers yourself (hardly a recommendation of your services or professionalism)


• You just don't care about your clients welfare

When these started being marketed, I wrote about the broad outlines. Never had the urge to hose a client by selling one, so didn't really investigate any further, although I wrote another article about the benefits being quite minimal as compared to the costs. But the ridiculous promises and over-aggressive marketing these have been subjected to in recent weeks have finally motivated me to do a rigorous analysis, and what I see is not "merely" of minimal benefit in even the scenarios most amenable to said benefit, but actually costs more than any putative benefit. I can see precisely zero justification for counseling any client in any situation to pay the money that every one of these I have yet encountered to set it up, as the benefits derived from any of these programs with which I'm familiar never do manage to equal the opportunity costs.

Before I sign off, the point needs to be made that the psychology the account engenders in the consumer is likely to be beneficial, rewarding themselves psychologically for making what are extra payments on the mortgage, and as far as that goes, the account does accomplish something praiseworthy. But the vast majority of all mortgage borrowers can make extra payments of principal any time they want, for free, and when you consider these accounts strictly on the basis of actual numerical advantage over real alternatives, the costs of the program are literally never recovered.

Caveat Emptor

Original article here

There are two sorts of buyer's agency contracts, exclusive and non-exclusive. Note that this has nothing to do with Exclusive Buyer's Agents, who do not accept property for listing. I disagree with their reasoning on the virtues of doing so, but I can see a reasonable person making the arguments that they do. Despite the fact that ninety percent of my business is as a buyer's agent, I have no plans to become an Exclusive Buyer's Agent. The line their organization takes is that agents tend to work on behalf of their listing clients, neglecting buyers even when they're representing them as well. To be fair, I do see that happening in the industry. The solution is quite simply to refuse Dual Agency. I get referral business by making each individual client as happy as I possibly can, not by hosing one class of clients so that I can make another that little bit happier. I'm only on one side of a given transaction, and my clients will tell you I'm not in the least hesitant to advise them if something isn't quite like I would like it to be. Furthermore, I learn things by listing properties - things that I can turn around and use to help my buyer clients - just as I learn things by representing buyers that I can turn around and use to help my next set of listing clients. Without that feedback between the two very different tasks of representing buyers and representing sellers, I'd be a much weaker agent, whichever side of the transaction I was on.

Some states permit agents to call themselves "exclusive buyer's agents" if they work with exclusive buyers agency contracts. An exclusive buyer's agency contract, however, does not mean that all of that agent's business comes from representing buyers. It means that they require buyers to sign a contract that essentially prevents those buyers from working with another agent. An exclusive buyer's agency contract says that no matter which property these buyers buy during the period it runs, that agent will get paid. End of discussion. Since the buyers accept responsibility to pay the agent if the seller or someone else doesn't, which isn't a problem if there's only one buyer's agent, because it is in the seller's interest to pay the buyer's agent. However, what the seller pays only covers one agent, so if there's a second agent involved, the buyer has to pay that second agent out of their own pocket. This essentially constrains them to work with the agent they've given that exclusive contract to. Many very weak agents require exclusive buyer's agency contracts because they're scared of the competition - they know they don't measure up, so they cut the competition out by binding them with an exclusive agency contract. They've got good advertising campaigns in effect, good networks of people, whatever - the essential element in their strategy is that the prospective buyers talk to them first, before those buyers understand what's really going on. Not to mention that this does, in some states, allow them to designate themselves as "Exclusive Buyer's Agents." This is confusing nonsense, and not beneficial for consumers.

There is, however, an alternative. This is the Non-Exclusive Buyer's Agency Contract. This is a standard contract, available in all fifty states through the work of the Association of Realtors (self-interested dinosaur controlled by major chains though the organization is, it does do some beneficial work). In California, it's put out as a part of the WinForms program of standard forms, and I suspect the same is true elsewhere. When you strip it of all the legalese, what it says is that If you buy a property that agent introduces you to, then that agent will be entitled to a buyer's agency commission. Notice that construction, straight out of you high school geometry or logic course? If A then B. If not A, then nothing. In other words, if some other agent introduces you to the property you buy, you owe this agent nothing.

Consumers can be working with literally any number of prospective buyer's agents through non-exclusive contracts, and be perfectly safe. There's only going to be one commission due - to the agent who actually gets the job done. Because of this, consumers can sign one of these and start working with any agent, safe in the knowledge they're not stuck with that agent if they find out they're not doing the job they should. The only thing consumers are giving up is the ability to cut out the agent who actually finds the property they want to buy at a price they're willing to pay. Since this is the hardest, most difficult, most time consuming and most liability ridden part of a buyer's agency job, this is only reasonable. You don't go down to the premium mechanic, have them fix your car, and get out of the bill by paying the cheap shop on the corner. That is the real work for a buyer's agent, not the paperwork of the offer and escrow period, or the gladhanding, or even the showing. The ability to recognize and negotiate a bargain are closely related, however, so even if you get a lower buyer's agency commission by cutting out the agent who finds the bargain, or a cash rebate, you're likely to end up paying more overall for the property. How is saving one or two percent and missing out on five percent, ten percent, or more a good investment? The lowest difference I've made in the last year was over fifteen percent, by CMA of properties sold. That's what a buyer's market will do for you. But you're unlikely to find the agent who makes that kind of difference in your area first time out of the box. The non-exclusive buyer's agency contract lets you give every agent you meet the same chance to earn your business - which means consumers get to force the agents to compete on the basis of who actually does the job!

This makes signing such an agreement a bet the consumer literally cannot lose. In fact, the more such bets the consumer makes, the better it's likely to turn out for them. The weaker agents will self-select out of the process in most cases. What this means in plain every day talk is they won't exert themselves because they know they're not likely to end up with the business. The consumer who signs ten non-exclusive buyer's agency contracts might have, at most, two or three agents who actually work for the business. The others simply won't. They know they can't compete, and simply won't bother. Actually, most of them won't sign the non-exclusive agreement. They'll try to talk you into an exclusive agreement, but don't let them. For the consumer's part, they can simply keep looking for agents until they find the ones that will compete.

Indeed, it's only when signing an exclusive contract that consumers are making a bet they can lose. Not only can they, they are extremely likely to. Remember the ten non-exclusive contracts you signed in the last paragraph, out of which you got two agents who were willing to actually do the work? Look at that the other way around. Eight out of ten didn't, and the real proportion is probably higher than that. So if you sign an exclusive buyer's agency contract, those are the kind of odds you're facing. Eighty percent or more chance you're locking your business up with an agent who won't really do the most important parts of the job. I get calls from these people's victims all the time, asking me to work for them without any chance of getting paid. My answer is no. I'm perfectly willing to compete for the business, but I'm not willing to work without pay so that someone else can get paid. I'm eager to make the bet that I can out-compete other buyer's agents, but if someone else has already been awarded the gold medal, I'm not going to so much as head for the stadium for that particular event - I'm looking for stadiums where the gold medal is available to me. How hard do you think the person who has been pre-emptively awarded that gold medal is likely to really work for you? If the answer you got is, "not very" then you understand why you shouldn't sign an exclusive agency agreement. But buyer's agency is one competition where "time in the competition" doesn't control who wins. If you don't award that gold medal before the competition is held, good agents will compete, and they'll work all the harder because if they don't measure up, you can always find some more agents who will. Isn't that what you really want as a consumer?

Caveat Emptor

Original article here

The answer depends upon what they're doing for you.

If you contact them because they're the listing agent for a property, they shouldn't ask you to sign an agreement at all. They have a fiduciary duty to that seller to get the property sold. If the act of asking to sign the agreement causes you not to buy, or not to view the property - something that cannot be known in advance - they have violated fiduciary duty. They've just caused potential buyers to be discouraged. That's as hard a violation as it gets. It doesn't stop a lot of agents, as I've written before about Tina Teaser and Sherrie Shark, but it is a straightforward, no nonsense, no kidding violation of fiduciary duty. It is also a marker for the informed buyer that this is a awful agent. You don't want to do Dual Agency, as I've written on many occasions. There are many reasons why you want a buyer's agent representing your interests, especially if it's a new development. There are all sorts of issues that will bite people without buyer's agents ten to a hundred times or more frequently. Issues that arise directly because of Buyer's who don't want buyer's agents are about nine of the top ten reasons why buyers get burned, including the top three or four.

If all an agent is doing is setting up an internet gateway, or search, that's no big deal either. MLS will allow me to have something like 120 client gateways at a time. I've never had half that at any one time. I can't serve that many people. I can only work with an absolute maximum of about six sets of full service buyers at a time - and that's if I don't have any listings. A smart agent will quite happily set up an internet gateway on the speculation of getting a transaction out of it. I'll call or email these folks periodically to see if they want to look at anything, or anything has caught their fancy. I'm not investing any significant time with them; they don't count against my (self-imposed) limit of six clients at a time. In fact, I make a lot more per hour with these clients than any others. Indeed, those of these folk who only want me for the paperwork will ask me for a contract that says I will rebate part of any buyer's agency commission at that point in time. If my liability is less and I'm not putting in anything like the time I need to for a full service client, I'm perfectly willing to work for a lot less money.

If you come to me to put an offer in, I don't need a contract there, either. The purchase contract specifies that I'm the buyer's agent - I don't need another one. Some agents use this moment as an opportunity to "lock up the business" by insisting people who want to make an offer through them sign an exclusive buyer's agency contract, but there is precisely zero need for any kind of agency contract at that point in time. The agency is created for this offer by the purchase contract itself, either explicitly (as in the California standard contract) or implicitly, by agency law. There's absolutely nothing wrong, ever, with an agent who asks you to sign a non-exclusive buyer's agency contract. You can walk away from a non-exclusive agency agreement at any time, but an exclusive agency contract requires that you stick with them even if this transaction falls apart. Suppose they do something to sabotage the transaction? It happens.

It's a rare client who requires something I have to pay for, but It does happen. Mostly, it's fresh foreclosure lists when it does happen. I haven't been subscribing consistently, as right now the well-aged ones are mostly better, but I know the ones that work for when I do have clients that want them. I can get them starting that day, and going back. I don't charge for this - but that's the only time I ask for an exclusive buyer's agency contract. Not only am I putting out a significant stream of money for their benefit, these people do count against the limit of six clients at a time I can work with - they count double! Working the fresh foreclosure lists is a lot more demanding than anything else I do, because it's all time critical. I can't put it off a day, and often not even an hour, even if there's something else going on with another client - it's got to be done NOW, and there are a lot of misses for every hit. It's kind of like being married to the ultimate high maintenance spouse. If that spouse is not willing to give just as much, nobody rational wants any part of that relationship. If you want an agent to put in that kind of work, you're going to have to commit to that agency relationship.

But the one common time a good agent will ask for a buyer's agency contract is when someone wants a real full service package. Property scouting is far too time intensive to do on speculation that you might want to do the transaction with me after I invest the time to find a real bargain. The agent has to invest usually weeks of time up front, culling out the bad prospects in favor of the better ones. This is, by the way, far and away the hardest work of the transaction, and the work that gets done has most of the liability of the process. A good agent - one who knows how good he or she is - will still only ask for a non-exclusive contract here. I'm perfectly willing to bet that I'm going to find you something you want to buy, and if I don't, then you owe me nothing. I'm eager to make that bet, as a matter of fact. I am not frightened of people who want to work with multiple agents. I know that the vast majority of other agents won't get out of their offices to go look. But if I do find something you want to buy - I take the time and do the work, and my experience and training spots a superior value - then I'm not going to countenance you then taking the transaction to some other agent. Kind of like a mechanic who gets the problem fixed - and then you decide to take the car to another mechanic. You're still going to have to pay the mechanic who actually solved your problem, and you're still going to have to pay the agent who finds the bargain. You don't think the agent did anything to deserve getting paid? Then don't buy that bargain property they found for you! But if you want to buy the property they found, then there is, by obvious fact, something particularly valuable, both about their property and about their work in finding it! If that were not the case, you wouldn't want to buy it.

So it's reasonable to be asked to sign a non-exclusive buyer's agency contract. As a matter of fact, agents that actually do this work have learned that if they don't get you to sign it, a very large percentage of people will then go to a discounter or rebate house, or even just buy the property "without an agent", thinking they'll get a better bargain that way. Not only will you get a better bargain through the agent who understands the property and the market, that agent can then stay in business for the next time you, your friends, or your family wants to buy real estate. That's a win-win. But trying to cut out the agent who found the bargain is a lose-lose. You'll get a cookie cutter transaction from someone who doesn't understand the market and can't bargain as well - you'll end up paying more, and if there comes a point where you should walk away, they won't know it and won't tell you if they do.

Caveat Emptor

Original article here

First off, let me say that your site has been very informative and helpful. I stumbled across your blog looking for information on ARM vs. 30 year fixed loans and ended up reading every article.

One issue I have never really seen addressed is joint loans. When a couple, married in this case, gets a loan, which FICO score do they use?

Right now, my wife is a nursing student, when she graduates in August we want to buy a new home that is significantly more expensive than our current home. Our combined salaries at that point should be somewhere around 120K. I have been told by a mortgage professional in our first phone conversation that being a student counts for "years in line of work", but we would have to wait until she receives her first paycheck from her new job before we could count her income. We just accepted an offer on our current home last week, and will have enough cash to put down 10% in the price range we are looking at (200-300 K). If we want to buy before she is employed, but has an offer so we know her salary, what are our options? It seems to me that we would be in a situation where we are doing a Stated Income type loan.

The answer to this is that whoever make more money is the primary borrower. This works with a couple as well as other arrangements. It's a very simple answer, but you'd be amazed how often I have to repeat it for trainee loan officers. Of course we all want to use whichever score is better, but it's the person who makes more money whom the lender will consider to be the primary borrower. It's their income that's providing the main source of income with which to pay back the loan.

Now as far as A paper goes, it's kind of academic. If you want to use both incomes for the loan, you both have to qualify. This can be an issue when one spouse forgets to pay bills and the other is as a-retentive as I am about it. Over time, spouses credit reports tend to track one another more and more closely, as they switch from single credit accounts to joint accounts. If it's a joint account, doesn't matter who forgot to pay the bill - you both take the hit. On the other hand, even long-married spouses don't tend to have exactly the same score, and in many cases they have intentionally segregated the credit accounts for precisely this reason, that one spouse is better about paying bills. So one spouse has a 760, and the other spouse has a 560. Ouch.

It is to be noted that the superior solution is to have the responsible spouse pay all of the bills, which results in two high credit scores. Why is this important? If one of you has a 760, they may qualify A paper. If the other has a 560, you have a choice: go sub-prime (if you can find it), or have the high scoring spouse be the only person on the loan. In other words, when you're talking about A paper, you both have to meet the credit score minimums, or you don't qualify as a couple.

This has implications. Suppose you have a 760 score spouse who makes $3000 per month, and a 560 score spouse who makes $5000 per month, you have a choice: Qualify based upon $3000 per month, go stated income (assuming it ever comes back), or drop to sub-prime (if you can find it).

$3000 per month doesn't qualify for a lot of house most places. So if you're thinking 3 bedroom house, you can be stuck with small one bedroom condo - if you want the best rates. Most people don't want to accept that.

The second alternative is going stated income. As of this update, stated income is essentially extinct. It's not quite illegal, but nobody actually does it because they can't sell the loan and the agencies that rate financial assets consider it a junk asset. This only works if the necessary income for the loan is believable for someone in that occupation. Even if it comes back someday, somebody who makes $3000 per month is not likely to be in a profession where $8000 per month is a believable income, and most people tend to overbuy a house rather than under-buy, regardless of the fact that under-buying is a lot more intelligent in most cases. Furthermore, you are committing fraud if the lender finds out and wants to prosecute.

The third solution is to go sub-prime, where you'll qualify, but get a higher rate and almost certainly a prepayment penalty. At this update, sub-prime lenders who will lend to someone with a lower credit score are difficult to find, and the down payment requirements are stiff. Furthermore, a single borrower with a 760 credit score gets a better loan, with proportionally less of a down payment, than the couple in this case - the primary borrower has a 560 score, remember - but they just won't qualify for as large of a loan because they can't afford the payments. Most people want to buy the more expensive property with a crummy loan rather than buy the property one spouse can afford, but it's just not on the list of options for most folks right now. The down payment, particularly for low credit scores, tends to be a major issue. Except for VA loans, 100% financing or anything close to it is very difficult to get.

Once upon a time, you might also have gone NINA, which is a "here I am - gotta love me!" approach where income is not verified, nor employment history. The loan you get is based totally upon your credit score and equity picture (how much of a down payment you make, in the case of a purchase). The rate was higher than stated income and the restrictions on equity were greater, but sometimes it was the best loan people could actually get. Unfortunately for those people, NINA went away even before stated income.

Now, as to what you were told, student does not, in general, count as time in line of work. Sometimes, exceptions are made for advanced professional degrees - medical doctor and lawyer and nurse - and have actually gotten easier than since I first wrote this. Even so, the lender is going to be careful because many folks get their degree and their license, then end up finding they can't stand the work. That's one of the main reasons for the two years line of work requirement. As a question to make why this more clear: How are you going to compute her average monthly income over the last two years? That is the way full documentation loans are justified. Some sub-prime lenders will accept it (not the better ones), or the person who told you this could just be planning to substitute a stated income loan based upon your income. The fact is, that unless you're talking ugly sub-prime, they're not going to accept your wife's income until there's some time actually working it. Many people graduate school and never work in the field. They don't pass licensing, or they decide soon after they start that it's not for them. When this happens, they generally end up not being able to afford the loan - and that's not something the lender wants.

As I keep telling folks, there are a lot of shysters out there in the mortgage profession. The easiest way to get people to sign up is to promise the moon, and until you get the final loan paperwork you have no way of knowing whether they intend to deliver what they said.

Caveat Emptor

Original here

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

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

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

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

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

Bankruptcy is another deal buster. People in Chapter 13, or just out of Chapter 7. Most banks won't touch them. It's not really rational, but you there you are.

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

Related Party Transfers are another questionable point. All of the background for loans assumes that the transaction is between unrelated parties, who have no reason to cooperate in order to do the lender dirt. If you're buying the house from your brother, that assumption goes out the window. Some lenders will do them, others wont. Some will but charge extra. Others will but have special requirements. Whatever they are, you have to meet them.

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

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

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

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

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

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

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

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

Caveat Emptor

Original here

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

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

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

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

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

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

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

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

On a note of personal relevance, at the time this was originally written, written rates were higher than they were two years previous, and the person who asked was in an interest only loan, while interest only loans were extremely difficult to get then (and harder now). The payment is likely going to end up higher in such circumstances, especially if you roll loans costs in even if the interest rate (i.e. actual ongoing cost of money) is lower. If the reason a borrower is in an interest only loan was that their debt to income ratio couldn't qualify for the real payment on a sustainable loan, that refinance is probably not going to happen for you. With prices having decreased locally by 25 to 30 percent, your loan to value ratio may not support refinancing either. If a refinance is not going to happen, and you can't afford your current payment, it's time to sell now. The FHA Secure program helps some people, but requires documenting enough income to afford all of your payments, and the 125% refinance programs Fannie and Freddie have out have the same restrictions. You owe what you owe and the rates are the rates. If the numbers don't work, get it sold. (On the plus side, due to underwriting paranoia the rates for those who can qualify at this update are very low)

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

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

Caveat Emptor

Original article here

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

Why would you want to do this? Taxes. No other reason but taxes. If the taxpayer makes the exchange according to the provisions, they defer the gain. But we're talking capital gains, not ordinary income, so keep in mind it's not worth going gonzo over. The maximum long term capital gains tax rate for most folks is 15 percent. At this update, our national leadership is set to allow the capital gains tax to revert to the same rate as ordinary income, so expect a lot more people to make use of this and revenue collected to actually go down. Getting to keep 100 percent of your gains instead of 85 (or 60, as of January 1, 2013) is worthwhile, and when we're talking sometimes about multiple hundreds of thousands of dollars, that's quite a bit of motivation. It's nice to be able to invest and use those (potentially) tens of thousands of dollars, rather than basically forking them directly to the tax man.

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original here

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here

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

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

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

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

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

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

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

Finally, there is one more factor: The Mortgage Loan Market Controls the Real Estate Market. Right now lenders are being picky about what circumstances they will loan money in, and incredibly picky about the loans they actually fund. This means that if you're one of those folks whom the lenders will fund, or who doesn't need a loan, you'll be able to pick up wonderful bargains.

Caveat Emptor

Original here

I refinanced my house and an existing lien was not discovered

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original here

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

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

First the good news: the change for the better is the new government forms. It's been almost 6 years since The new HUD 1 and Good Faith Estimate were approved, and they are more intuitive and easier for laypeople to understand than the old forms. There is also new verbiage on the forms that tells people that just because they applied for this loan in no way obligates them to actually complete it. That's also good

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here