Dan Melson: August 2014 Archives

There are many ways of suckering real estate consumers, and cash as an inducement to get people to swallow a raw deal is one of the most common.

From sellers (usually developers), "free" upgrades are one of the most common. They overprice the property by $50,000, and make you feel like you're getting a deal with "$10,000 worth of free upgrades" that really cost much less. In many cases, they're pre-installed and if you wanted to buy one without the upgrades, they would be unable to accommodate you. But if you're not working with a good buyer's agent who is looking out for your interests, you'll never hear about better properties offered for less.

From agents, they offer commission rebates or reduced price listing packages. But to pretend that these packages offer the same level of service as more expensive packages is ridiculous. If you're looking for a cheap MLS listing service, I've seen them for less than $100. But if you want someone to market your home, look for and attract the buyers you really want, or negotiate on your behalf, you are going to be extremely disappointed. When you are dealing with a strong sellers market like we've had for most of the last decade and don't care if your property sells for ten to twenty percent less than you could have gotten, discount listing services may be the way to go. If you are dealing with a buyer's market, if you have some issues with the property, if you really want someone to market it in such a way as to find your ideal buyer and get the best price, the more expensive agent who does more work is likely to get you enough more money to more than pay their increased compensation.

Agents who offer a portion of the buyers agents commission back are not the most proactive agents out there. They do not typically advise you as to the state of the market and whether there is a better buy out there. They aren't looking for the better bargain, they don't know enough about the state of the market to be strong negotiators, and they're certainly not out scouting properties looking for value and trying to spot issues before you make an offer. They do the minimum necessary to get a commission - they literally cannot afford to do more. It is trivial for a more involved agent to get you a better overall bargain.

Some sellers will offer cash back to the buyers. This needs to be distinguished from paying the closing costs you would normally pay as the buyer, which is legal and acceptable, providing it is disclosed to the lender. When the seller offers to put cash back in your pocket, you have the choice of either disclosing it to your lender or not disclosing it. If you don't disclose it to the lender, congratulations! You have just committed fraud, and lenders do get their dander up over it. If you do disclose it to the lender, they will base their loan off (at most) the net sales price, which is the official price minus the rebate. This shoots yourself in the foot other ways, as well, because it will likely increase your tax assessment, and could increase your cost of insurance.

Cash back from a loan provider is most often an intentional distraction, so that they don't have to compete on the real price of the loan. They tell you you're getting $10,000 cash back instead of how much the loan is costing, they can hit you for an extra $2000 in closing cost markups and three points of origination, not to mention that what they are really doing is adding all of that money AND the $10,000 to boot to your balance, where you'll not only owe the money, but pay interest on it for years. Plus it's likely that they stuck you with a higher than market rate of interest as well, because you were distracted by what you thought was free money, so they make more money there, also. Shop your loan by the terms, rate, and total cost to you. All of this can trivially eclipse the $10,000 they put in your pocket - even if they weren't adding that $10,000 to the balance of the loan.

Offers by a lender to pay your appraisal fees are most often trying to lock up your business from their competition. They're not competitive on price, so they apparently offer you a $400 freebie, while charging you $2000 extra in marked up closing costs, those same three points of origination I talked about, and then they ding you $500 for the appraisal on the final paperwork. This is one of the best ways to get a very high markup on a loan that there is. If you like paying more for a loan than you need to, a "free appraisal" is one of the best ways to go about it.

Finally, this article wouldn't be complete without mentioning several of the ways that quoting low payments for a loan can mess you up. The average consumer may know better in other contexts, but they still shop for real estate loans by which one has the lowest payment. This is basically financial suicide. When I first wrote this, there were so many loan providers out there pushing negative amortization loans, in which your balance owed increases from month to month in order to allow you to make lower payments, that it was difficult to find someone willing to do a thirty year fixed rate loan. The negative amortization loan is now gone - lenders and investors lost too much money on them - but the whole phenomenon is still instructive. People trying to sell you a low payment are crooks. Real cost is interest rate and closing cost of the loan, and negative amortization loans carried real rates more than two percent higher than thirty year fixed rate loans.

Nor is this the only game played by quoting low payments, merely the most prevalent and most egregious right now. Interest Only loans, short term hybrid ARMs, and Temporary Rate Buydowns are all quite common. Even if you manage to dodge that bullet with those who quote you low payments in order to sell you a loan (unlikely), there are still all of the standard games that get played with payment. They fudge the math, they "forget" to include the costs in the computations, they pretend you are going to pay the costs of the loan out of pocket when they know good and well that you intend rolling them into the loan, they just lie about their rates and the costs to get them, or, to be able to quote a low payment, they quote you the rate that costs so much that you will never recover the costs of that loan over its entire lifetime and pretend it doesn't have those costs. The payment is determined by how much you borrow, at what rate, with what length repayment schedule. The math is the same regardless of the lender. You need $X for the obligations - either the current loan or the purchase. Adding the least cost and being charged the lowest interest rate (always a trade-off between the two) makes for a lower real cost to the loan. Remember, when you refinance, or buy another property, you're paying for your loan rate all over again, so all that money you paid to get a lower rate is gone when you let the lender off the hook by refinancing or selling the property. Most folks do this far more often than they realize.

Greed is good, Gordon Gecko not withstanding. But let's make it rational greed, because thinking that you are getting a freebie and not asking what it really costs is likely to cost you many times the amount of what you think you're getting for free.

Caveat Emptor

Original here


There have always been real estate transactions that fall apart. The reasons why they fall apart are as varied as the people who enter into the transaction in the first place. Let's get back to the very basics for a moment. An offer to purchase is a representation that a given prospective buyer would be at least willing to purchase the property on the terms you are offering. Accepting that offer to purchase means that the seller is at least willing to sell it on the same terms that the buyer is offering to buy upon. If one or the other of these parties is not willing to consummate the deal on those terms, why was there both offer and acceptance? There was offer and acceptance, or there isn't anything more than negotiations to fall apart. People fail to reach agreement all the time. That's not what this article is about. It's about what happens to prevent the transaction from being completed after you have a valid contract.

The last credible figure I heard was that 50 percent of all escrows in San Diego County are falling apart. This means that one out of every two contracts don't happen. A few years ago, the proportion was a small fraction of that - I can't find it online, but I seem to remember 11%. This increase is both outrageous and preventable.

The first reason transactions fail is new information. It isn't cost effective or a good negotiations tool for a buyer to spend money on inspection and appraisal before there is an acceptable contract. When this information comes in, you can expect there to be a reassessment of the transaction, because you can expect there to be something about the property that does not conform to reasonable expectations. I certainly can't remember any transactions I've had where the inspections didn't reveal anything new. Most of the ones where I was buyer's agent, what was revealed was trivial enough to ignore, but never a one where there was nothing. Transfer disclosures from the current owner to the prospective buyer are another of the possibilities for new information to crop up.

All of this new information can indicate a need to subsequent negotiations when it comes to light. If the buyer thinks it's small enough that they are willing to accept the transaction "as is", they can choose to let the transaction continue on the track it's on. If it's big enough that they're unwilling to deal with the situation, they can also choose to walk away. The vast majority of the time, the sanest response is some new negotiations based upon the new information. This isn't normally about things like overall sales price, it's about getting the property into the condition and functionality that the buyer thought they were getting in the first place. Either party can be obstreperous and unreasonable at this point, effectively killing the transaction.

There's also the issue of cold feet, and the related issue of "grass is greener" syndrome. Either one can apply to either party in the transaction. In the first, the buyer decides they don't want to buy or the seller doesn't want to sell after all. In either case, they weren't really "sold" on the benefits of the transaction to them. "Grass is greener" is where they still want a deal, just not this deal. Those happen when markets are asymmetric in power. A few years ago, it was sellers who wanted to bail out of contracts they had duly negotiated because someone offered them a higher price. More recently, it's been buyers trying to pull out because they think they've found a better deal somewhere else. Both are vile. It's not a sin to want the best possible deal, but once you enter into a legal contract you should be prepared to honor your representation that you want that deal. Both of these phenomena are the fault of poor agents, and both are a good way to waste a lot of money in legal expenses when their clients are sued for specific performance. I don't want any part of agents that don't take appropriate steps to prevent either one of these in their clients, and I take note when I hear about them. It's also a reason not to take an attitude of "no quarter!" in negotiations. My client signed that offer or contract because those terms will make them happy. If the other side decides they need to bail out because the terms are odious, my client isn't happy.

Closer to the point is ability to perform. This can be a seller who can't or won't or doesn't meet their obligations in a timely fashion. Delivering good title to the buyer is kind of important to the transaction, and it does occasionally happen that the seller can't do this. Or they don't have the money to make needed repairs, or just won't get off their backside to actually do it.

But far more commonly, it's the ability of the buyer to perform their obligations under the contract that kills the transaction. I have heard about occasional buyers who couldn't or wouldn't or didn't perform on other scores, but the most central of these in the current market, and the reason for at least 90% of the rise in failed transactions, is that the buyer cannot qualify for the necessary loan.

The Era of Make-Believe Loans is over, but judging by the evidence, there's an awful lot of people who haven't figured this out yet. That's the first thing I want to find out when I get a new buyer into my office: What's the evidence of their ability to qualify for the necessary loan? How much do they make, what are their other payments, what is their credit score, how much do they have for a down payment, and is there anything about their situation which might be a cause for concern during the loan process? I don't want to give them the third degree, but I want to be confident I'm not wasting their time or mine, and that I'm not setting them up for a failed transaction. Failed transactions don't make clients happy, they waste the client's money, and they aren't any good for my business, either.

A few years ago, if somebody came into my office with a 580 to 600 credit score and two years in the same line of work, chances were excellent that a loan could be done - even 100% financing. That is not the case currently, and the time to plan the loan is before the clients fall in love with the property they can't afford.

Lest I be unclear: except for VA loans,100% financing is completely gone (at least for right now). The same thing applies to Stated Income loans. Purchase contracts not written in concordance with current loan underwriting standards are going to fail and that is as predictable as gravity. Write the purchase contract wrong, and you have killed the deal before it begins because there's something there that's not going to be acceptable to the lender, and sometimes it can prevent other folks from signing off on the deal as well. Furthermore, if the required steps in the contract are going to cause the seller to balk, you're better off finding out before you've got a contract.

The loan environment, especially for loans above 80% loan to value ratio, has changed drastically in the last few years, and all of the changes thus far have been in the nature of making qualification more difficult.

Even the government programs like VA and FHA with their low down payment requirements have their stumbling blocks. Not only do they require a buyer to qualify via full documentation of income (as do ALL government-based loan programs), but there are subsidiary requirements as well. Some properties are not eligible, period. Some people (and some companies) can't be involved, period. Investment property and second homes are iffy to doubtful with the VA and practically non-existent for FHA. It's a real good idea to know if you're going to hit one of these roadblocks before you are sixty days into a transaction that's not going to happen, and now we're all going to pay lawyers to fight over the deposit.

When I list a property, I want real information that tells me a loan is doable for this borrower before I advise my client to accept a given offer. Pre-qualification is a joke and even pre-approvals aren't anything to put stock in. The only examples of either that I trust are ones that I wrote, because I know what went into them. However, Steering is illegal. I can't require the buyer to get their loan through me or even to talk to me (or anyone else of my choosing). What I can do is require their loan officer fill out my form and provide documentation that enables me to determine whether a loan is doable or not. If I can't find a lender that can fund that loan, we've got a problem. When I'm the listing agent, it's kind of important to know this before we counter.

Unfortunately, we've had ten years where loan money was easy to get, no matter how ridiculous the transaction, and it's left a very strong imprint on many agents. Many have literally known no other environment, and they're finding it hard to make the necessary mental changes. I haven't been in the business ten years, either, but I do understand how the loan environment has tightened up and its effects upon my clients. Even the agents who have been in the business much longer may have no real grasp of the loan environment and often they're just checking off the box that says, "pre-qualification" on the checklist because that shows they did their due diligence. That isn't going to fly anymore. It may or may not help them when they're defending against a lawsuit, but it certainly isn't going to make their future ex-client happy about the thousands of dollars they lost, either because they couldn't qualify or because their prospective buyer couldn't.

Caveat Emptor

Original article here


For at least the last thirty years, I've been hearing "affordable housing" advocates yammer about the high cost of housing, and how working families can no longer afford "decent" housing, which they apparently consider to be the three or four bedroom, two bathroom detached home. They go on and on about what is necessary to create more of this type of housing and our "moral obligation" to create more of it. In light of the current situation, I'm going to make a conscious effort to continue my occasional series on factors that influence the overall market for housing. I'm going to examine the broad macroeconomics involved, the assumptions necessary, whether it is or is not long term sustainable, and the choices we face in sustaining or curtailing it.

Today's topic is how the housing market of today came about and what sustains it. A century ago, roughly eighty-five percent of the population did not live in major cities, but rather in small farming communities which more or less blanketed the nation. Suitable land for housing could be anywhere, and so it was much more readily available and much cheaper. When the criteria is "anywhere there's land I can farm," you can choose any arable parcel and build a house on it. Even if you don't live on a farm but in one of the small towns, when you can walk the length of the town in five or ten minutes, it's a lot easier to arrange housing for everyone. If one particular town becomes too crowded, the next one over became attractive. If you need a place for a few more people, one of the farmers whose land immediately surrounded the town could usually be persuaded to sell some land. The cities were dense affairs, much more like european cities than is the case today. Indeed, the few large cities we had built up before World War II still retain that urban core with dense multistory housing that is characteristic of the period. The typical pattern of the day was that young women, in particular, would continue to live with their parents until marriage. Young men of marriageable age would most often live in rooming-houses or boarding houses once they became gainfully employed. Apartment dwelling was only somewhat expected for young couples just getting started and urban dwellers who might have been together for many years, yet could not afford anything better in close proximity to their profession. Urban housing was tight-packed because the land was very expensive by standards of the time, and urban transportation was communal to a far greater extent than today. It is much more common today for even people in Manhattan to own and drive cars than it was before World War II. The use of steel as a building material was a big deal for those urban centers because it meant that it was possible for them to build further up. San Diego is very much a post war city, but even we still have areas that were built in those times - packed in tightly, cheek by jowl, extremely dense living. Once upon a time, before reliance upon military work and bad policy ruined it, San Diego was a major west coast port and the base for the largest fishing fleet in the world - two of my aunts married tuna fishermen. Even further out, in what were before WWII the "newly urban" areas of North Park and National City, the housing very much resembled classic "company town" housing - 600 and 800 square foot one and two bedroom cottages sitting on 3500 square foot lots. These were the era's predecessor to the exurban bedroom community of today, usually owned by members of the skilled trades or young professionals. The core suburbs today such as La Mesa were still economically speaking, farming communities. Even Mission Valley was mostly farms until the early sixties. During this time frame, only the comparatively wealthy lived in larger houses within city limits. If you go to Mission Hills above Old Town, or Grant or Banker's Hill (and here and there in other neighborhoods) you can still see a very few of the large houses for the well-to-do of that era.

Indeed, the three bedroom, two bath detached house in an urban setting for the working class is almost entirely a creation of the post World War II mood in this country. For several years, very little housing had been built, and now these men who had gone off to war and saved the world as seventeen and eighteen year olds who had traditionally remained with their parents or moved on to boarding houses until they got married were now returning as twenty-two and twenty-three year olds who were traditionally married and starting families by that point in their lives. The women to marry them wasn't a problem; the housing to put the new families in was. These folks had several years of savings (war bonds, the wartime sacrifices, etcetera), and the traditional apartments were considered a poor and at best temporary inconvenience until that new modern post-War marvel - tract housing - could be built in sufficient numbers. And if such housing was horribly inefficient in terms of land, utilities, and transportation, nonetheless we were the wealthiest nation in the history of the world, and accommodating their desires for such was the least the nation could do for our valiant warriors. Furthermore, with the aforementioned savings they had accumulated during the war, the young men and their new wives could afford to pay for this new housing. If you're wondering about "It's a Wonderful Life," keep in mind that most of that 1946 movie takes place well before the war, and even by the time of its release, the country hadn't yet shifted very far from the way things were done pre-War.

The land was available and largely vacant then, and certainly could not and can not be covered effieciently by public transportation, but the newly affluent families (through savings during the war and better jobs after) could afford far more automobiles as well. For the first time, women were staying in the work force in significant numbers until motherhood. There was plenty of land available. As a young child in the early sixties, I can still remember when there was space between all of the suburbs, even when we drove to Los Angeles to visit family members or Disneyland. I-5 was brand new thanks to President Eisenhower, and from the point we got out of the Pacific Beach, there weren't any towns visible from the road, just widely separated houses, until we passed Oceanside and Camp Pendleton, at which point there wasn't anything more until San Clemente and San Juan Capistrano, then another good long way past that before there was anything more again. It wasn't until just before Disneyland that we saw more city. The I-5/405 split in the middle of present day Irvine was out in the middle of nowhere back then. My parents almost bought a 320 acre farm just east of the Del Mar fairgrounds the year I was born. One of my best friend's parents had considered a farm in Mission Valley, despite the fact my friend's father was in the navy. If you clicked on the images, you know none of these are empty land any longer.

Why not? Suburban housing and to a lesser extent, support services have eaten it up. The only open area between the Mexican border and the Tejon Pass is the stuff that's been held aside for other reasons, such as Camp Pendleton, which the Marines badly need. Los Angeles with 3.8 million people has an area of almost 470 square miles, while by comparison cities of similar population elsewhere such as Ahmedabad in India, Alexandria in Egypt are a fraction the physical size. If we're going to keep doing the same thing, we're going to run out of places to put everybody. In fact, in Southern California we have essentially done so. New development is taking place in Hesperia and Victorville, or out past Banning, or out in Hemet or eastern Murrieta, all of which are an hour and a half minimum trip time from the center of the urban areas they service, even if you're driving it at an hour when there's no traffic. Nobody wants to drive an hour and a half each way to work - especially not in stop and go traffic when gas is this expensive.

This also creates a lot of logistical problems. Most inhabitants of the cities concerned would have no trouble naming the most salient problem, which is transportation. When you have that many people that spread out, and you need to move them all significant distances at pretty much the same time, it takes a massive amount of transportation infrastructure to do so. US 395, the predecessor to I-15, was one lane each direction from Escondido until just a few miles south of present day I-10. But it isn't just transportation. Utilities are a much larger headache to supply than sixty years ago as well, and the logistics of keeping that many people supplied with groceries and gas and everything else make the transportation and utilities problems seem easy.

Finally, there are legal and political barriers to continuing to build housing in this manner. Environmental concerns are the most obvious of these, but building codes, zoning, and other concerns form significant obstacles to its continuation, as does the consumption of land. Once upon a time Southern California was some of the most productive farm land there was. My wife's uncle was a well-off citrus grower until the developers bought his land for millions of dollars. I can remember (barely) large tracts of citrus in El Cajon and Lemon Grove and Escondido. The only reason the hillsides north of Escondido are still relatively uninhabited avocado farms is because they're steep enough to render development difficult. The same applies to all of the other agricultural land remaining.

All that aside, I would like for housing prices to be affordable, and for everyone who's going to grow up in this country for the next century to be able to afford the type of housing they want, where they want. Absent some major changes in public policy and employment practices, it's not going to happen. The land no longer exists, we can't afford ongoing losses in arable land (look up how few countries in the world are net exporters of food), the transportation networks are saturated, environmental regulations are restricting development as are legal hurdles such as necessary permits (which add roughly $20,000 per unit to the cost of new housing, but over $100,000 to the price due to constricted supply), and lets not forget legal challenges from NIMBYs, BANANAs and environmentalists who already have their 3 bedroom 2 bathroom suburban home, and whose property values just happen to increase in a manner directly dependent upon how far they can constrict the supply of new housing. In short, the current situation does not appear to be sustainable absent major societal changes.

Caveat Emptor

Original article here

Must you sell if you list at a specific price and the broker comes up with a qualified buyer?

in the US in general, no you do not have to sell, but you could still be liable to the broker for their commission. You might also need to justify why your decision was non-discriminatory (assuming that it wasn't), but if (for instance) your broker brings you someone you have had business dealings with in the past, and they have tried every maneuver possible to scam you after reaching agreement in those past dealings, you are (usually) quite justified in refusing to do business with them.

Talk to a lawyer, but generally speaking, if you do not have complete and perfect agreement between the parties on the contract, you do not have a valid purchase contract. If you didn't want to do business with (say) Bill Clinton or George W. Bush, such is your right as long as you refuse to do so on the basis of them being a particular individual, not based upon them being members of a class protected under anti-discrimination law.

In general, nobody can force you to sell unless you've agreed to a fully executed purchase contract. But I'm talking about legal force here, not economic. It can be expensive not to take a particular offer. I am not familiar with any cases where a real estate agent, listing or buyer's, was awarded a commission even though there was no transaction consummated, but that doesn't mean it couldn't happen. And lest the general tone of this article be mis-interpreted, refusing to sell on the basis of race, sex, religion, sexual orientation, lifestyle or any other legally protected reason is setting yourself up for a lawsuit.

List price is a representation that you would be willing to accept that price, but there are other proposed terms of the contract to consider. As I have said before, if you're still arguing about who replaces a given light bulb, you don't have a valid contract any more than you do if you're $100,000 apart on the price. I can't imagine stressing about a light bulb like that, but the point is just because someone offers you full list price does not mean you have to accept their offer. If the other terms proposed are onerous, if it comes attached with conditions you don't care to accept, or if it is merely from an individual who you have done business with in the past and are unwilling to be involved with again, you are usually within your rights to refuse the offer.

Or instead of an outright refusal, you can return a counter-offer back to them, which is usually the smarter thing to do.

Caveat Emptor

Original here

Purchase Money: This is a loan that enables you, in combination with your down payment, to actually purchase the property. If you spend cash to buy the property and get a loan the next day, that is not a purchase money loan. Whether it is or is not a purchase money loan has significant tax consequences everywhere, and significant legal consequences almost everywhere.

Rate/Term Refinance: This is a refinance that does not put money in your pocket for other purposes. As it is more usually defined, this is a refinance that does not put significant numbers of dollars in your pocket. These loans typically have the best rates of the three purposes. For A paper rate/term, you are allowed to pay off an existing first mortgage against the same property, you are allowed to borrow enough money to "seed" a new impound account, you are allowed enough money to pay up to one month of prepaid interest, and you are allowed up to 1% of the new loan amount, or $2000, whichever is less, to be put into your pocket for other purposes. In order to qualify as rate/term, A paper cannot do anything with an existing second (or third) mortgage, unless every last cent of that second (or third) mortgage was spent in acquiring the property, a fact which can force you to either do a cash out refinance or to subordinate your existing second mortgage to a new first trust deed. Sub-prime may have more forgiving definitions regarding other debts, but choosing a sub-prime loan because it allows your new loan to be defined as a rate/term refinance is like voting Cthulhu for President because you're tired of voting for the lesser of two evils. Sub-prime loans have pre-payment penalties by default, and generally carry higher rates.

The difference in tradeoffs between rate and cost can be small to non-existent between rate/term and cash out refinances, particularly at lower loan to value ratios. The difference also varies depending upon credit score, size of loan, and individual lender policy, but it can be quite steep. The point is to get an honest discussion of your options beforehand, not simply to sign up with some lender who pretends that the difference doesn't exist.

Cash Out Refinance is any refinance that does not meet the definition of rate/term. It puts cash in your pocket, it pays off other debts, it includes or combines or refinances a home equity loan or home equity line of credit that you took out for improvements or to pay other debts. Violating any of the requirements to be considered rate/term means that the loan becomes a "cash out" loan. Cash out refinances will usually have the least favorable set of rate and cost trade offs, what the uneducated think of as "highest rates" of these three purposes, at least at higher loan to value ratios. Depending upon the lender, cash out loans with loan to value ratios under seventy to sixty percent may have the same rate structure as rate term refinances. Cash out refinances also usually have slightly tougher underwriting guidelines than either of the other two categories. One specific example that trips a significant number of people is that there cannot have been anyone added to title in the last six months.

Caveat Emptor

Original here

One of the concepts I keep seeing without a decent treatment is the concept of leveraging an investment. Real Estate has this like no other investment. You go talk to a bank about leveraging eighty to ninety or even one hundred percent of your investment in the stock market, or the same percentage of a speculative venture, and see what happens. Be prepared for laughter, and they're not laughing with you. But for real estate the lenders will do it. Why? Because it's land. It's not going anywhere, and they're not making any more.

The fact is that real estate has the potential for leverage like no other. This is due to the interplay of two factors. One is the fact that you can rent the property out to pay for the expenses of owning it, and even if you use it yourself, you're able to save the money you would be paying in rent. Everyone's got to live somewhere, and every business needs a place to put it. The other, more important factor is leverage, the fact that you're able to use the bank's money for such a large portion of your investment. The bank will loan you anywhere from fifty to one hundred per cent of the value of the property. Yes, you've got to pay interest on it, but you're paying that through the rent - either the rent you'd save or the rent you're getting - and there are tax deductions that make such costs less than they might appear.

Now here are some computations based upon the situation local to me. Suppose you have a choice as to whether to buy a three bedroom single family residence for $450,000 (to pick the figure for a starter home) or rent it for $1900 per month. Let's even allow for the fact that the home may be overpriced by $100,000. You have $22500 - a five percent down payment. More than most folks, and you would invest that and the difference in monthly housing cost, and earn ten percent tax deferred if you didn't buy the house. Let's crank the numbers and see what they say.






Year

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

Value

$450,000.00

$374,500.00

$400,715.00

$428,765.05

$458,778.60

$490,893.11

$525,255.62

$562,023.52

$601,365.16

$643,460.72

$688,502.98

$736,698.18

$788,267.06

$843,445.75

$902,486.95

$965,661.04

$1,033,257.31

$1,105,585.32

$1,182,976.30

$1,265,784.64

$1,354,389.56

$1,449,196.83

$1,550,640.61

$1,659,185.45

$1,775,328.43

$1,899,601.42

$2,032,573.52

$2,174,853.67

$2,327,093.43

$2,489,989.97

Monthly Rent

$1,900.00

$1,976.00

$2,055.04

$2,137.24

$2,222.73

$2,311.64

$2,404.11

$2,500.27

$2,600.28

$2,704.29

$2,812.46

$2,924.96

$3,041.96

$3,163.64

$3,290.19

$3,421.79

$3,558.66

$3,701.01

$3,849.05

$4,003.01

$4,163.13

$4,329.66

$4,502.85

$4,682.96

$4,870.28

$5,065.09

$5,267.69

$5,478.40

$5,697.54

$5,925.44

Equity

22,500.00

-48,406.32

-17,287.01

15,999.55

51,604.93

89,691.37

130,432.52

174,014.27

220,635.59

270,509.51

323,864.05

380,943.34

442,008.77

507,340.18

577,237.20

652,020.69

732,034.20

817,645.65

909,249.05

1,007,266.37

1,112,149.54

1,224,382.64

1,344,484.16

1,473,009.54

1,610,553.79

1,757,754.34

1,915,294.15

2,083,904.97

2,264,370.91

2,457,532.19

Net Benefit

-31,500.00

-110,236.00

-94,761.88

-77,990.23

-59,828.07

-40,176.54

-18,930.59

-4,021.36

28,797.71

55,524.07

84,333.56

115,367.22

148,774.35

184,712.85

223,349.64

264,861.00

309,432.96

357,261.61

408,553.54

463,526.08

522,407.72

585,438.30

652,869.38

724,964.38

802,381.90

885,736.68

975,442.55

1,071,939.93

1,175,697.38

1,287,213.19


The Net Benefit Column is net of taxes, net of the value of the investment account. The cost of selling the property is also built in. Now most people won't really do this, invest every penny they'd save. I have intentionally created a scenario that contrasts a real world real estate investment where you bought in at a temporary top, with a hopelessly idealized other investment.

There is a potential downside, and it could be big. This is a real risk, and anyone who tells you otherwise is not your friend. Look at the beginning of years numbered 2 through 5 in the equity column. You haven't gotten your initial investment back until sometime in the fourth year. Look at years 1 through 7 in the net benefits column. You're immediately down $31,500, due to me assuming it would cost you seven percent to turn around and sell the property. A year later, due to me assuming the bubble has popped, you're down by over one hundred ten thousand dollars, as opposed to where you'd be in you put it in the idealized ten percent per year investment. There is no such thing, but for the purposes of this essay I'm assuming there is. This is the illustration of why you need to look ahead when you're playing with real estate - a long way ahead. A loan payment that makes you feel comfortable for a couple of years isn't going to cut it. You need something viable for a longer term. If you'll look at projected equity at the beginning of years five and six, it goes between fifty odd thousand and eighty some thousand, assuming you've been making a principal and interest payment. You have plenty of equity to refinance there if you need to. If you need to do something in year three, however, you're hosed. If you've been negatively amortizing, you're hosed. You owe more than the property is worth. The payment adjusts, you can't afford it, you can't refinance, and you have to sell at a loss, as well as getting that 1099 love note from the lender that says "You Owe Taxes!"

But now look ten years out. At the beginning of year 11, you have $323,000 in equity, and if you sell at that point, you are $84,000 ahead of where you would have been if you invested that money in the idealized investment I've posited. That's four times your original investment, and I only assumed real estate went up seven percent per year, whereas the alternative investment went up by ten percent per year. How could that possibly be right?

The answer is leverage. That $450,000 was almost entirely the bank's money. The appreciation applied to this entire amount. But you only invested $22,500. The bank isn't on the hook for the value; their upside is only the repayment of the loan. If the property goes to a value of $481,500 and then $515,205 (normal seven percent appreciation in two years), then that extra money is yours. Think Daffy Duck shouting "Mine! Mine! All Mine!". Daffy's got to pay some money to get the property sold, as real estate is not liquid. Then the bank gets all of its money. The bank always gets all of its money first. After that, however, then the extra belongs only to the owner, not the lender.

The lender gets none of the appreciation. This is all fine and well with them, by the way. They've been well paid whether the property increased in value or not. This money from increased value is all yours. This applies even, as in our example, if the property lost value for a while. Yes, if you had had to sell in year two, you'd have been up the creek. But you didn't; you kept your head and waited until the property increased again. Given that you didn't, the only numbers that are important are the numbers when you bought it, and when you sold it. The rest of the time is completely irrelevant to the equation, a fact that is true for any investment, by the way. Doesn't matter if the value is ten times what it was when you bought on paper, it only matters that when you actually sold, it was for a loss. Doesn't matter if the value goes to zero the day after you buy, and stays there for thirty years. If in the thirty-first year it rebounds to fifty or a hundred times the original purchase price and that's when you sell, then you really were a genius. Get it? Got it? Good.

So when the property appreciated back to $688,000 and change at the beginning of year eleven, and you only owe $364,000 and change, that's $323,000 in equity. You're almost fifty percent owner. Even after you pay seven percent to sell the property, you come away with $275,000, as opposed to a little over $191,000 that you'd have in the idealized but unleveraged investment.

Keep in mind this whole scenario is a hypothetical. Every Real Estate transaction is different. Every property is different, every market is different, and the timing makes a critical difference. That's why you can't just call your broker to sell it and get a check within seven days, like you can with stocks and bonds. That's why a decent agent is worth every penny, and a good one is worth more than you will ever pay us. But properly executed, a leveraged investment pays off like nothing else can, and real estate is the easiest way to make a highly leveraged investment that is stable until such time as it is favorable to sell.

Caveat Emptor

Original here

Yesterday, I published the first half of this article, describing the issues currently preventing a return to a more normal real estate market, and the facts that any proposed solution needs to be built upon. At a quick recap, the main facts to take into account are: magic solutions don't exist, people will continue to be people, The Mortgage Loan Market Controls the Real Estate Market. The main issues causing problems are: Overly paranoid underwriting, the overly restrictive requirements regarding income documentation that do not take into account societal changes since they were solidified in the 1930s, and a return of an old (and discriminatory) monster known as the 60% owner occupancy rule that is only going to get worse with time.

So, how would I fix this mess?

First off, I'd get rid of the 60% owner occupancy requirement for condominium loans. Other than scale, I can't see a difference between this requirement and Redlining, which has been illegal for decades. Furthermore, it's just helping the already rich get richer, to the detriment of those without large amounts of cash for a down payment. I described this issue at length in the first half of this article, so I don't want to make those who have already done so wade through it again, but if you haven't read the first part you probably should. This article will still be here when you're done. I've said many times I don't hate rich people and I want to be one of them, but they don't need the rules artificially rigged in their favor. Nor, unlike investments in employment producing enterprises, does this provide economic benefit to the economy. It's a purely parasitic transfer of wealth from those who don't have a large amount of cash to those who do.

Second, repeal or substantially amend the rules essentially prohibiting all but private money lenders from making more money when they make a riskier loan. I don't want to bring back loan sharks, not that they're kept out now. The current rules enacted in 2008 don't keep loan sharks out and they do keep out the enterprises with the ability to bring real competition back to the field. Allowing the regulated lenders with access to the capital markets to make these loans means that for consumers there is both more money available and a less costly alternative to loan sharks. More money legally able to make these loans means more supply for the same demand which means lowered interest rates, as well as meaning that people have the ability to choose whether getting the loan they can qualify for and get puts them into a better situation, instead of being locked out by law. In the early 1990s recession, such loans and the lenders who made them were at least one of the biggest drivers of recovery, perhaps even the biggest - but they're completely absent now because Congress and the Federal Reserve made them illegal in 2008. Allow mortgage securities investors to make more money if they assume a little more risk, and many of them will choose to do so. In fact, net returns on the secondary mortgage market are so low right now it's hard to imagine a scenario where the increased money they make does not more than pay for the increased risk, meaning pension funds and the like which are required to have so many percent of their money in mortgage securities can maybe start showing something more closely resembling a reasonable rate of return to those investing in them.

Third, we need something (or several somethings) that fills at least part of the niche that Stated Income loans used to fill. Yes, Stated Income was badly abused, but when it existed, there were people it was intended for and those who made responsible use of it for many years. The self-employed, those with large deductible expenses, those with gaps in employment or changes in career. When Stated Income loans went away, a large number of people who weren't having any difficulty making their payments suddenly found they were unable to refinance when their loan hit the end of the fixed rate period. People who were making the payments and had made ALL of their payments, had excellent credit, good reserves of money they could access if they had to, suddenly found their 5% interest rate shooting up to 9% or more but through no fault of their own were completely unable to refinance into something more affordable because the rules they originally qualified under were gone, made illegal at the stroke of a pen by the government. Many lost their homes solely for this reason.

I am NOT saying bring back Stated Income. I am saying we need alternative methods for documenting income that are generally acceptable, and acceptable in all loan niches from A paper down to what used to be called sub-prime. Methods of documenting and making acceptable to underwriters interrupted income. Change in Job Title or Career, providing you can show me a stream of income for at least four to six months at what you're doing now, should no longer be a reason to refuse a loan at all. I think the maximum you should be allowed is the stream documented in the current career, but income from all careers you may have had over some relevant period should be allowed up to that maximum. To illustrate what I'm saying, if six months ago you went from making a salary of $3500 per month as a clerk to $6000 per month as a nurse, you should get credit for ($6000x6months + $3500x18 months)/24 months = $4125 per month. If you did the reverse, you get credit for $3500 per month because the maximum is what you're making currently. Document the income, but be real about the economic changes that have happened since the traditional standards were adopted. Currently, if the sort of situation described in these examples applies, regulatory underwriting standards automatically reject the loan, and that's not in anyone's best interest. Current loan standards reject the loan even if someone went from being an employee making $6000 per month to being a contractor with a contract for $9000 per month for doing the same work, and that is nonsense on stilts.

Finally, I'd concentrate on the low end of the market - real first time buyers. I don't mean what the NAR considers to be "starter homes" of up to the conforming loan limit. I mean the people making $10 or $15 dollars per hour and the properties it would be appropriate for them to purchase as first time buyers. These people strongly tend not to have large down payments because they can't save them on such salaries. If a couple is both making $15 per hour, they're making about $4800 per month. If they've got car payments and maybe some debt, they can maybe afford a $200,000 loan at 6%, which may be higher than current rates but is low in terms of both historical rates and where we're most likely headed.

In most of the dense highly populated urban areas where the majority of the actual population lives, this means condominiums, or developments that may look like detached housing but are still legally condominiums. But condominiums or true single family detached housing, this price range is the real foundation of our housing market.

The real first time buyer market is damned weak for reasons that go back nearly 15 years now. In the Era of Make Believe Loans, the people in this market segment got leapfrogged by real estate agents and loan officers who realized they could make a larger commission by selling the people who should have been buying one of these properties a more attractive and therefore more expensive property. And now, with the 60% owner occupation rule for condominiums, the people who should be the market to buy these are locked out of the vast majority of condominium ownership because nobody will fund the loan they need to buy.

Let's take a slightly more in depth look at the situation of this couple who each make $15 per hour. With taxes and health care, if they can save $500 per month, they're doing better than 95%+ of their compatriots, and at $500 per month it takes them about seven years to save a traditional 20% down payment, assuming no financial setbacks at all. How many times you know has a car gone seven years without needing repairs? Why should their cars be any different?

What I'm trying to get at is that these people do not have enough for a traditional 20% down payment, and rules that require them to have that much are not based upon reality. Such rules will crash the market further, if implemented as currently proposed. This will result in further transfer of wealth from these people to the people who already have the cash for a down payment, who then are able to buy for a lowered price, and turn around and make a profit by renting to these people. Even a 10% down payment takes three and half years to save, while a 5% down payment takes just under two years, and none of these figures include the actual costs of buying the property nor any reserves so that a minor setback that occurs in the first couple years after purchase isn't an unrecoverable financial disaster. Think about that: Two years of scrimping and saving just to make a bare minimum 5% down payment, plus at least another year so they can pay the actual costs of buying, plus perhaps another year or more so they've still got something in the credit union in case the car needs fixing after they've bought the property. Minimum four years, more likely 5 or more, of focused disciplined saving just to have the money for a 5% down payment that the wealthy people in Congress and the lenders behind them are trying to outlaw as too small by a factor of 4. I have a great number of words for those who would mandate a 20% down payment rule for all loans, but I can't use any of them in a family friendly environment.

When I look at the loans which are out there and available to the general public right now, there is one loan program which the first time buyer with a 5% down payment can qualify for: The FHA Loan. The downsides, however, are many. The most significant is that the FHA loan is one of those government controlled loan programs out there that never did repeal the 60% owner occupied ratio requirement, and the FHA is now more firmly wedded to it than ever. Practically speaking, this means that once a condominium complex drops below 60% owner occupancy once, those wanting to buy there will never be able to get an FHA loan again. In point of fact, I don't know of any loan current loan programs requiring less than 25% down without a 60% owner occupancy requirement.

The FHA loan charges an insurance premium to borrowers to pay for the chance of default on the loan. Even if there is evidence somewhere showing that the 60% owner occupancy ratio significantly increases risk of default or loss, even if this requirement isn't illegal for precisely the same reason why Redlining is illegal, there is no reason on God's Green Earth why this insurance premium cannot be adjusted to pay for such increased risk, and if ever there has been a reason why we should make an entire insurance pool pay a slight increase in premiums, this is certainly that instance. The practical fact in favor of it is that paying to remove the 60% owner occupancy requirement prevents a crash in value of that development the first time it drops below 60% owner occupancy. Remember, The Mortgage Loan Market Controls the Real Estate Market. If the FHA won't lend on the complex, and every other lender requires 25% down payment in order to buy, people with less than 25% down payments can't buy there, which means the prices fall for that complex. When the value of a property falls, especially for reasons like that, likelihood of default skyrockets. There's a strong likelihood that removing the 60% owner occupancy requirement will lower the default rate over time, thereby lowering the risk and therefore the premiums necessary for that risk.

Even if such a step does not lower the default rate and therefore the risk over time, insurance pools are legally obligated to pay increased premiums in innumerable instances for purposes of social engineering. If you're not going to argue for the abolition of all of them, show me a more deserving candidate. You can't, because there isn't one. I'm a diehard libertarian and deficit hawk, and I'd vote for the US taxpayer financing this increased cost if there was no other way because the benefits to the treasury would far outweigh the cost. The FHA needs to abolish their 60% owner occupancy requirement immediately if they want to move people in urban areas onto at least the bottom rung of ownership. If they don't want to move people onto the bottom rung of ownership, then why do they exist?

Once people are flowing once more into the bottom rung of housing ownership, I think the market will pretty much sort itself out. It won't be immediate and it won't be perfect, but solutions alleged to have either of those properties rarely function anything like intended. Putting into effect small changes intended to push the markets back towards normal don't prevent someone from also finding some other solution I've overlooked, they won't hamper the implementation of additional ideas, and someone does try other solutions this cannot do anything but help push the market back towards normalcy. Those who currently own and live in bottom rung units will have equity increase as well as just flat out being able to sell, enabling them to in turn move to the next higher rung on the ladder if they so desire - and many of them desire, because they've been wanting to sell and move up for years but haven't been able to sell because the loan markets have been so screwed up, first in one direction (leapfrogging them) then the other (cutting them off from potential buyers).

As a general rule, It's really only first time buyers that have issues with saving a down payment. Once you're an owner, equity tends to increase over time. Not universally, and not evenly, but the vast majority of home owners are paying their balances down every month and when normal conditions apply, values do tend to increase for many reasons. The point is, if you buy a $100,000 condominium that increases in value to $130,000 over a period of several years while paying the balance down to $80,000, when you sell you'll walk away with $40,000 after expenses of selling - a perfectly acceptable down payment for much pricier properties. This is the "move up" or "property ladder" idea that, when the loan market isn't as screwed up as it has been, happens every day because of natural demographics. Normally, "move up" owners tend to have more of a down payment than they really need.

It takes some time, but the people in the rungs above that will see the benefits from this as well. It's straightforward macroeconomics. The "move up" or "property ladder" effect works on such a routine level that it's like water is for fish. Fish don't realize water is there, and most folks take the property ladder so much for granted that it is built into all of their assumptions about housing. The fact that it's so screwed up right now is itself one of the biggest things wrong with the housing market. Fix the property ladder, and you go a long way towards fixing the entire market, given time. It doesn't make everything magically better overnight, but as I told you at the beginning, there's no "magic wand that makes it all better right now" solution. There are, however, a few cheap and easy fixes that get things almost inexorably started in the right direction, especially if undertaken together.

Caveat Emptor

Original article here


Lots of folks have offered lots of different proposals for fixing the real estate markets and the mess we were in (and continue to be in to a less obvious degree). All of the ones I have seen have suffered from one or more of about three problems. First, the majority have been suffering from what I like to call "magic wand" syndrome: somebody waves this magic wand and all of a sudden everything is magically all better. Not gonna happen. Macroeconomics doesn't work that way.

Second, they think that people are somehow magically going to stop doing things in their own best interest. Sometimes I wonder if blunt enough language exists to get through these folks' mental barriers. Any proposed solution that wants to have a hope of being successful is going to have to acknowledge that people will continue to be people, and in the main, act in what they perceive to be their own personal best interests.

Third, they fail to understand that the loan market controls the real estate market. I'm going to be talking about the implications of this fact quite a bit in this article. If the loans don't exist, neither do the buyers, at least not in sufficient numbers. The alternative, waiting for people to be able to afford to buy with cash, would mean either a massive crash in housing prices - to the point where nobody can profitably build - or stagnation until massive inflation takes hold and general price levels catch up, which has the same implications for value in the housing market and much worse implications for everything else. The only way to move away from the loan market controlling the housing market will effectively crash the value of housing much further than it has already fallen. Whether this is done by maintaining dollar cost constant while everything else spikes, or by crashing the actual value, the implications are the same. It takes a certain amount of materials and a certain amount of labor to create an acceptable housing unit, and the costs for those are well in excess of what most people can afford to pay 100% cash for in a unit of housing or anything else. If the people can't afford to pay for it, there won't be any sold, and before too long there won't be any more being built. Yeah, we could go back to one room log cabins and massive unreinforced masonry apartment buildings with no running water or electricity, but I happen to think that the idea of having at least a minimal building code is a good idea. It costs money to comply with building codes - more money than most people are willing or able to save prior to purchasing a home. That's the situation as it would exist without loans. Lest you think the influence of loans is something recent recent, here's entertaining evidence otherwise. 65 year old evidence that most of you will have seen before, if probably not considered in this context, describing a phenomenon that had been widespread in the United States since the 1830s. When you're looking at the real estate market, you're essentially looking at the loan market - the exceptions are damned few, statistically speaking.

So understand that if you want to fix the real estate market - really fix it - what you really need to do is fix the loan market.

This is far from straightforward, and yet the evidence is overwhelming that we have problems. 26.8% of all loans were rejected in 2010. That's 26.8% of ALL loan applications - the data wasn't broken down by loan type, but I strongly suspect it was lower for "rate/term" refinances and higher for both "cash out" and purchase money, as that would be in line with what I know and what's related to me by others in the business. 2010 was a great year for refinancing as rates tumbled - but few could actually qualify. I know I don't want to take an application if I don't have a reasonable idea that this loan should stand an excellent chance of approval. If the values in the neighborhood don't support an appraisal that's going to work, I'll tell the folks, "Look, I will process this if you really want me to, but I think you're wasting your time and about $450 for an appraisal. The highest selling price within the distance and time that appraisers are allowed to consider is 10% less than the value we need - and that was a bigger property well maintained." Similarly, if the debt to income ratio isn't going to work, it's better serving both the applicants and myself to find out as soon as possible.

What are the sorts of things I'm seeing or hearing about as reasons for a decline on an application? Most common is that appraised value of the property is too low, usually on a refinance simply because bargaining power for those willing to actually make a purchase is so great right now. Somebody owes $400,000 on what was a $600,000 property and is now a $440,000 property - a 91% Loan to Value ratio, and that's for those people who don't owe more than the property is currently worth. No lenders want to refinance above 80% loan to value right now (some will, with PMI, but even there 90% is about the absolute limit). Net result: That rate under 4% for a thirty year fixed rate loan you see everyone quoting is no good if you can't qualify for it because you don't have the equity and you sure as heck don't have the cash to pay your loan down that far. If you're in default or in trouble, your current lender will likely work with you in the hopes of avoiding losses. That's not the same thing as a regular refinance. I predicted this problem back in March 2006.

Another reason: Debt to income ratio doesn't work, usually because of a term of low to non-existent income. In plain English, someone has been laid off, or downsized, and it took them a while to find a new job. Even if the income now is as high as the income was before - it usually isn't - due to the way lenders calculate income having six months of missing income can completely kill your chance of a loan until that period is at least 2 years in the past. Stated income is essentially dead, so there just isn't a good way around this. I can get you a hard money loan at 13% or so if your equity is good enough (25% or more; 35-40% if there's "cash out") but that just doesn't help most people.

These ways are pretty much predictable. I can look at the situation before we even complete the application and tell if it's likely to be rejected on such grounds. Yeah, I'm perfectly willing to go ahead and try if the people say to try, but most people get the message when I tell them that in my experience, if they submit a loan application it is likely to be rejected. I can't remember anyone who told me to go ahead and commit them to spending the money for the appraisal when I'm talking about predictable reasons for rejection. From what other loan officers have told me, this tends to be their experience as well.

The majority of the actual rejections are ones that I never would have predicted. This class of failures seems to stem from mortgage investors who have taken losses and are now completely paranoid about losses, to the point of ridiculousness. I think the most egregious was a lender refusing to refinance because there was a private money second that had been originally written to comply with their own specifications when the people bought the home. I was the original agent and loan officer, and the client's parents wanted to give them a loan that would be forgiven in accordance with federal gifting rules so as not to create estate tax problems. So under the lender's instructions, we wrote it up with a given interest rate and payment schedule that did not take into account the planned forgiveness and did include the projected payments in the client's debt to income ratio. Everything worked, everything fit, everything completely above board, legal, verified and copacetic- until the refinance several years later where the bank wouldn't lend because this - much shrunken - private money second was still in place - even though the holders would sign any subordination the lender wanted, or even reconvey the trust deed and convert it into an unsecured personal loan. There was no issue whatsoever with property loan to value ratio, client credit, debt to income ratio or anything else. Just a flat rejection because they owed money to a non-institutional lender. I have yet to tell this story to another loan officer or processor without getting a three word response that most people abbreviate "WTF?", usually with severe emphasis on the last word thereof. (Under other circumstances, it would have been hilarious coming from my processor who is usually quite ladylike). I tried taking the loan elsewhere only to be told it wouldn't be approved there (or there, or there, or ...) either, in large part due to paranoid investor rules about approving loans that had been rejected elsewhere.

Just because the worst I can personally vouch for, but that doesn't mean it's the only one. Refusing to allow the inclusion of rental income for other properties despite extensive documentation of it actually being paid. Slight job title changes due to consolidated duties. Many things that would take way too long to explain, but I (and other loan officers and our loan processors) have been flabbergasted by. Crap that just wasn't on the radar even 20 years ago, well before the Era of Make Believe Loans, but today it's being used as a reason to refuse a loan application.

Now, let me ask "Who is being hurt by the current state of the loan market?" Yes, lenders have taken some real damage, but they are not among those being hurt the worst from current events and going forward. Their pain is mostly in the past, and the ones that have survived this far are pretty much insulated from bad effects going forward. The federal government has assumed the liabilities for the bad loans. They're also still making their usual and customary margin - if not more - on every loan they sell to the secondary market ("mortgage investors" above). In point of fact, lenders - who in my opinion bore far and away the largest non-governmental share of guilt for the meltdown - are doing very well with sweetheart deals from the Federal Reserve and other government agencies, not to mention the hundreds of billions they got through TARP.

Consumers are being hurt far worse. Few people can buy because they can't scrape up the higher down payment necessary even considering the lower prices. As a result, people who need to sell for whatever reason, can't sell.

Another group taking it in the shorts are mortgage investors. A lot of these are pension plans and investor groups who have to invest a certain amount in mortgage securities, because they have traditionally been such a solid investment and there are therefore requirements to invest in them written into their charter documents. The results of this are as obvious as gravity: if you're not making diddly squat on something you're required to have and which you have recently lost a blortload of money on, you're going to be certain you only fund the very safest ones, leading to the paranoid nonsense of underwriting rules discussed earlier and other things that prevent would be borrowers from getting the money to borrow.

Making the entire situation worse are several rules the federal government has passed, allegedly to "protect" consumers, but the net effect is to protect the big lenders with the large bundles of campaign contributions from competition, and even if the politicians in Congress are ignorant enough to believe these rules benefited consumers, the lenders who sponsored them are not. Among other things, these rules prohibit both charging significantly higher rates of interest to compensate for risk and funding loans without having traditional documentation to show the people can afford it.

I'm going to cover the latter item first. Stated Income (and so called "NINA programs, which you may have heard called "ninja" loans) were so badly abused I doubt I can communicate how much damage it did to people who weren't dealing with the situation every day of their working lives. But traditional income documentation was set in place when almost everyone worked the same job with the same company from the time they first went to work as teenagers to the time they retired. I shouldn't have to tell people how rare that is today, or how common disruptions in employment, changes in employer, or even career field, let alone moving to self-employment. The income documentation it requires is inflexible and doesn't take into account the way people work in this modern world. We change jobs, change careers, get promoted, get laid off, go back to school and find new careers, sometimes at intervals measured in months. The response of traditional income documentation to all of these is to cause the loan to be rejected. Pardon me, but I really don't think that someone who can document making $10 an hour in one field, $11 per hour in a second, and $12.50 an hour in a third all within a 2 year window is a larger risk for extended unemployment that anyone who has been solely in any one of the 3 fields. If one field of employment dries up, they still have two others where they have a track record of employment. Traditional lending standards, however, disagree. Such an applicant will be rejected outright for the loan because they cannot show 2 years in the same line of work. Even if the 2 years same line of work requirement here were to be relaxed, lending standards declare that said folks are only able to count the income from the one they're currently in, averaged over a 2 year period even though they may only have been doing it a few months. $12.50 per hour over six months is about like making $3.12 per hour over two years, and the loan is rejected because debt to income ratio is too high.

In regards to the former item, if lenders can't charge more interest to allow for higher risk, then there will be no higher risk loans made, despite the fact that they are good loans and the ability to get those loans puts people into better situations. If Young Couple A can get a loan for $90,000 on a $100,000 condo at 8% - much higher currently available rates - their monthly cost of mortgage become $660, which even with $250 per month for association fees and $100 per month for property taxes means they are paying almost $300 per month less than the $1300 per month rent they were paying for an identical unit elsewhere in the complex, and they're building equity with that money and they OWN the damn thing, which means they are motivated to take care of it. If it is a condo, they get a seat at the table in deciding how to manage the complex. If not, they get to decide all on their own. This also generates all sorts of other good things that I have yet to hear anyone make a single argument against in my time on this planet. Unfortunately, they probably can't get that loan on a condominium, even without this restriction, because of the re-institution of another brain damaged rule: The 60% owner occupancy requirement.

The 60% owner occupancy requirement for condominiums is an old monster come back to life. VA and FHA loans, controlled by the federal government, never dropped this requirement, but every other loan program in the known universe did. When the federal government nominally reassumed ownership of Fannie Mae and Freddie Mac (which had been ruined by political requirements and political appointees, as they were always controlled by politicians), Fannie and Freddie were required by Congress to resume requiring 60% owner occupancy, and so the entire mortgage market in homage to investor paranoia above re-instituted this requirement. Practical effect: Once a condominium complex drops below 60% owner occupancy even once, units in that complex will never be eligible for any of the loans designed to move people into at least fist time ownership ever again, because from that point forward the only people who can buy are the ones with enough cash that they don't need a loan that comes with a 60% owner occupancy requirement. Remember, the loan market controls the real estate market.

Let me also observe that there are a lot of places out there that are legally condominiums even if they may not look like it. A group of detached dwellings on a large lot sharing parking and community recreation? Odds are long they are legally condominiums, and therefore the lender must treat them as condominiums. If it's got a Homeowner's Association and dues, it's most likely a condominium. Many developments in recent years have taken the "legally it's a condominium" route because it makes the property more valuable and means the developer can make more money. But once they drop below 60% owner occupancy, they're still stuck with the rules that lenders have for condominiums, and the questions isn't if it's going to bite a given development, but when.

The fact that these units are not eligible for those loans means that most people can't buy them. Since most people can't buy them, the value drops until some investor realizes that for a $30,000 investment in what used to be a $100,000 condo but is now only worth $60,000, he can make over $750 per month by renting it for $1300 to the poor suckers who can't buy because they don't have the down payment required. Additionally, his equity is increasing every month. All because the renters can't manage to save the necessary down payment because they're too busy paying all their money to investors like this. Overall effect: Transfer of wealth from the less affluent to the more affluent. The people who already own them when such a change happens see a loss of a large portion of their value, quite likely going from having made a significant upfront investment to owing more than the property is now worth - because your average buyer who might actually want to live in it, can't buy it, it's worth far less. I should also mention that in practice this is extremely discriminatory in effect. If it were a private company doing this, it would be probably disallowed by the courts because try as I might to have someone point me at research that shows the 60% owner occupancy ratio means something tangible, nobody has been able to do so. Even if such research exists somewhere, may I point out that Redlining has been illegal for decades? What is the 60% owner occupancy ratio if not Redlining on a smaller scale?

This is the situation we face in the current housing and loan markets. Tomorrow, I will propose some solutions. Not grand sweeping costly solutions that will allegedly fix everything overnight. Solutions like that not only aren't real; they tend to screw the markets up even worse. But incremental changes grounded in accepting the changes in society that have happened in my lifetime. Small touches that make a big difference over time, by allowing the markets to return to a state where the vast majority of those who would like to buy do not face artificially increased barriers to ownership, and therefore, the people who currently own and would like to sell are able to do so.

continued here

Original article here


First off, neither the California Mortgage Loan Disclosure Statement nor the Federal Good Faith Estimate are promises, commitments, or anything more than your loan provider wants them to be. Quite often, they're nothing more than a fictional story told to get you to sign up for their loan. It's amazing and disgusting how much it's legal for lenders to lowball their quotes.

That said, there are three explanations as to why your rate, cost, or both are higher. They're not mutually exclusive by any means, but it has to be at least one of these three.

The one that reflects on you is that you somehow misrepresented your situation when you were getting that loan quote. In that case, you are no one's victim except your own. It is pointless to lie to a loan officer, and if you don't know the answer, you should say "I don't know" instead of making one up. This does happen, but it's probably the rarest of the three answers, and you should know if you did it. If you didn't do this, what's left is one or both of two common loan officer sins. They're not mutually exclusive; it can be both.

The less abusive of these is that the loan officer did not lock the loan. When I originally wrote this, I said, "This is either rank stupidity or frustrated avarice. Shorter rate locks are cheaper, and there's always the hope that rates will go down, so they can make more money on the same loan they quoted you. Of course, rates can go up, also, and they do so about fifty percent of the time. When that happens, they can either make less money, often to the point where delivering the original loan would cost them thousands of dollars, or they can deliver a loan with a higher rate. Since we're living in the real world here, which of these alternatives do you think is going to happen?"

Since then the market has changed, especially for brokers and correspondents. Every loan that is locked that does not result in a funded loan under that lender costs that loan officer and their future clients money in the form of higher costs for every loan, raising the tradeoff between rate and cost for their loans to the point they may no longer be competitive even with bank branches, much less other brokers and correspondents. Net result: Brokers and correspondents are having to be very careful which loans they lock, which means uncertainty for you, the client. What, you thought the regulators were looking after consumer interests? They're looking after the interests of large institutions, who want to put brokers and correspondents out of business because brokers and correspondents offer cheaper loans than they do.

The more abusive alternative is that you were deliberately lowballed. There is always a tradeoff between rate and cost for real estate loans, and the person who gave you that quote told you about a loan that didn't exist. Either it always carried a rate much higher than you were told, or the loan officer ignored potentially many thousands of dollars it was going to cost all along. I see this happening literally every time I check a loan quote forum. I do business with eighty lenders, among which are the lenders who are most keen to compete based upon price. I know what's deliverable and what is not, every other loan officer I respect knows what is and is not deliverable, and I can't imagine anyone in their right mind wanting to do business with anyone who doesn't know whether what they quote is deliverable. It's not exactly confidence inspiring to be told essentially, "I can get you this loan, but I don't know if it really exists." I'm sure you'd line up for that loan like it was free beer, right?

Not really. But loan officers do this because none of the paperwork you get at the beginning of the loan process is in any way binding. Not for price, not for a loan at all. In fact, the only form that's required to give an accurate accounting of the costs is the HUD 1, which you don't get even in preliminary form until you are signing final loan documents. Loan officers do this because once you have signed up for their loan, you are likely to sign the final loan documents no matter how bad they are. Why is that? Because thirty days or so have gone by, you've got a deposit at risk that you're going to lose if you don't sign, and you're not going to get that house that you wanted badly enough to put yourself in debt for thirty years. I assure you that loan officers know that they will have you over a barrel when you go to sign final documents. Many of them are counting upon that from the day you sign up, and they'll tell you anything at loan sign up in order to get you to choose their loan, because it's not like any of this is binding on them.

Let me get one other thing out of the way to clear the air: You didn't get a higher rate because you somehow didn't qualify for the lower rate. The way people qualify for loans is based upon debt to income ratio and loan to value ratio, and of those two ratios, debt to income ratio is much more important. The lower the debt to income ratio, the more qualified you are. Debt to income ratio is a measure of the ratio of how your housing and expenses compare to your overall income. Lower interest rate means lower payments. Lower payments mean lower debt to income ratio, and hence, you become better qualified the lower the interest rate that is available. Counter-intuitive though it may be, it's easier to qualify you for a lower interest rate than a higher one. Any loan officer who offers you an excuse that you didn't qualify for the lower rate has just flat out told you that they are a liar.

What really happens is that while this loan officer was spinning you a tale of how great the rate you were supposedly going to get was (a loan officer's version of, "Yes I'll respect you in the morning"), in amongst all that creative storytelling, they neglected to account for the money you really are going to be paying, or even the money they admitted you were going to be paying.

However, we're dealing in the real world here. That money still needs to be paid.

There are three ways to pay it: Borrower cash, rolling it into your mortgage balance, or by giving you a higher rate. They have to tell you if they want more cash, and you may not have it. There's only so much equity in the property, particularly since there are no playing valuation games via a compliant appraiser. But since there is always a tradeoff between rate and costs, they can always create some more cash by sticking you with a higher rate, resulting in more cash available to pay for the things you were going to be paying from the very first. Often it means they'll make more money as well, for providing this "service", because "you were such a hard loan." Sticking you with a higher rate is often the only way they can pay for all the things that need to get paid. Yes, this means that you end up paying more for the low-ball deceiver's loan than for a loan where you were quoted something honest.

All of this is nothing more than practical effects of the common phenomenon of lenders low-balling their quotes to get you to sign up with them, knowing that when the time comes to actually deliver that loan, they will have all of the power and you will have none, which is a 180 degree reversal from the situation at sign up. They have this loan that you need right now, where anyone else will take time you probably don't have. If rates have gone up (once again, this happens about fifty percent of the time), even the lowest cost, most ethical provider in the world might not be able to deliver what this scumbag is offering you by signing his loan right now. If he's got the originals of your documents, you can't take your loan elsewhere. Finally, most people are tired of the whole loan thing by the time it comes to sign documents. Many folks won't examine the final documents carefully - figures I've seen say that over fifty percent of all borrowers literally never figure out that they were hosed by their lender, and on the ones who do figure it out, about eighty five percent will sign anyway because signing means they're done.

The games that lenders play are legion. They can lure you in with talk of low rate that exists, but costs you more than you'll ever recover. Whether they deliver that rate and soak you on the cost end, or switch it off for a higher one to pay the costs and make more money, is up to them. I see lenders quoting full documentation A paper conforming loans for people who are known to be stated income, temporary conforming ("Jumbo conforming"), non-conforming loans, or even decidedly sub-prime. Even for people who are full documentation and would have qualified if that loan existed at the costs they told you about, this need to raise the rate can move you to over to being a stated income loan because you no longer qualify full documentation at the higher rate. With stated income loans now gone, this not only means higher rates, but quite often means that no loan can be done, something completely alien to the thinking of many agents and loan officers who became accustomed to the Era of Make Believe Loans, and they haven't yet gotten their heads out of that mindset.

How can you avoid this? Ask all these questions of every loan provider, know what the red flags are if you encounter them, and take steps to protect yourself from being lowballed. A written loan quote guarantee used to be good, but even the most ethical provider in the world can't issue one without locking the rate, which the market has made costly for their future business. I used to tell people to get a back-up loan, but back up loans are dead. Even I cannot economically do them any longer. The only practical solution is to stop rate shopping by telephone and have a real problem solving conversation with prospective loan officers.

If someone goes over cost components for your loan and rate, chances are they are being more honest than someone who doesn't. If it's investment property and they tell you there's a point and a half surcharge from the lender right up front, they are likely being honest. Such adjustments exist, and you're going to pay the ones that apply to your loan. Period. Therefore, you're better off knowing what they are. You should still choose the loan that has the lowest bottom line to you, but choose the one with the real bottom line, not the one that looks lower because the person quoting you "forgot" the adjustments. If someone told you about the adjustments that apply to your loan, ask other prospective about those adjustments. Even they're "included" in the quote you still want to know how much they are. Why? Because once you know this information, it may become apparent to you that the loan you are being quoted is not the real loan you will end up getting.

You don't need to get victimized by any of the things that go on in the world of mortgage loans. But you have to understand that they do happen, and you have to take specific steps to prevent it from happening to you. Otherwise, you're just trusting to luck, and judging by what people have brought me from other providers, you'd need less luck to win the lottery so you can pay cash for the property.

Caveat Emptor

Original article here


The buyer's deposit is always at risk. This is just a fact of real estate transactions. I could pretend it's not so, but that wouldn't keep the deposit from being at risk - it would just make me a liar. Nonetheless, because it's cash that the buyer had to forego spending that money in order to painstakingly set it aside a few dollars at a time, they understand that the deposit is real money in no uncertain terms, where most don't have that same understanding about a loan that's probably fifty times bigger and just as real. It may be comparatively rare that the buyer's deposit is actually forfeit (As of yet, I haven't lost one), but by recognizing that it is at risk and planning for it, I can protect a client's deposit far more effectively than anyone who pretends otherwise.

The first rule is to be careful writing the offer. I want to make certain that all offers (and counteroffers) consist of something my client qualifies for and that I can make happen. This is one of the best reasons why real estate agents want to know enough that they could do loans, even if they don't. If I wasn't a loan officer, I'd consult a loan officer before writing an offer. Review client qualifications and necessary loan guidelines before the offer is written. If the issues of whether the client can qualify and what needs to happen so they do qualify have already been solved, you start the transaction with the largest part of the road to successful completion already paved.

Related to this is the issue of a client getting cold feet, which is one of the most common ways to lose a deposit. The best way to solve this is by showing them enough properties that they really understand the value offered by this one. Some agents believe in pressure sales and glossing over problems with the property. I believe in meeting these issues head on. One thing I tell every buyer client at our first meeting is that there is no such thing as a perfect property. They need to decide what they're willing to live with and what they aren't, and how much they're willing to pay for not doing so. It's my job to make certain they understand what the issues are with a given property, and that they'd be happy paying the necessary price to live there. All of an agent's nightmare scenarios start with talking someone into buying a property they don't like, so I'm not going there ever. This also solves the "cold feet" before we make an offer, where someone who doesn't understand these issues is going to be in danger of cold feet at every bump in the road.

The main issue with all of the buyer contingencies is time. You have a certain number of days to deal with those contingencies. When I get them done well before the time limit, the time limit isn't a problem.

For the loan contingency, I want an automated underwriting decision ASAP. Usually, there are reasons not to do this before we've got that fully executed purchase contract, but once we have that contract, there's no reason whatsoever not to do it that day.

I also want to order inspection and appraisal immediately, to meet those contingencies. I've got seventeen days for those. If I've got the appraiser and inspector out there the next day, I should have their report within two to three business days after that. Any subsequent negotiations needed due to those reports, I can start on right away. If the seller isn't going to be reasonable (or reasonable enough), we can find out about it right away and if the buyer decides to walk away based upon these reports or subsequent negotiations, we're in a much better position to argue that they should retain the deposit than if it were twenty-five days into the transaction and now the deposit is in jeopardy regardless of whether the contingencies have been released in writing or not. All parties agreed the contingencies ran for seventeen days in the purchase contract, and if that period is up, there's an argument to be made that the deposit is forfeit. I'm not a lawyer, so I don't know if it's a good, valid, legal argument, but if the whole issue is moot because we're done on day ten, the argument never gets started.

While this is all going on, I'm getting any final loan stuff together. This includes Preliminary Title Report and Escrow information. That complete loan package should be submitted before I go home on the day I get the appraisal. If it's not done by then, something major is wrong. I can submit loan packages with the appraisal "to follow", but it's better to submit them complete in the first place, even if it does mean I've got to pay for color copies. Every time an underwriter touches a file, they can add conditions. Those conditions can effectively make a loan impossible, and far more loans are approved with impossible conditions than flatly rejected. Also, submitting a loan with minimal information is itself one of the best ways to raise red flags in an underwriter's mind, or would be if raising red flags in the underwriter's mind was a good thing. It isn't. Once red flags get raised, expect them to throw as many roadblocks at you as they can. Better to submit a clean, complete loan package as soon as possible. Doing the extra work right off the bat really does save you a lot of future work.

This has become even more important of late. When I first wrote this, underwriting was a lot less paranoid than it is now. Even when refinances were running several weeks, purchases were usually no more than two days for underwriting. If you submitted a clean complete file, any prior to documents conditions you do get would be minimal and trivial, and the funding conditions were just the absolutely standard cookie cutter stuff. That has now changed. Fannie and Freddie and the Federal Government have now added all kinds of new twists to lending. I have lately started saying that we need to extend the default loan contingency period on purchases to 30 days on purchase contracts, because it has become difficult to get a real loan commitment in seventeen, and even forty five day escrows are becoming a thing of the past because the new requirements mean that loans take longer - adding three weeks or more to the process in some cases. I don't like getting anything other than the routine funding conditions that happen on every transaction, because it means I have to get those conditions and wait a couple of days for the underwriter to get back to the file. I originally wrote that this waste of time is my fault if it happens, but with the best will in the world, it will happen to you a pretty significant percentage of the time. In the past year that percentage has increased in the last year to nearly 100%, and there's nothing that can be done to change this because giving unnecessary information to an underwriter is the Number One way to get the loan essentially rejected.

I believe in giving the seller and their agent a reasonable amount of time to hang themselves, but once the loan is submitted, I'm going to be asking about their responsibilities if I haven't gotten evidence they're done yet. Allowing them to hang themselves doesn't mean letting them hang my client. I want to see that termite inspection in particular before the end of seventeen days. The standard contract has the buyer responsible for section 2 work. It's never happened to me, but it's very possible that there's enough section 2 work needed to call the transaction into question. After seventeen days, this becomes more difficult for the buyer.

As soon as possible, I order the closing documents and get them signed. Even if you're not ready and able to close the transaction as a whole, this is a good idea. Something that's already done correctly isn't going to be an issue if my client gets called away on business - particularly out of the country as does happen. Notary work becomes a real issue outside the United States - it must be done at a US Consulate or Embassy. There is no exception for "Buyer had to leave the country" (or even just "go out of town") written into the time frames and contingencies on that purchase contract. I suppose you could ask for one, but it will make most sellers more than a little nervous, for tolerably obvious reasons. Better to know and plan in advance, but life happens. Better not to be bit if it does.

If I can get all the ducks in a row before the contingency period expires, not only does this preserve my buyers rights and give us an advantage in subsequent negotiations, but preserves as much as possible of my client's options to exit the transaction while preserving their right to recover the deposit. If I can close the entire transaction before the end of the contingency period, that makes me very very happy, and not just because I get paid sooner. It means that the issue of my client losing the deposit for walking away never comes up..

By finishing everything before the end of the contingency period, I've also preserved as much as possible of the right of specific performance in case the seller gets cold feet. It happens. Not so much right now, but a few years ago in the crazy seller's market, it happened because sellers decided they could get a higher price. If my buyer client is happy with the state of the contract as it sits, their lawyer can quite likely argue specific performance of the contract, and maybe recover legal costs too. Not my place to say whether or not, as I'm not a lawyer. I only know that lawyers seem to be much happier with agents that keep this information in mind.

If I can't close it before the end of contingency period (and I recently had signed loan documents sitting at escrow for two weeks while we waiting for the sellers to finish termite work), I still want to get together with my clients before the contingency period expires, put the evidence in front of them, and have them make a choice to continue or abort the transaction. Just because the contingencies haven't been released in writing is no reason that a seller's lawyer can't argue that they were released anyway. Much better if the argument never comes up because it's a moot point.

There is nothing I can do that generates an ironclad, foolproof guarantee that my client won't lose their deposit. But doing things the right way, quickly, can certainly make it a lot less likely than pretending that tje deposit isn't at risk. Lawyers and judges are the only ones who can answer the question of whether it has been forfeited, but it the issue is resolved without them getting involved, everybody is going to be happier. Neither party should have signed the purchase offer if they didn't want the transaction to happen on those terms set forth in the contract. Therefore, making it happen quickly, reliably, cleanly, and before the deadlines have passed is the best way to prevent making anyone unhappy.

Caveat Emptor

Original article here

That's one of the questions I've been asked, and it deserves an answer. Know that there is some flexibility to the answer, as there are embedded trade offs. You don't need as much of an income, or as high of a credit score, if you have a larger down payment. A sufficiently high credit score can also mean that you can afford a more expensive property, as higher credit scores get better interest rates, and therefore, lower payments for the same property. On the flip side, if you have monthly bills that consume a large amount of your income, you cannot afford to pay as much for a property. When I originally wrote this, there was another tradeoff involved in whether you can prove sufficient income via the traditional means of w-2s or income tax forms, as the alternative loan forms do not give rates as good, and most have higher down payment requirements. However, stated income loans are gone, at least for now. Finally, most of this only applies if you want or need a loan. If you intend to pay 100% of the price with cash, you can buy anything legal that you desire with your cash, and the hurdles become much smaller. So admittedly this only applies to 99.9999% of first time home buyers.

The first thing any buyers need if they want a loan for the property is a source of income. If you want a loan, you've got to have money coming in from somewhere to make the payments. Preferably, it's a documentable, regular source of income, such as paychecks or income from a business on which you report taxable income. I suppose I should mention that tax cheats have difficulty getting good quality home loans, because I have dealt with a few people I suspect of that. Don't worry, I'm not an IRS employee and I won't turn you in. But all lenders must report loan transactions, and every real estate transaction is a matter of public record. If you make a major purchase or take out a major loan, the IRS can take an interest in you. Just saying.

You income, together with whatever amount you have for a down payment, gives you a budget for a property. The vast majority of the loan is driven off two ratios, debt to income and loan to value. These two ratios together will determine minimums for everything else about your loan. If your credit score was not horrible, a down payment was pretty much optional for several years during the Era of Make Believe Loans, although it has since become essentially mandatory as the VA loan is the only loan out there where most lenders are willing to fund loans without a down payment.

You will need at least a few thousand dollars for a good faith deposit, and probably another thousand at least for appraisal, inspections, and miscellaneous stuff. The once-upon-a-time rule of thumb about a 2% earnest money deposit has long gone by the wayside, but a good deposit is often evidence that you are serious about your ability to consummate the deal, and might get you a lower price in negotiations. I will argue against my listing clients accepting any offer, no matter how good, without a deposit, and most sane real estate agents agree with me.

The larger the down payment, the lower you can expect the needed income to be, and the better the interest rate you are likely to get at any given time. In order to make a difference on the terms of your loan, the required down payment generally goes in increments of 5%. 3.5% for an FHA loan is the absolute minimum for most people currently, but you will get a better deal from conventional loans that require a minimum of 5% down (But as few lenders as will do that, they can charge higher rates than others). 10% will get you better terms than you would get for 5% down, 15% will get you better terms than ten, and the really major differences happen if you can put 20% down. More still will get you better terms yet, but 20% is the big dividing line.

If you want to take advantage of a governmental first time buyer assistance program, either the Mortgage Credit Certificate or a locally based buyer assistance program, you need to be very careful about staying within what you can prove you can afford via tax forms. Stated Income, or documenting your income via bank statements, is not an option on any of those programs and never has been. Using creative financing options, such as negative amortization loans, with such programs is similarly forbidden. First time assistance programs are not designed to encourage irresponsibly buying a more expensive property than you can afford; they are designed to help you stretch what you can afford just a little further. Know what you can afford in terms of sales price, because agents and loan officers can too easily manipulate payment quotations. Rules of thumb based upon income (2.5 times income, four times income, whatever) are garbage, and the entire concept is a good way to get into trouble. This article will help you compute what you can afford, once you know the approximate rates for current thirty year fixed rate loans.

You will need to be able to document a two year history of housing payments. Since you have never bought before, this means rent. No fun to have had to enrich someone else for a couple of years, but there are valid reasons why lenders require a history of regular housing payments on time. If you can document that you've been paying regular rent to your parents, grandparents, or what have you, that can count, although lenders will usually demand copies of the canceled checks rather than accepting their word for it.

You will also need a history of credit payments. Mortgage lenders want to see evidence that you have the habit of paying your debts on time regularly. The usual criteria is three total lines of credit, one open for at least 24 months, the other two for at least six months. These can be revolving lines of credit such as credit cards, or installment debt such as car payments or student loans. Note that they do not necessarily have to still be open, but whatever balances and monthly payments you still have will be counted against your debt to income ratio.

Also, you generally need at least two open lines of credit in order to have credit scores reported by the major credit bureaus. Ideal is two long term credit cards with very small balances. The way I handle this is to charge one thing per month for about $20 or so that I would normally pay cash for, and pay the bill in full when it arrives. You will need an appropriate credit score for what you are trying to do. What score is sufficient will depend upon the exact characteristics of your transaction. Better scores will lower your rate, and therefore your payments, but the best thing that can be said about a 580 credit score (which some lenders will accept for FHA loans) is that it isn't putrid. Unfortunately for those who want to buy now without any cash, the lenders have now figured out that them being on the hook for 100% of the value of the property is a good way to lose money. I do anticipate 100% financing returning eventually, but "eventually" could be years, and even A paper has introduced differentials to the tradeoff between rate and cost based upon credit score, where until recently, as long as you staggered over the line into qualification, you'd get the same rates and costs as King Midas.

The last things I will mention that will stand you in good stead are also optional: An educated layperson's knowledge of the process (I would like to think being a regular reader here will help with that), a investigative attitude, and the willingness to shop effectively for services, both loan and real estate. There seems to be popular resistance to this, but getting a good buyer's agent will not only save your backside, it'll make a real difference to the quality of the property you end up with as well as to how much you pay.

Caveat Emptor

Original here


Many people think that mortgage interest works like rent: paid in advance before you live in the property for the month.

This is not the case.

Mortgage interest is paid in arrears. As you begin the month, interest begins accruing. It accrues throughout the month, and the payment is due at the beginning of the following month. The reason for this is that the interest is unearned until you have actually borrowed the money throughout the month. You could win the lottery, write a best seller, sign a contract a with professional sports team, or any number of other farfetched but real possibilities for suddenly acquiring a windfall of cash enabling you to pay that loan off. You could also refinance, in which case that lender is only entitled to the interest from the days you had their loan.

When you refinance, however, or even when you take out an initial purchase money loan, you will generally be required to pay the interest for the remainder of the month on that new loan in advance. The reason for this is quite simple administrative - it gives the lender some time to set all the bookkeeping on that account up, gives them a full month at least between initializing the loan and the time any money should be hitting their account in payment of that debt.

So when you refinance, you make an upfront payment to the old lender for the part of the month they held your loan during the month, and to the new lender for the time they held your loan. Say the new loan funds and pays off the old loan on June 15th. You will pay the interest from June 1st to 15th to the old lender, and from June 15th though the 30th to the new lender. You never, ever, get a free month, because interest never stops, at least so long as you owe the money. In point of fact, I tell people to think of it as making their normal payment early, as in this case they're writing the check they normally would have written July 1st two weeks early on June 15th. It's really just the interest owed, but since most folks don't keep their loan more than a few years, there usually isn't a large proportion of principal in their regular payment anyway. Therefore, if you think of it as your regular payment, paid early, it'll usually be a little bit less. There are usually one or two days of overlapping interest, which is why most escrow officers won't request funds on a Friday. You don't want to be paying interest on two loans over the weekend to no good purpose.

So why do lenders use the "skip a month of payments!" come on? Some will even use, "Skip two payments!" Because a new loan is being originated, they can (generally) roll that money into the balance on your new loan where you not only pay the money, but you pay interest on it for as long as you owe that money. Make you feel all warm and cuddly? Didn't think so. Anyone who uses the "skip a payment!" promise to get you to refinance has just told you point blank that they're a dishonest crook. However, since most people don't know how to translate loan officer speak into English, they get away with it disgustingly often. The state of financial education in this country is a national disgrace. Of course, it's to the benefit of certain political groups to have voters believing that there is such a thing as a free lunch.

You never really skip a loan payment when you refinance. If you try, all you're really doing is adding it to your balance. You can decide to pay your balance down at loan inception and pay closing costs out of pocket, and while an accountant or financial planner will generally tell you there are better uses for the money, it can be a very smart thing to do if your circumstances are right for it.

Caveat Emptor

Original article here

You've probably heard the horror stories, and I've mentioned the possibility more than once. Some unsuspecting person is looking at properties beyond their price range, and it therefore has all kinds of attractive features that properties which are in their price range do not have. They are just about to regretfully but firmly put the notion of buying this particular property out of their heads when the Real Estate agent whispers seductively, "I can see that you want it, so let me show you how you can afford it!"

There are all kinds of reasons why this happens. Bigger commission check for the bigger sale certainly is one, but a far bigger concern to most of the predators who do this is that it's an easy immediate sale. Instead of having to take those folks around to dozens more properties that are in their price range (and perhaps lose them to some other agent taking advantage of an opportunity in the meantime), while the clients agonize about the trade-offs of linoleum versus carpet in the bathroom and kitchen, and maybe if they'll keep looking just a little while longer they'll find one that is perfect despite the market, so they're not going to make an offer today, thank you very much, this predator has shown them the equivalent of the holy grail, provided the clients do not understand the downsides of the loan that is necessary to procure that property.

There is a reason why I advise people shopping for a property to make a budget based upon what they can afford based upon current rates on 30 year fixed rate loans costing no more than one point total, or at the very most a fully amortized 5/1 ARM, and stick to it (It's actually harder to qualify for the 5/1, due to lower debt to income ratio guidelines). That's the maximum price you will offer - end of discussion. Even if you, the client, end up applying for another type of loan that has lower payments, if you could make the payment on a thirty year fixed rate loan, you are pretty certain you are not getting in over your head. But shop by sales price, not payment. It's not like the sharks haven't figured out that suckers shop by payment - so don't be a sucker. "Creative financing" has become so pervasive and so varied that shopping by the payment the real estate agent has posted, or tells you about, is severely hazardous to your financial health. Maximum purchase price you are willing to consider should be the most important thing buyers discuss with their agents, and the budget must be quoted in terms of purchase price, not monthly payment. There are too many games that can be played with monthly payment, and just when I think I have them all covered, another one pops up.

Indeed, the very head of the list of reasons why buyers should fire an agent is that the agent showed them a property which can not reasonably be gotten for the sales price limit they told the agent about. You tell me that your limit is $320,000, it might be okay to show you a property listing for $340,000 or even $350,000 if buyers have enough power to bargain it down to the agreed maximum and are willing to walk away if they can't. In a seller's market, of course, it would likely rule out anything where the ask is over $325,000. But if the agent show you a property listing for $450,000, simply ask to be taken home or back to your vehicle immediately, and then inform them that their services are no longer required and that you desire them to make no further efforts to contact you. Were I shopping for a property, I would demand to know the asking prices before I went, and not only fire the agent but also refuse to go if they cannot show me why they think this property can be obtained for the total cost limits we have agreed upon. Not monthly payment limits, sales price.

So what loans should not be used to purchase a property? Well keep in mind that this list assumes that your loan providers are telling the truth about the kind of loan they are working on for you, an assumption that, judging by a dozen or so different e-mails I've gotten from people who were scammed, is increasingly iffy. Furthermore, if you are a real financial and loan expert, there are reasons why these warnings may not apply, particularly if the property in question is investment property, but those sorts of experts should know the exceptions, should not be looking to this website for advice, and are always able to accept the financial consequences of not following these guidelines (in other words, they have the ability to absorb the losses).

The absolute head of the list, the loan that should never be used for purchase of a primary residence is the negative amortization loan. Known by many other friendly sounding names such as "pick a pay", "Option ARM", "COFI loan," "MTA loan," and "1% loan" (which it is not), this loan is a truly horrible choice for the vast majority of the population (99%+). It was only approved by regulators to service a very small niche market, and if you are a member of that niche market, chances are that your Option ARM will not be approved by the lender! This loan is usually sold strictly on the basis of the fact that the minimum payment is lower than any other type of loan, making it look like clients can afford a loan that they cannot, in fact, afford. This low payment is based upon a low nominal, or "in name only" rate that is not the real rate the money is accumulating interest at. In fact, the real rate that you are being charged is currently at least 1.5 percent above equivalent rates for thirty year fixed rate loans, as well as being month to month variable. How often do you think people who are being fully informed of the loan would agree to accept a rate a full 1.5 percent higher on a fully variable loan than what they would have gotten on a thirty year fixed rate mortgage, and with a prepayment penalty also? The lenders pay very high yield spreads for doing these loans, and the bond market pays even higher premiums, so many lenders push them hard, and many wholesalers push them even harder. Despite being warned that I was not interested in any loans that feature negative amortization, three new potential wholesalers had gotten themselves thrown out of my office in the month prior to originally writing this. I guess they weren't interested - or able - to compete with other lenders on real loans. Fortunately, now that the chickens have come home to roost on this "Nightmare Mortgage," very few lenders are quite so eager - or even willing - to offer them. The lenders lost a blortload of money on them, investors aren't buying the bonds, and the federal government has made them very difficult to sell. I hope that continues because the absurdly low percentage of people who saved their homes after signing up for a negative amortization loan is completely unacceptable. And although this loan is gone now, I'm leaving it in because I thought it had been permanently staked through the heart in the early 1990s too.

The Interest only 2/28 does have one redeeming factor, as compared to the negative amortization loan: At least your balance isn't getting higher every month. With the average loan around here being about $400,000, a rate of 5.5% would have the payment being $1833. But if that's all you can afford, what happens in two years when the rate adjusts and it starts amortizing, and if the market stays right where it is today, the payment goes to $2771, an increase of 51%? You haven't paid the principal down. There's a pre-payment penalty stopping you from selling or refinancing until it does adjust. If prices have appreciated enough to pay the costs of selling you might not come out so bad, but what if they haven't, or if prices have actually gone down? This is not the sort of bet that someone with a fiduciary relationship should make, as real estate prices increasing in two years is not something you can make a risk free bet on. Millions of people are finding that out right now.

The next loan on the list is the 3/27 Interest Only. This does offer you one more year to get your act together and start making more money to make the payments with than the 2/28. The downside is that it actually adjust higher due to the increased interest only period. In the example above, the payment would adjust to $2804, an increase of just under 53%. This also means you have another year for the value of the property to do the historically normal thing and appreciate a little. Still doesn't mean it's a bet somebody with a fiduciary responsibility should be making with your finances.

The scamster's new favorite substitute for the essentially extinct negative amortization is the buydown, because it allows them to quote a lower payment and a lower interest rate, because they can pretend that the initial rate and payment are what is important. Most suckers will only look at now, and be far less concerned with a year or two down the line ("and maybe the horse will learn to sing"). Make no mistake - that rate and payment will rise in one year, and will almost always rise again in two. So not only are you stuck with what's probably a higher loan rate than you can otherwise get, but you paid good money - more than you will recover - for that temporarily lowered rate.

The next type of loan to be wary of is anything stated income or even lesser levels of documentation (NINA or "no ratio" loans). These loans are great and wonderful if you really are making that money and really can make those payments, but don't let the temptation to buy a more expensive property lead you to exaggerate what you really make, or allow a loan officer to exaggerate what you really make, in order to qualify for the loan. Remember, you are still going to have to make those payments, and if you can't, the bad things that will happen more than counterbalance the nicest thing that might happen. Again, millions of people are discovering this right now. As of this update, I know of no loan providers offering a stated income loan. The downside to this is that the people stated income was designed to serve now can't get a loan at all. The upside is that people it's inappropriate for can't be seduced into something that's most likely going to ruin their financial future.

Somewhat less dangerous are interest only loans with a longer term or extended amortization loans. A five, seven, or ten year interest only period, while much more endurable than a two or three, is still not a certain bet of making a profit. Same thing with a forty or fifty year amortization loan. Given the way the rate structure is applied by most lenders, these loans are given out by lenders wishing to cover questionable lending practices to people who do not qualify for interest only loans according to bond market guidelines. Still, if it's got a good long fixed period of at least five years, you are paying the balance down and it's a reasonable bet that you will be able to sell for a profit before the adjustment hits. Not a certain bet, but a reasonable one, as in "the odds of making a profit or being able to refinance on more favorable terms before the payment becomes something you cannot afford are definitely on your side."

The ordinary 2/28 and 3/27 are dangerous enough for most fully informed adults. Using the interest only examples above, the 5.5% rate actually becomes 5.25% fully amortized, as it's a less risky loan for the lender. The initial payment becomes $2208, which does pay the loan down some, but then the payment becomes $2691 (in the case of the 2/28) or $2678 (3/27) holding the market constant as it sits and keeping other background assumptions constant. If you cannot afford these smaller jumps when they happen, at least you've got several thousand dollars that you have paid the principal down to use for closing costs on the new loan or towards the costs of selling, but be aware that the market is never reliable in its fluctuations over a short period of time, and using these loans for a purchase can and many times has meant that when the fixed period ran out, those people who choose these loans are in the unenviable position of being unable to afford their current payments, being unable to refinance, and being unable to sell for enough to break even when you consider the costs of selling.

There is nothing really wrong if you can afford the thirty year fixed rate loan but deliberately choose some other loan. I do this myself to save money on interest charges, which is the real major cost of the loan, but as narrow as the gap in rates was when I originally wrote this, even I might have chosen a thirty year fixed rate loan if I had needed to refinance. It's not being able to afford the sustainable loan that will kill you. If not a thirty year fixed rate loan, at least a fully amortizing ARM with a fixed period of at least five years. I do like the 5/1 ARM, however, and rates for it are once again becoming attractive - as in significantly lower than the thirty year fixed rate loan.

The most important things about any loan is the interest you are being charged for the money you are borrowing, how long it lasts, and the cost in dollars of getting that loan done, not a lower minimum payment that, certain as gravity, has a gotcha! engraved on it that will cause you to regret getting that loan. Unfortunately, we cannot go back to the past with information we learn in the future, and real estate loans are especially unforgiving of borrowers who do not understand the future implications of their current loan decisions.

As a final note, I have structured this essay around the loan to purchase a property, but the arguments work just as strongly and just as universally for so-called "cash out" refinances as they do for purchase money loans.

Caveat Emptor

Original here


Many agents seem to answer this question differently depending upon whether their client is the prospective buyer or seller, according to what they think will make the client most comfortable. When their client is making an offer, "No, your deposit could never possibly be at risk," while when their client is evaluating an offer, "And besides, if they renege or can't bring it off, you get to keep the deposit." Both of these are false, misleading, and practicing law without a license.

The cold hard fact is that the deposit is always at risk, but there is absolutely no guarantee that a jilted seller will get it, either. The answer to "Is the deposit at risk?" from a real estate agent can never honestly be anything other than "Yes."

For buyers, the deposit is "at risk." Otherwise, what would be the point of having it? If it couldn't be lost, why would it need to go into escrow? Just to prove the buyer has a couple thousand dollars to their name? I can do that with a Verification of Deposit. The only reason to make a deposit on a purchase offer is that it is at risk, and no listing agent in their right mind is going to accept any purchase offer where there is no deposit - even if the buyer is doing a "one dollar down" VA loan. That seller is risking a minimum of a full month of all carrying costs (usually much more) upon your representation that you want the property, and they are entitled to keep your deposit if certain conditions are met. For sellers, no you don't automatically get the deposit if the buyer flakes out. There are burdens upon you and your agent, and contingencies, aka escape clauses for the buyer, built right into the purchase contract. You don't want to allow those clauses, that's your choice, but you'll severely restrict the number of people willing to make offers as well as the price you will actually get. Even if the seller negotiates the payment of the deposit to them as part of the contract, the buyers can still sue to get it back. This is the real world and an offer is being made with real money and real consequences to that money. If you're unable to come to terms with that fact, stay a renter, because that fact is not going to change. For agents, if the only way you can make a sale is to misrepresent the deposit, it doesn't take a great fortune teller to see a courtroom in your future.

For buyer clients, I can do a lot to keep a deposit from being forfeit - any agent and loan officer can. Get out in front of all the contingency issues and any other reason that my client might decide they don't want to purchase the property, and get them dealt with right away, during the contingency period. Loan, appraisal, inspection, I want them all done before their contingency expires, or at the absolute minimum, a loan commitment with contingencies I'm certain we can meet. As of this writing, I have not yet lost any buyer deposit money. Nonetheless, since no agent can honestly guarantee the deposit will not be lost, I cannot and will not pretend that I'm some kind of exception to the law. The only way I could make such a guarantee is by putting up my own money as a surety, and if my client lost a deposit for a reason that was in any way my fault, I hope I would reimburse them (Until it happens and I'm facing an actual choice, there's no way to be certain). But it's not my investment, and if the investment succeeds, I'm not going to share in the proceeds (I'm given to understand that's illegal, at least in California), and one of the essential, unchangeable facts about investment is that there is no such thing as a risk free investment. If you don't understand this, any money or assets you may have can be considered a temporary thing, and you have no business in a profession with responsibility for other people's money. Anyone willing to say that there is no risk is either a fool or a crook. Nor is it likely your agent or anyone will reimburse you, especially for situations beyond their control, or if you misrepresent your situation or miss deadlines.

For listing clients, the same thing applies: Get what I need to done right away, and keep after that buyer's agent to remove contingencies in a timely fashion. If they won't remove contingencies when they are supposed to be removed, it tells me all I need to know. It's my client's call, but I know what my recommendation is going to be. I want the transaction to work, but I also want my client to get that money if it doesn't. Incidentally, Deposit issues are one reason of many that nobody should ever be willing to accept dual agency.

The bottom line is like something out of quantum physics: Schrodinger's Cat. Ideally, you want the sale to go through and record and for everybody to be happy because it all turned out exactly as agreed. Unfortunately, that's not perfectly predictable or knowable in advance. If it was, no real estate transaction would ever blow up, and the deposit would not be an issue. There are laws and procedures, and things agreed to in the purchase contract, that you have to be a real estate lawyer to offer an informed opinion about, and the judge, arbitrator, or whatever making the decision to make a definitive ruling. Escrow has custody of the money, but they're not going to do anything without mutual agreement of the buyer and seller. Either side can potentially decide to be stubborn and force the matter to arbitration, court, or whatever is appropriate, and all the consequent expenses of the legal system (which additional money is also at risk as the usual agreement is that prevailing party is entitled to legal expenses). And the legal system runs in incomprehensible ways for unpredictable reasons - the one thing that seems to be a constant is that if the judge wants the ruling to go a certain way, they can probably find a precedent to justify it if they try.

The point is this: The deposit is at risk. It is not "safe", and it does not necessarily belong to the seller either. Since this is cash, people understand that it is real money, because they had to scrimp, save, and set every single dollar in it aside from other uses, so they get understandably nervous about it. It represents a great vacation, a down payment on a new car, or something else very desirable that they're giving up, and they're putting at risk of forfeiture. Against this, the seller wants it if the transaction fails. There are ways to protect it, and ways to endanger it, and you've got both agents working to their client's advantage. As with any other competitive or potentially competitive situation, that makes the result indefinite until the game is complete. It isn't common in my experience that the deposit is forfeit, but it does happen. And anybody who tells you otherwise is either lying or hopelessly incompetent. Nonetheless, real estate is such a powerful investment that you are well advised to come to terms with the risk, because it's a necessary risk in order to buy real estate.

Caveat Emptor

Original article here


When I wrote explaining why borrowers should consider a 5/1 ARM, because the tradeoff between rate and cost is lower for that loan, and most people don't keep their loans 5 years anyway, so having a likely need to refinance 5 years out is not an additional cost for most people with mortgages.

Costs for a loan break into two categories: The cost to get the loan done ("closing costs"). This pays for everything that needs to happen so that the loan gets done. These costs may vary from place to place, but they are absolutely mandatory - they are going to get paid. For instance, on a $400,000 refinance with full escrow, my clients are going to pay $2945 in closing costs, when you really include everything. Many lenders will try to pretend some or all of the closing costs don't exist in order to get people to sign up, but they do. I can save some money with virtual escrow in some cases, but $2945 is real. The proof is that I can put it in writing and guarantee not to go over. Lenders don't want to do this, but if they're not willing to put it in writing that they'll pay anything over that, the reason is because they know it's going to be more when it comes down to it at the end of the loan.

The other cost is the cost for the rate. There is always a tradeoff between rate and cost. If you want the lower rate, it is going to cost you more money. If you are willing to accept a higher rate, you can save money on the cost for the rate, to the point where it can reduce or eliminate the closing costs you're going to have to pay. Zero Cost Real Estate Loans exist - I've done dozens. I love them because they save my clients money.

NOTE: Since I wrote this Congress has changed the law to discriminate against brokers by making Yield Spread legally a cost of the loan, despite the fact that it adds zero to the amount the consumer pays and in fact can mean that what the loan actually costs the consumer is reduced. So technically, a broker can no longer deliver a zero cost loan. However, we can deliver a loan where you don't actually pay any money - either out of pocket or through increased loan balance. A matter of semantics and sounds to your average cynical but uneducated consumer like I'm weaseling in order to hose them later. If not for the law meant to confuse matters, it would be easier and more straightforward for consumers to understand. Thank Barney Frank and Christopher Dodd for "protecting" you.

You can lump the loan provider's profit in with the costs for the rate, as origination points, or in with the cost of the loan, as an origination fee, and pay it via Yield spread (if you're a broker) or even (in the case of a direct lender or correspondent) hide it in the fact that you're going to make a huge profit selling that loan on the secondary market, but I guarantee you it's going to get paid somehow. Nobody does loans for free, for the same reason you wouldn't work if you didn't get paid.

These costs are going to get paid. End of discussion. The costs are slightly different in states with different laws, but necessary costs are going to get paid. They can get paid out of pocket or they can get paid by rolling them into your loan balance but they are going to get paid. Most people don't understand loan costs which aren't paid by cash, and think that they are somehow "free", but that is not the case. Not only did you pay it, but it increases the dollar cost of any points you may pay, you're going to pay interest on it, and (less importantly) it's going to increase your payment amount.

The genesis of this whole thing was a guy I thought I had talked into a 5/1 ARM when I originally wrote this (rates are lower now). I went through this whole process of explaining why the rate/cost tradeoff for a 30 year fixed rate loan was not going to help him, and then a couple days later, he called me saying he'd found a thirty year fixed rate loan at 5.5, saving him three quarters of a percent on the interest rate and almost $400 on the payment. Remember that at the time, I had 5.5 available as well (rates are lower at this update). So I'm going to keep that exact same table:

30F Rate30F Cost5/1 rate5/1 Cost
5.5%2.65.25%1.5
5.875%1.85.5%0.9
6.25%0.25.875%0

The problem with the rate of 5.5% is that for a $600,000 loan, those closing costs are going up to $3475 (lender and third party costs are higher above the conforming limit) in order to get the loan done, and at the time, based upon current loan amount, 2.6 points would cost $16,100 and change. But he had gone to a loan officer who did his math as if that $19,585 (my loan quote at that time for that rate - I suspect the competitor's was higher) was going to magically disappear like one of a David Copperfield's illusions. He calculated payments and savings as if there were no costs - based upon the current balance and new interest rate and amortization period. Of course, this makes it look like the client was saving a lot of money $382 off the payment and three quarters of a percent off the rate, give him a whole new thirty years to pay off the loan, and pretend the costs of the loan aren't going to happen to get the guy to sign up. You'd think that somebody who reads this website every day would know better, but that does not appear to have been the case. In point of fact, the competing loan officer still has not told the guy how much his closing costs are or how much that 5.5% rate is going to cost him through him. I'll bet it's more than I would charge, but I don't know.

Psychologically speaking, what the competing loan officer is doing is smart. Because there's incomplete information available to the prospect, and I'm straightforwardly admitting how much it's going to cost (which is a lot, as most people who aren't billionaires or politicians think about money), an indefinite, uncertain number sounds like it might be less, even though it won't end up that way. Furthermore, by pretending costs don't exist, he has raised the possibility in the client's mind that there won't be any, because most people don't know how much lenders can legally lowball. There will be costs,and I'm willing to put my money where my mouth is that I have honestly represented mine. If this other loan officer could really deliver that loan at a cost lower than I can, there would be no reason for him to prevaricate, obfuscate, or attempt to confuse the issue. I've written before about how you can't compare loans without specific numbers, and there is no doubt in my mind that this other loan officer knows what those numbers really are - he just doesn't want to share that information, and the way our public consciousness about loans works, he can most often get away with it. It's still scummy behavior, and takes advantages of loopholes in the disclosure laws to practice bait and switch, knowing that when the deception comes to light (at closing) most people won't notice, and most of those who do notice will want to be done so badly they'll sign on the dotted line anyway.

Now what's really going to happen in 99% plus of all cases is that the costs are going to get rolled into the balance of the loan. The client certainly isn't going to be prepared to pay them "out of pocket" if they're not expecting those costs. So here's what happens: The client ends up with a new loan balance of $619,585 (Probably higher, because they're likely to roll the prepaid interest in as well, and quite likely the money to seed the impound account, but I'll limit myself to actual costs). In fact, the difference in payment drops to $290 when you consider cost, and $115 of that difference is directly attributable to starting over on the loan period, stretching out the repayment period to an entirely new thirty year schedule of payments (even though he was only two years in), completely debunking any serious consideration of payment as a reason to refinance. But lets compare cost of money, in the form upfront costs ($19,585 to get the new loan, versus zero to keep the loan he's got) and ongoing interest charges ($3125 per month on the existing loan, versus $2840 per month on the new loan). In this case, you're essentially spending nearly $20,000 in order to save $285 per month on interest. Straight line division has that taking sixty-nine months to break even. Actual computation of the progress of the respective loans cuts a month off that, to sixty eight months. As compared to a national mean time between refinances of 28 months, and this particular prospect is currently looking to refinance after less than that. In good conscience, I cannot recommend a loan where it's going to take him almost six years to break even, and by not considering the costs involved in getting that rate, he's setting himself up to waste probably half or more of the nearly $20,000 it's going to cost him to get that loan.

In fact, if this prospect were to refinance again in 28 months (once again, national median time), he would have spent $19,585 in order to save himself $7847. That doesn't sound like a good deal to me, and it shouldn't sound like a good deal to you. But here's the real kicker: The balance of the loan he refinances in two years is $19,250 higher. Let's assume it takes a low rate, rather than a cash out refinance to lure him into refinancing again, so he gets a 5% loan to refinance again. The extra $19,250 he owes will continue to cost him money, even thought the benefits of the refinance he is considering end when he refinances again or sells the property. At 5% for a putative future loan, that $19,250 extra he owes will cost him $962.50 per year extra on the new loan. Even if he sells in order to buy something else, that's $19,250 the client needs to borrow, and pay interest on, that he otherwise would not. Even if the client waits a full five years to refinance again, he's only saved roughly $16,400 in interest, and the additional balance owed on the new loan has actually increased slightly, to $19,280 (Remember, he's two years into the existing loan, hence $115 of phantom payment savings which keeps reducing his balance if he keeps paying it)

Failing to consider the fact that most people are not going to keep their new loan as long as they think they will is the gift that keeps on giving - to lenders. I run across people in their forties and fifties who have done this, all unsuspecting, half a dozen times or more, running up eighty to a hundred thousand dollars in debt for nothing but the cost of refinancing, and at 6% interest, that's $4800 to $6000 per year they're spending in interest on that debt. A more careful analysis says that the calculus of refinancing should emphasize finding a rate that helps you for a lower cost, but that's not the way lenders get paid the secondary market premium, and that's not the way that loan officers get paid to do lots of loans. Therefore, if you find someone who will go over these numbers with you and tell you it's not a good idea to refinance when it isn't, that loan officer is quite a valuable treasure because they're going to keep you from wasting all that money to no good purpose.

A good rule of thumb is that if a zero cost loan won't put you into a better situation, it is unlikely that paying costs and points to get the rate down is really going to help you either. You are unlikely to recover those costs and points before you sell or refinance your property. If a loan that's free doesn't buy you a better loan than you've got, then the current tradeoff between rate and cost isn't favorable to refinance. There may be reasons to do so anyway - cash out, ARM adjustment, etcetera, but chances are against you getting a rate that is enough better to justify the cost. When you consider how often most people refinance or even actually sell and move, it's hard to make a case for anything other than low cost loans and hybrid ARMs. I understand the people who want the security of a fixed rate loan and a low fixed rate - especially with the loan qualification standards as fussy as they currently are. But that rate, especially, is likely to come with a cost that they will never recover before they voluntarily let the lender off the hook. Good mortgage advice takes this into account, with the net result that the folks don't end up in debt to the tune of $80,000 to $100,000 extra, and spending thousands of dollars per year just on interest for money they shouldn't owe in the first place. No, they never wrote a check for it, but it's money they spent, and if they had needed to write a check for it, they probably wouldn't have spent the money in the first place. Kind of like having a credit card with a balance owing of $80,000 or more, just for the unrecovered costs of refinancing, but people don't realize it because it's not broken out of the total cost and balance of their mortgage, and nobody educates them as to where they would be if they hadn't made these mistakes. I try to teach my clients what they need to know to avoid that situation, so they don't find themselves victimized by it.

Caveat Emptor

Original article here

For Sale By Owner Issues

| | Comments (0)

I've been taking a long look at the world of For Sale By Owner and similar concepts lately. With the digital revolution, you always want to be watching the tide to figure out if you're in a business that's about to go the way of milk delivery and diaper service - a few left, but only a tiny fraction of the size they were. Since blogs and online magazines replacing or at least greatly supplementing mainstream journalism is one thing I'm constantly reading about, it might be good information to know if my real career is about to go the way of journalism.

At this point, I'm not worried about needing to change professions. The world of For Sale By Owner (FSBO) does seem to be figuring out the legal ramifications fairly well. There are resources available to get most, if not all, of the legally required disclosures for sellers to avoid future liability to the buyers. I'm going to go on record as believing from the things that I have read and seen that they are not as assiduously practiced as they are by people with real estate agents working for them. Reading the groups, I am seeing all kinds of whining about "Do I have to disclose X?" "Do I really have to disclose Y?" Sometimes, the stuff is minor and inconsequential (leaky toilet, drippy faucet), but a lot of times it's pretty major as well (water leak in/under slab, lead based paint, asbestos, "minor" cracks in the slab). Mind you, I've heard similar whining from real estate agents, particularly new ones. But the real estate agents at least want to be in business (and not sued) for a long professional career with many transactions every year, and so have motivation to disclose everything they find out about, lest one transaction cost them their license. Many individual owners, it seems, even the ones who have been made aware of the legal requirement to disclose, are hoping to get through the one transaction unscathed. After all, they hope they're going to be long gone when the problem crops up. To this, I say, don't count on it, and failure to disclose can often make your legal liability worse than it needs to be.

Needless to say, this is a big "let the buyer beware," when dealing with FSBO properties. You're standing across the table from someone with an immediate motivation to not tell you about whatever metaphorical bodies are buried in the property because once told you may not still want to buy, and most particularly you may wish to reduce your offering price. They have only a hazy motivation to tell you - the indefinite threat of perhaps some legal action sometime in the future, when they may or may not have assets you can even go after. If that doesn't make you uneasy, something is wrong.

One area FSBO is falling short in is picking an appropriate asking price. By the evidence, this is not only lack of information but also homeowner ego speaking here. Some people are not aware of what their home is really worth, or if they are aware then they are ignoring the evidence. Speaking from personal experience, persuading people to put an appropriate asking price on their property is one of the most difficult parts of the listing interview. Also significantly, in the long seller's market we had, many real estate professionals were making a lot of money buying "For Sale By Owner" properties that were under-priced, and immediately "flipping" them for $30,000 to $50,000 profit, often more. Here's the math for a property that sells for $460,000 but should have sold for $500,000: In the latter case, assuming you pay a standard 5%, you paid a $25,000 commission, split between the buying and selling brokers. But you come away with a net that's $15,000 higher. I personally know of several sales where an agent purchasing a FSBO property then sold it again before escrow was even completed for profit of $75,000 or more.

There is still some of that going on, but the problem with most FSBO properties seems to be over-pricing the market, rather than under. Their neighbors house sold for $500,000, and by god they are going to get $525,000. Never mind that the neighbor house has an extra bedroom, an extra bathroom, 800 more square feet, sits on a corner lot that's twice the size, and most importantly, sold when demand was high and supply was low. They are going to get that price, come hell or high water. So they put that out as the asking price, and they wonder why the one or two people to express enough interest to look vanish as soon as they've seen it. The reason is simple: They've priced themselves out of the market. There are better homes to be had for less money. In a fast rising market, this may be a survivable defect. When prices are rising as fast as they were, the market would catch up to anything that was vaguely reasonable. That has changed now. It's bad enough with people who have a real estate agent for their listing. Two of the hardest fights with listing clients in this market are keeping the property priced to the market, and getting them to accept what in today's market is a good offer rather than hoping for previous years' "bigger fool." Seems that most people who don't have an agent are just in denial. There's a FSBO two doors down the block from a corner listing we had where I held an open house. Even with me drawing the traffic to him, he didn't get a single offer because his asking price was too high. That's fine if you would be happy and able to stay if the property doesn't sell. If you're not in that situation, it's not.

Another area where FSBO properties are falling short is in marketing. They've got an internet advertisement and a sign in the yard. Maybe they've got an advertisement in the paper (usually the wrong one), and maybe they are holding open houses. All of these are nice. None of these are optimal. First thing is that internet advertisement you have is often on one site where even internet savvy buyers don't necessarily see it. Even if that is free, it's probably worth money to list on a co-operating network of sites. For Sale By Owner signs in the yard are more bait for agents than a prospective buyer. I'll put a sign out there when I get a listing also - it does catch a few people, and a sign with an agent or broker's name on it keeps other agents from bothering you. But it's a long shot at actually selling the property.

There are places to advertise your property to actually sell it, and there are places where agents advertise their business to attract new clients. Most of the FSBO ads I see seem to be in the latter sort of place. I don't think I recall a "For Sale By Owner" ad in the places where I'd expect it to generate significant actual interest in buying that particular property. There are reasons for this. The ones that are likely to generate interest require more lead time. I don't mind spending the money (especially amalgamating my listing with other listings in the office). Even if it sells before then, it helps the office generate more clients we're going to go out and show similar properties with, and I get a certain proportion of those. But For Sale By Owners tend to balk, as they are thinking one transaction. There are also resources that make an Open House effective, but are not cost effective for somebody looking to sell one house.

Number one resource for actually selling the property is the Multiple Listing Service (MLS). Put it out there where the agents who the buyers come to will see it. My primary specialty is buyer's agent. I know they are ready, willing and able to buy a property. Do I even take them to look at "For Sale By Owner" properties? Not unless I know ahead of time that the seller will pay my commission. Nor does any other buyer's agent I know of. Before you "For Sale By Owner" types start cursing us, remember first, we've got to make a living so we'll be there for the next buyer. Second, we're actually living up to our fiduciary responsibility when we do this, as I've got their signature on a piece of paper that says they'll pay me if you don't. So unless your property is priced far enough under the market to justify the expense on my client's part, your property is not a contender, and I'd better be prepared to justify the expense on my client's part in court, so your under-pricing the market has got to be by more than my commission. Furthermore, going back to legal requirements, I've got to figure that there is a higher than usual chance that the seller will not make all the necessary disclosures, or perhaps won't tell the complete truth and nothing but the truth on them. This puts my clients, and through them, me in a bind: Sure my clients can and will sue you, but if you don't have the money my insurance is likely going to end up paying out, because even though I've done everything I reasonably could have done, you didn't have an agent.

Given that the Multiple Listing Service is far and away the best tool for selling any given property, if you're not on it, you're missing out on buyers. If you don't have a selling agent's commission listed on Multiple Listing Service that is at least what is specified in the default Buyer's Agent Agreement in your area, you are missing out on buyers. If you don't have an agent at all, you are missing more buyers. Because I, like other buyer's agents, want to be certain we're not wasting our time. I've done a real pre-qualification or even a preapproval on my buyers (if the transaction doesn't actually go through, I don't get paid by anyone). Compare that with Mr. P, whom I sent away the night before I finished this essay. He's out there looking at houses he wants to buy, but the fact is that given the situation he should continue renting. A competent loan officer such as myself who was less ethical could maybe get him the loan anyway, or maybe not. It would certainly be an uphill fight. So he's out low-balling "For Sale By Owner" properties on his own today. The one who's desperate enough to sell at that price needs the transaction done with the first buyer who comes along, and is going to spend at least a month finding out there's only a small chance of the transaction actually going through, a month that they likely don't have to spare. The other For Sale By Owners are likely to get mightily annoyed with him, but he's the customer they're most likely to get.

There are also issues of timeliness and context and negotiations to consider. Putting your property on the market for the wrong price is a recipe for disaster, because by the time you figure out that the buyers aren't interested at that price, your "days on market" counter is so high that they're not interested, period. Agents know - because they're dealing with the issues all the time - what is a good response in this situation to a given event, and the good ones understand a lot more about keeping negotiations appropriate, so as not to lose what really is a good offer.

Caveat Emptor (and Vendor)

Original here

Yet that is exactly what you want them to do.

To avoid competing on price, they have all kinds of distractions they offer to make life more convenient, but not cheaper. They offer automatic payment options, the convenience of having your mortgage at your corner financial institution, biweekly payments, mortgage accelerators, and even negative amortization loans, which offer the apparent benefit of lower payments, which many uneducated consumers believe is price, at the price of a much higher interest rate than you would otherwise be able to get, which is the price the lender really cares about, and the one you should also.

There is always a trade-off between rate and cost for a given type of loan. That doesn't mean that different lenders won't have different trade-offs. Some are less willing to compete on price than others, so they tell you about how great their service is, how you are such a difficult loan that nobody else can do, or how easy their paperwork is, or how easy their loans are to qualify for. As a matter of fact, the lender with the easiest paperwork and loosest qualification standards will usually have the highest price trade-off, because their loans are statistically more likely to default, and therefore have to bring in a higher interest rate in order to have the same return.

Just like branding in the world of consumer products, which is also in effect for mortgages (why else would National Megabank be spending all that money for commercials? They expect to make a profit on it!), all of these little extra bells and whistles increases the price they can charge consumers for their loans, which is to say, the rate that you get, and the cost to get that rate.

So long as the terms are comparable, a loan is a loan is a loan. Provided that it has no hidden gotchas, a 5.875% thirty year fixed rate loan is exactly the same loan from National Megabank as it is from the Lender You Have Never Heard Of. No pre-payment penalty, and lower costs for the same rate? That's the lender I'll choose. It should be the same one you choose as well. It doesn't matter to me what name I make the check out to, or what address I put on the envelope. It shouldn't matter what routing symbol you put on the automatic payment, either, if that's what floats your boat. Lower rate for the same cost on the same loan? Same situation. Everything else is window dressing.

(Okay, it doesn't often matter to me. There are lenders that I'll bet you've heard of where I won't place my client's loans no matter how good the price due to some issues with their lending practices. But those lenders trend heavily to be the ones with massive consumer ad campaigns that don't really try very hard for broker generated business, anyway, because brokers learn to stay away from them fast. Nor are they usually competitive on price, because they're aiming for the "consumers shopping by name recognition" market).

So how do you force lenders to compete based on price? It's actually very simple. Ignore all of the stuff that they try to distract you with, like low payments for a while or mortgage accelerators or biweekly payment programs. Those are bait, and they serve the same purpose as bait: To get you to take the hook. Think about the things that happen to the fish after it takes the hook. That's you, if you take the hook. Concentrate on the type of loan, the rate, and the cost to get that loan. Here is a list of Questions You Should Ask Prospective Loan Providers. Ask all of them with every conversation you have about what is the right loan for you, and the best rate and cost they can deliver on that type of loan. After you have settled on one loan with one provider, it is then okay to ask about the bells and whistles that lenders (and every other sales organization) love to distract you with. If you want auto-pay, or biweekly payments, or a mortgage accelerator, these are just as much in the lender's best interest to offer you as they are convenient for you to have. I wouldn't pay for them, but many people think they're nice to have, and that's fine. Just don't let them distract you from what's really important: The price of the money you're buying.

Caveat Emptor

Original here

First of all I love the information on the site. I've done some research into buying a home and have talked to several people who have bought homes and I can never believe the stories I've heard. My response is always "why didn't you just walk out . . it's only a $2000 deposit . . . you're paying that in the first year with the difference in interest you are getting now" but after reading your site it seems to me you would have to get lucky to find a good mortgage broker and get a good loan where what you are told is what you get. The rule seems to be if you want a house "getting screwed" is just a part of the process. In this market (DELETED) you would need to be especially lucky to find someone who is willing to be honest . . . it's a risk and, again, it seems to me being honest is will just lead all clients to the fibbers who, frankly, tell people what they want to hear.

Anyway, back in May 2003 I was looking for a house and a friend of mine was looking to invest $70,000 (that he got from another land sale) so he wouldn't have to pay taxes on it. We ended up buying a $150,000 home where I live now. By "we", I mean "he" because my name couldn't be on the loan for tax purposes (at least that's what they told us . . . it's hard to get good information). And, I know, I know, I have no rights and he can do whatever he wants and I understand that. If anything I've had a place to live where the rent was relatively low (but it sucks that I didn't get a house when they were affordable). I've been living in this house and paying the mortgage for more than 3 years now. I'm in a much better financial situation now and I'd like to buy the house from him. He also has another $70,000 from another land sale (I'm not sure of the details but suffice to say he is thinking about paying off the mortgage). Anyway, once all this happens I want to buy the house from him at a price way below market (similar houses are now around $300,000 but there is no way I'm paying $300,000 when I could have gotten it for $150,000 when I moved in). My question is: can a seller also be a lender? Where do I start? I've talked to a few people and they won't touch it . . . in fact, they have no advice whatsoever beside for me to move out and get my own house (which they would be happy to help me with). What are the tax implications of all this?

Thanks again.

If it was inevitable that you would get screwed as part of doing a real estate transaction, most of the information on this website would be useless and pointless. Furthermore, if it was inevitable, I'm not certain it would be appropriate to call it "getting screwed," if it happened on every transaction - it would simply be the way things are. But that is not the case - better outcomes are possible, and not uncommon. What I'm trying to do here is give folks the tools to get correct relevant information, make rational informed choices, find honest competent service providers (it is not as difficult as I may make it seem sometimes, but neither is it easy!), and in general have a better outcome, which is the target you really want to hit. How much effort you want to spend is up to the individual reader. If you want to do only the easiest and most basic items, it should still make a significant difference. If you want to go whole hog, you should see much larger benefits.

Now, as to your specific situation, here are the issues I see:

First off, I have never heard of a situation where you cannot be on the title "for tax purposes." The only tax purposes that would serve is allowing the other person to get the entire deduction, which he would anyway from being the only person on the loan. As soon as the loan is recorded, there is no reason why there could not have been a quitclaim from him to him and you (in whatever manner you desired to hold it, most likely tenants in common in this case). This would have started the clock on having you on title, and since you cannot refinance for cash out within six months of having your name put on title via quitclaim, this constrains your options as well as putting you at your friend's mercy. You may have been paying the mortgage, but even if you can prove it this is unlikely to give you any legal rights if your friend decides not to play it straight. That's what I'm told anyway - talk to a lawyer in your state to be certain.

The next issue, relatively minor, is that you have no verifiable history of paying either rent or mortgage payments at this point. Those checks you have been writing to pay the mortgage in your friend's name? Well, that mortgage is being reported as paid, but your name is not on it. Rent? Not there either.

However, assuming this really is a friend who intends to play it straight with you, this situation is very workable. If it was someone who wanted to work you over, you would be well and truly hosed. You bought for $150,000, of which your friend furnished $70k. The loan for the remainder that you have been paying for sure looks like your contribution to me! By my reading, this makes him approximately 7/15ths owner, and you 8/15ths, but if your friend has been playing it straight, he's done you a pretty big favor not just by tying up his money in the down payment, but by allowing his credit to be used for your loan. This has effects on his debt to income ratio if he wants another loan, among other things. I wouldn't mind ceding him a larger share of ownership were I in your shoes.

Whatever the amounts of ownership you agree upon, however, you are also going to need to agree on a method for valuation. Assuming you're not actually going to sell the property (in which case the net sale price would be the value) I'd probably agree to something like the average of a Comparative Market Analysis of sold properties in your area, and an appraisal. Appraisals are not what you could get on the market in the current conditions, and don't try to think that they are, but both measurements can be manipulated. Pay for each of them in equal shares. As compared to each of your investments, it's small potatoes, and a worthwhile guard.

You have an agreed valuation, and an agreed upon share of ownership. Out of that, you currently have a loan on your share, but that should probably be your issue, not the partnership's. So from that, you can figure what your friend's current share of ownership is, and therefore what he is due upon buy out. You should still have a pretty good ownership equity, roughly $80,000 by the rough amounts and ownership shares in the previous paragraph. So you need to come up with about $80,000 to pay off the current loan, plus about $140,000 (again, by the computations as to ownership share above, subject to revision per your agreement) to pay off your friend. Total owed: $220,000.

Your friend actually want to go from owner to lender, and I don't know of anything wrong with that, although in all truth I've never encountered it before in this context (seller carrybacks happen all the time in this market). Furthermore, he wants to invest an additional $70,000 in being the lender. Whereas this will not qualify for 1031 tax deferred treatment as far as I can see (consult a tax professional), this means you are going to have two loans on the property, one from a regular lender, and one from your friend. The specifics of this are difficult to see without more information, and shopping your situation around (I'm not licensed in your state, so I can't put my wholesalers through that for no potential pay off!). It could well be that your friend's loan ends up in second position, but it strikes me as more likely appropriate for a first, as the guidelines for Home Equity Loans and Home Equity Lines of Credit are more likely to have this whole situation be acceptable to your lender for the balance.

As to the structure of the transaction, it's going to look like a sale, but don't expect real estate agents to want to work through that without a commission, which you are probably not going to want to pay, because all of the hard work to the transaction is kind of irrelevant in your case. On the other hand, good loan officers do these all the time. However, the commission structure for Home Equity Loans and Lines of Credit leaves them not making a whole lot of money unless you agree to pay them a flat fee for going through all of this, and for all the times I tell people that transactions aren't as difficult as some loan providers would have you believe, this is a very difficult transaction. I normally work on less than one point of total compensation for loans but I'd probably want to see about $6000 in order to put this transaction through, and that's if everything else is perfect. I don't know about your state's predatory lending law (most states have one, limiting total loan costs to a certain percentage of the loan), which may well prevent them from getting paid enough to make the transaction worthwhile for them. By comparison, on a loan of about $80,000 plus transaction costs, which is what the computations above suggest, California's predatory lending law limits total cost of the loan (and also total lender compensation via another law) to $4800. In most cases, direct lenders can basically ignore this by jacking the rate up so that they can sell the loan for more on the secondary market, but brokers cannot. And whereas that's way more than plenty in most situations, in this case it is not.

On top of everything else, this is a related party transaction. You are effectively selling from a partnership to one of the partners. That is going to mandate shopping lenders not only for price, but for willingness to do the transaction based upon the situation.

When I first wrote this, the loan was difficult but possible in that way. Today, I wouldn't even try without an upfront compensation agreement. You're going to need a very flexible lender. A paper Fannie Mae/Freddie Mac is right out, and due to changes in the market flexibility in lending standards is mostly a thing of the past. I might be able to find a portfolio lender that'll do it, or maybe not. We are going to have to document an awful lot of stuff, and there are a number of points on which the loan can fall apart. You're also probably going to want this to be a short term loan without a pre-payment penalty, so that you can refinance after you've been on title six months or so, because you'll be able to get a better rate then (unless rates have skyrocketed). All this stuff adds to the complexity, and whether the loan will get funded or not is not something I can control by paying attention to underwriting guidelines like I can in other cases. This requires a lender who's willing to issue some waivers and exceptions, and I might have to submit this loan several times to different lenders over a period of months before it actually funds. That's probably the reason nobody wants it: They can't get paid enough to make it worthwhile. The predatory lending law may have good intentions, but in this particular case it's making life difficult for the consumer because brokers and correspondents can't get paid enough to make it worth their while, and any given direct lender (especially the ones that consumers see, which tend strongly toward the A paper cookie cutter loan tailored to the pickiest of secondary market guidelines) is unlikely to have sufficiently flexible guidelines. You could go to a hard money lender, of course, but those rates are about fourteen percent or so, which causes most consumers to say, "Never mind!"

There is one other alternative. He could use that cash to buy you out, at which point he is left with basically his current loan, and I think this might even qualify for 1031 deferral (but consult a qualified tax professional before doing anything). If he can't rent it out for enough to have a positive cash flow under those circumstances, something is very badly wrong. He verifies that you've been paying rent/mortgage/whatever, and away you go with $70,000 or so in your pocket and all the leverage a qualified buyer has in a very strong buyer's market, and yours becomes a very easy transaction. I think you could do very well for yourself, given what little I know of your particular market at this point in time.

Caveat Emptor

Original here

This visitor came from a search engine on this search:

amortization of real estate loans early payoff based on a lump sum payment

This is one of the smart things you can do. Not necessarily the smartest, mind you, but smart. Unless you have a pre-payment penalty, you can always pay more than your minimum payment, and often even with a penalty. The question is if there's a better way to get a return on that money, whether by paying down a higher interest debt or by investing the money in a new asset. If you owe thousands of dollars on a credit card at twenty-four percent when your mortgage is at six, why would you want to pay down a tax deductible six percent instead of a non-deductible twenty four?

Similarly, if you can earn ten percent somewhere else with the money, why do you want to pay your six percent loan down? Net of taxes, a six percent loan costs you about 4.5 percent, depending upon your tax bracket and other deductions. Even if the return is not tax deferred, the net return on ten percent averages somewhere over seven percent for most folks. Say you are in the twenty-eight percent tax bracket and the ten percent is completely taxed every year. A lump sum of $10,000 will over the course of 15 years turn into $28,374 if invested. If it's fully tax deferred, it turns into $41,772. For comparison with other numbers later on in the essay, at twenty-seven years the numbers are $65,352 and $131,099, respectively. Not half bad.

Suppose you've got the cash flow to instead buy another property? That puts the power of leverage to work for you, and if you can rent out one of your properties or something, possibly multiply your money by a factor of ten within a few years. When you put ten percent down, and your new property appreciates ten percent while giving you a few dollars per month of cash flow, that's smart investing. At seven percent annual appreciation (historical average), you've doubled your purchase price in a little over ten years. A three hundred thousand dollar property will likely be a six hundred thousand dollar property in about ten years (It's just numbers), while you've paid the loan down from $270,000 to about $226,000. Even if your expenses of selling are seven percent, your gross is $558,000, less the $226,000 you've paid the loan down to, and you've come away from the property with $332,000, not counting those few dollars per month you netted after paying your expenses. Sure there are places and properties that don't pencil out, and being a landlord is a headache, but as you can see the potential rewards are substantial if it does "pencil out".

Now, let's say you do this every nine years on a three to one split, and 1031 Exchange the first two at least. After nine years you have $281,267 pre-tax, net in your 1031 account. You then turn around and buy three $600,000 properties. You end up with three loans of about $506,000 each. Assuming net zero cash flow on the properties, after nine more years, you have three loans at $434,100, netting you $1,775,286 into your 1031 accounts, which you then roll into three more properties each at $1.2 million purchase price. Your loans are $1,000,000 each, but let's say you rent them for enough money to break even on expenses. After nine years, you sell all of these properties, and end up with just a little under $10,750,000 net of sales costs in your pocket before tax, which at long term capital gains rates (15%) nets you $9.13 million or thereabouts. Admittedly in this example you did start with three times as much money, and nobody in their right mind sells off nine highly appreciated properties in one year, and you did have the headaches of being a landlord on an increasingly widespread basis for those twenty-seven years, but this illustrates the money to be made for the same investment. Patience and leverage working for you over time are far more powerful than any quick flip.

But assuming there are no better alternatives, it is a smart idea to pay down your mortgage. Here's why: Let's say your balance is $270,000 at six percent, and you pay your loan balance down by $10,000. Your regular payment was $1618.78, and it still is, but interest is $1350 of that. Only $268.78 would normally be applied to principal. Yeah, you've just sent them about six months of payments - but it just paid your loan down by three years of principal payments. Assuming you never sell and never refinance and never pay an extra penny again, you will be done in month 324 - saving yourself thirty-six payments for a total savings of $58,276. Not to mention that if you do refinance, you'll pay lower fees. Not in the league of some of the alternatives above, but still a nice return on investment. From a financial management standpoint, it definitely beats just spending the money.

Caveat Emptor

Original here


I got this email the other day, responding to one of my Hot Bargain Properties posts on my other site:


I am currently working with a coworker with no agreement. However, she has offered to rebate 50% of her commission. Are you negotiable with your commission?

I am very ready to buy a place at a bargain or discounted price. I have been pre approved by DELETED for $550 but I do not want to spend more than $525, preferably around the $450 range.

I have sufficient liquid funds for 10% down and have an excellent credit score...score 3 months ago was 752.

Let me know.

I do have lower cost and commission rebate packages for when buyers bring me transactions that have the property at least settled upon. The reason is that not only is there much less work to be done done, but I'm providing a lot less value in those circumstances. I'm not going out and going over dozens of properties, eliminating eighty percent of them before taking them around to see the good stuff. I'm not doing background checks on all those properties, looking for issues. At the point that the property is settled on, at least half of the value a good buyer's agent brings in is already moot. We've already dealt with the issue of which property (or properties) are worthy of making an offer on. Now we're down to negotiations, where I still provide a lot of value, facilitation of the transaction, which any real estate agent worthy of their license can do, and looking out for problems, which starts earlier when I'm locating the property, but when you have title companies and building inspectors and appraisers getting into the act and getting paid, it becomes easy. It's no longer a matter of spotting the issue before an offer is made, it's a matter of dealing with the issue if and when it pops up. Much easier, much less time consuming, and much less liability on my part. When you've decided to make an offer before I even come into the picture, there is no issue with whether my representations caused you to make an offer on the property when you would not otherwise have done so. I haven't been sued yet, but that's the number one cause of real estate lawsuits. Sometimes it's an unscrupulous agent telling the folks that the airport is going to close, but sometimes it's also people who think the agent said something they did not in fact say, and sometimes it's people who make something up due to buyer's remorse. If you've already decided to make an offer, that whole issue is gone. Liability? Much less. Amount of work done and time invested? Way less. Amount of value provided to buyers? Also much lower. So yes, I'll work for less in those situations.

When I'm responsible for finding the property, I retain the entire commission.

Yes, consumers getting half the buyer's agent commission seems like a good idea on the face of it. One to 1.5 percent of a purchase price in the hundreds of thousands of dollars. But how much value do those agents really provide? Consider: Did that agent find them something as interesting as the property they emailed me on? If the agent they were working with was finding them properties like that, there would be no need and no interest in working with me, and they wouldn't be asking about this property I found. If that agent spent enough time shopping the market that she even knows what is and is not a bargain, this person would never have contacted me. Does she look for problems and issues or does she just say "Here is the living room," and try to talk you into making an offer on every property? What value is that other agent providing you? If the answer is, "not much," then no wonder she's willing to rebate half the commission! As far as she's concerned, the half she does keep is free money for going around and looking with you. My goal is that my clients end up with at least 10% they would not have had without me - either a better property for the same money, or the same value property for a lower price, or some combination of the two. Now, if getting half of a two point five percent commission via rebate sounds better than saving 10% of the value of the property, or getting a property 10% more valuable for the same price, by all means keep shopping agents who rebate commission. If getting a property that is worth more, or paying less for the same property, is what you are after, you need someone who is likely to deliver that, and those discounters business model does not allow them to invest the time and energy to do so. Quite frankly, if they don't make a habit of it, they aren't likely to have the necessary expertise, even if they wanted to.

You may ask about how this squares with my attitude about loans. Yes, I'm one of the deepest loan discounters there is. That's because a loan is a loan is a loan, as long as it's on the same terms, and most folks qualify for better loans than they get. A thirty year fixed from National Megabank is the same loan as a thirty year fixed from the Bank of Nowhere in Particular, provided the rate, costs, and terms are the same. Only difference is who you make the check out to.

Real estate is on the polar opposite end of that scale. No two properties are alike. Especially in the current market, the difference between shopping smart and not doing so is multiple tens of thousands of dollars, far more than a commission rebate. I don't rebate buyer's commissions because I provide more than that in value. In my estimation, and that of the people who are working with me, it's money well spent. You get what you pay for.

Good buyers agents make a habit of looking for real bargains, whether or not they have a client it's appropriate for. It's called market knowledge. With market knowledge, a good agent can not only identify the ones that are bargains, you are able to negotiate better terms on those bargains. Good buyer's agents usually have bargains they know about that they just haven't found the appropriate client for yet. If you'd like to work with them and get shown these bargains, or have them go looking for bargains specifically for you, there is a price to be paid, and that price is that they make a little more money than the do-nothing discounter. You don't pay it, at least not directly, the listing agent does, and through them, the seller. If you believe that the final price might be somewhat higher to reflect that, you would have some justice on your side, provided you don't consider the value in locating the bargain property, the value in negotiating for a better price, and the value in avoiding problems before they happen, or dealing with them in initial negotiations rather than at the end of escrow. If you don't see the value, then not only are you saying that you don't see the solution, but that you don't understand that there is an issue. This indicates someone on the first level of competence: The unconscious incompetent. Not only do you not know how to do it, you don't realize that there is acquired knowledge and acquired skill involved.

Now a good agent who knows they provide value should have no difficulties asking only for a non-exclusive buyer's agent contract. if you don't like what that agent does, if you do not agree that there is value in that agent's approach, this leaves you free to stop working with them at any time and go work with someone else. If the agent doesn't perform, as in find and deliver a property that you agree is more "bang for the buck" than you would otherwise have gotten, by all means go work with the bump on a log who splits the buyer's commission with you.

If you want a Yugo agent that breaks down in the middle of the transaction and leaves you stranded, that's no skin off my nose, but you are not the client I'm looking for and the bargains I find are for my clients. I am neither obligated nor inclined to share them with people who want to use some other agent. Go find them yourself if you don't think I'm providing value. Just the knowledge that something like that is available should be a large amount of help. But if you can't, perhaps you might consider that perhaps I might be providing a certain amount of real value for my pay?

Very few people reading this are likely to be receiving minimum wage for their employment. If you are not prepared to concede that it is possible for more skilled, more knowledgeable people to deliver a more valuable product, whether that product is service or commodity, what possible justification do you have in making more than minimum wage? For that matter, unless you are one of those people whose work has to be done on site, why isn't your job being done by some subsistence level worker in a Fifth World hellhole? Even if we limit ourselves in the application of this principle to qualified and licensed people here in the United States, my guess is that your boss could probably hire other people to do your job more cheaply, but his additional investment in you probably makes him more money than that cheap replacement worker would save, and that's the reason you are worthy of your pay. This very same reason is why I am also worthy of my pay.

By the characteristics they are claiming, the person with the email at the top of the article is a very qualified buyer. Don't you think that should be working with someone who knows how to use that as leverage to get them a better bargain? Suppose they weren't so qualified. Don't you think it might be in their best interest to have an agent who knows how to structure a transaction so that it can work, and can help avoid wasting time and money on properties and transactions where it can't and sellers who do not have the option of working with them in the requisite way?

Or you can pay full price for a mediocre property, and console yourself with a rebate for much smaller amount of cash, that when you consider the entire situation, is a fraction of the money that came out of your pocket but didn't have to. Pay too much, and get a check back for at most a fifth of it in cash. Sound like a good deal to you? Maybe you didn't pay cash for the property, but then you've got a loan, and you paid additional fees based upon the size of that loan, and interest because you borrowed that money, and more in property taxes because you paid more than you should have. All of this eats away at money you would otherwise have in your pocket and equity that you would otherwise have in the property. Just because there's no explicit dollar figure on it doesn't make it any less real. How would you feel about writing a check drawn directly on your net worth for some unknown amount? Not so hot? That's what you are doing by using some bump on a log discounter who basically allows you to keep a percentage of what they provided no real value to earn. This is one of the largest transactions of your life. Scrimping on the compensation of the person who has the knowledge and skills to save you many times what they cost is almost as intelligent as OJ Simpson hiring a cheap lawyer. Even though I hope that you haven't been accused of murder, using a less skillful agent means you wasted money. Even though that's not a crime and you did it to yourself, it's still nothing beneficial to your overall financial picture.

Caveat Emptor

Original here


No, I'm not a David Letterman watcher, for reasons having to do with turning into a pumpkin before his show starts. I'm going to treat it a little more seriously than he does, as this is a serious subject, but I'll do my best to inject a little humor into it.

10. Surrounding Environment - These are environmental factors arising from areas beyond your property, and therefore, beyond your immediate control. Freeway noise 24/7, being downwind of a hog or chicken farm, being next door to a strip club with a huge neon sign constantly flashing, "LIVE NUDE GIRLS" - all of these and many more neighborhood factors can prevent people from even looking at your property. They see what's around it, and decide they're not interested in living there, or that the investment potential for the property is limited (to be charitable). The only real way to fix problems of this nature is not to buy the property in the first place. Look at all of the issues. Just because it doesn't bother you now doesn't mean it won't bother prospective purchasers later. Blame your buyer's agent. If you didn't have a buyer's agent, that leaves only one candidate for blame. You'll find them hanging around any mirror you might check.

9 HOA: This is closely related to surrounding environment, and condos and PUDs are the poster children of what a lot of people don't want. People want the property to be theirs to do with as they please. It's a sad fact of life that in an increasing number of places, they are going to be disappointed because they can't afford anything without a homeowner's association. Homeowner's Asssociations really are a good guardian of property values, but they have a tendency to give way to much power to the busybody and the would-be dictator. Unfortunately for a lot of people, the newer developments they crave all have homeowner's associations because while everyone knows that they personally can be trusted to maintain the property, those horrible neighbors who can't be trusted won't trust them. Unfortunately, the only way to appeal to people who don't want an HOA is not to have an HOA. Once again, blame the buyer's agent that "helped" with your purchase.

8. Zoning: Zoning restrictions, lot constraints, etcetera are all parts of this category. If you've got a two bedroom property and setback requirements keep you from building a third bedroom, your property is not likely to appeal to people who need a three bedroom place to live in. Once again, the only way to fix this issue is not to buy where it is an issue. Over-restrictive zoning is a real economic problem for a lot of reasons, but while people like to be able to cause everyone else in the neighborhood problems by not having enough parking for their apartment house or mini-dorm, they don't want everybody else turning the tables and causing them problems. Yeah, maybe you can get the zoning changed sometimes - but that's not the way to bet.

7. Schools: If you buy in an area that includes the right to attend a great public school, that's a gift you give yourself that keeps on giving, at least until the neighborhood starts voting against additional property tax bonds. Or if you can cause a school that heretofore taught only "hanging out with a GPS tracker on your ankle," to start teaching the kids some economically desirable skills, you can expect a windfall in the form of property value. I think that shackling kids to a particular neighborhood public school is slow motion suicide for society, but evidently at least fifty percent plus one of teacher's unions feel it's beneficial to getting union leaders more money and power. Once again, this is just a fact of life, and once you have bought a particular property, you're locked into whatever the local educational insanity might be.

6. Clutter: If you're tripping over knick-knacks, carnivorous house plants, and cannot eat meals as a family because the table is six feet deep in stuff, it would be a real good idea to do something about it. There are a lot of easy options here: Trash, charity, storage rental, loan or give it to some family member who's not trying to sell their house. If you're trying to sell, engrave the saying, "A place for everything and everything in its place" upon your soul for the duration. If there's any doubt as to whether you need it in your day to day life, the place for it is "elsewhere." If the place is so full of your stuff, people worry about whether there's going to be room for their stuff. Believe me when I tell you I understand how difficult this is: I've got two young kids and two dogs, all four of which are highly efficient entropy generators, but getting clutter under control and keeping it there is critical to selling for a good price.

5. Staging: Absolutely empty is better than "chock full of clutter," but then people wonder how their stuff would fit. I still have trouble believing this one, but I have to admit the facts. Most people have a hard time picturing their couch and their TV in the living room. A small amount of furniture gives them a reference point, scale, and a starting point for their mental decoration. It helps them figure out how their stuff is going to fit. A bare minimum of vanilla furniture shows better than even a vacant, empty property. Even most stagers seem to want to put too much stuff in the place, for some reason. Seriously, keep it to a bare minimum. A bed in the bedroom, a couch in the living room, a dining set in the dining room. Maybe one nightstand in the master bedroom, a coffee table and placeholder for the TV in the living room. That's it. If the place is not vacant, and you are still living there, that's still the target you should aim at. If you don't absolutely have to have it every day, get it out of there. This especially applies to family heirlooms, anything expensive, and anything irreplaceable. Get. It. Out. People want to be able to see their stuff in the place, and they can't do that if there's too much of yours. By the way, this applies to you, too, at least while prospective buyers are looking at it. Don't follow them around your property like you're worried they're going to steal the silverware. Get out. If there's anything you're worried about them stealing, get it out also, and keep it out until the property is sold. For everything else, your listing agent should have a record of who has been in the property, and you should be insured even if you're not trying to sell the property.

4. Condition Is it clean? Is it neat? Is it attractive? Here's an example for you: Carpet is at most $40 per square yard, installed, with a good pad. If you've got a hundred square yards of carpet that needs to be replaced, call it $4000. Not replacing it will probably cost you at least $10,000 on the sales price. More likely double that, and it'll take longer to sell and you'll end up giving a carpet allowance to your buyers out of what you do get. Dirty floors, chipped tiles, all that stuff is unbelievably costly not to fix. Believe me, I understand what a pain it is. My newest family member loved to chew drywall when she was a puppy. It costs far less to fix it yourself than you're going to have to give up to sell the property. Get a cleaning service in if you don't want to scrub everything yourself. It's stupid, but opening the blinds or drapes so that prospective buyers see all that light as they're walking in is worth serious cash, not to mention much broader interest. The point is this: Many prospective buyers have the imagination of a rock, and their agent isn't any better, because they don't want to say anything that would give the people they're supposed to be helping (but aren't) grounds to sue. You can choose to market only to the people who are visualization's answer to Albert Einstein, but it really does narrow your potential market, and hence, cost you money and time (and therefore more money) when you're trying to sell.

3. Showing Restrictions: If people can't see your property when they have the time, they're not going to make an offer on it. Cold hard fact. Since the time of highest interest is the first few days its on the market, if you haven't gotten an offer withing thirty days, not only is something wrong but it's cost you some serious cash in the form of lowered selling price. Showing instructions are easy to fix. "Just go!" is absolutely the best, but (unless you're an international supermodel), prospective buyers don't want to catch you in the shower or in bed any more than you want to be caught there. One bad experience in this area is all any agent needs, and I've had mine (believe me, you don't want details). Asking for a few minutes notice so you can evacuate is reasonable. Telling prospective buyers to avoid a time slot is also reasonable. But the more restrictions you put on showing, the more likely it will be that you've raised the cost for viewing your property too high. Asking for four hour notice - let alone 24 - is almost guaranteed to prevent prospective buyers from viewing your property. And if someone does ask that far in advance, for crying out loud get back with them and be as accommodating as you possibly can. I actually laid out a trip "day before" last week, and of the seven people who wanted advance notice, precisely one got back to me. That gives me quite a bit of information as to how interested they really were in selling the property, which is to say, not very. Even if you don't really care if the property sells, act like you do.

2. Price: I really hope you weren't expecting this to be number one. Buyers choose properties to look at based upon asking price. They choose which property to make an offer on based upon how well your property compares to others of similar asking price. If your property is clearly outclassed by properties of equivalent asking price, you're doomed. It is to be noted that just about every sin in the list is forgivable if the price is low enough, but the more sins there are, and the worse the violation, the lower the sales price is going to be, and most of the rational world wants the highest possible net from the sale. Trying to make believe that any problems that exist aren't there will only prevent the property from selling at all.

1. The Agent Plain and simple, you've chosen a bad one. Either they don't market the property effectively, they don't explain how things work to you, they make it difficult for other agents to show the property, they discourage offers represented by other agents, they don't return phone calls, they evidence a bad attitude, they're using your property to troll for buyer clients and don't want it to actually sell - the list goes on and on. They're effectively raising the price to make an offer on your property. Just because you've signed a listing agreement doesn't mean you're on cruise control. You need to monitor agent performance. At least, if you want to know whether they are performing or not. Are they forwarding all offers? Are they discouraging people from making offers because that offer might mean they don't get a kickback? All of these sins and many others really do happen.


Bonus Super Deluxe Reason. Homeowner Attitude About sixty percent of all listings I read leave me with one very strongly negative conclusion: That the owner of this property does not really want to sell. Maybe it's the agent's fault in some cases, but if you won't find - or pay attention to - an agent who won't tell you unpleasant truths, you're hurting only yourself. I tell my buyer clients that there is no such thing as a perfect property, but the same warning is equally important to sellers. There is no such thing as a perfect property, and acting like you own one is a great way to drive buyers and their agents off. You are not doing buyers a favor by putting your property on the market. You have real estate, the most illiquid investment there is, you want the cash those buyers have, and you're not going to get it by giving them reasons why you're too difficult to do business with. If you didn't want what buyers have (cash), you wouldn't have the property on the market. Buyers, their agents, anybody who comes to look at that property is helping you get what you want. I believe that people who look at the property you're trying to sell are doing you a favor. Even if they just want to look at it, in the middle of the best seller's market there has ever been. If the property doesn't show, you won't get offers - guaranteed. If you don't get offers, you are highly unlikely to consummate a successful sale. The property is only worth what someone is willing to offer for it - end of discussion. If the most you can get someone to offer is thirty-nine cents, that's what it's worth. You can choose to sell, or not to sell, for that price, but trying to tell yourself or anyone else that the property is "worth $400,000" when nobody is making offers that high is a waste of energy, and quite likely, of a buyer and an offer that really are offering the best you're likely to get.

Caveat Emptor

Original article here

We got behind on house pymts & it was sent to an attorney for foreclosure.? The attorney has printed a notice in our paper on Oct 9 that it will go up for public action on Nov.16th. We found out we could get financial help on friday. Can we stop this action now without it going up for auction?

This never ceases to amaze me. People have a contract they can't meet, and they don't call the other party to see if anything can be done.

The lenders do NOT want to foreclose on any more properties right now. Actually, this is pretty much a constant of the real estate market. They never want to foreclose; they will only do so when it is apparently the least bad solution to their situation.

To be truthful, you should have called the lender and explained your situation as soon as you knew you were going to be late with a payment. Lenders will always work with anyone to a reasonable extent, but now they're bending over backwards. Foreclosures are 1) bad publicity, 2) bad for their relationship with the secondary loan market, and 3) almost certain to lose them a blortload of money.

Call them this instant (or as soon as they open on Monday) and ask for Loss Mitigation. They will not be as forgiving as if you'd called them right away, but they're still likely to be willing to work something out. Just about anything is better than losing it through foreclosure, I might add, so you be willing to give as much as you can to encourage them. Foreclosures hit them in ways beyond the cash they immediately lose. They don't want to foreclose.

Now, the downsides:

First off, you've waited until you are "in extremis", long past the best time to call the lender. They're quite likely to see your belated request to talk as a last ditch method to delay the inevitable. Lots of folks do precisely this. Had you called earlier and been working with them all along, made agreements and kept them, they'd have evidence you're really doing your best to get them their money. You're not a criminal, but this is the same sort of behavior judges see with convicted criminals at sentencing, faking penitence to avoid jail - then they go right out and do the same thing again.

Payment modifications aren't some kind of magical "make it all better" The lender wants their money, and they're not going to settle for a situation that doesn't turn the loan into what they call a "performing asset." If you borrowed more money than you could really afford, and you aren't able to make at least the interest payments on it at real rates, as many people with negative amortization loans did, then the best modification they'll agree to really isn't going to help you, and you're better off selling the property ASAP, even if you don't get enough for the property to cover what you owe ("short sales").

Bottom line: Please call and ask them. It never hurts to ask. But be mentally prepared if such a modification doesn't really solve your problem. Because you waited until the very end, don't be surprised if their willingness to work with you is limited, but even in such circumstances, they would rather not foreclose if you can show them another course that gives them better prospects for getting more of their money back.

Caveat Emptor

Original article here

That was a question that brought someone to the site and the answer is very simple: they don't give you the loan. You haven't agreed to pay them back, so why should they?

There are two major cases of this, one of which has two sub-cases. The first case is that if it's a purchase money loan. Because you don't get the loan when you don't sign mortgage documents, there may be issues with whether or not the seller is entitled to keep your good faith deposit. If you can come up with the cash to pay the seller from somewhere else, for instance, if you have it sitting around and just would have preferred to get a loan, no worries. You still have the option of hauling out your checkbook, and you can get a loan later, although it will be "cash out" loan which generally has a rate and term trade-off a little bit higher than "purchase money" as well as implications for deductibility. But since most people don't fall into this category - people with the cash lying around - you are probably looking at the unpleasant reality of not having the money to purchase the property. In most cases, the loan contingency has expired, assuming there was one to start with (I used to advise people to apply for a back-up loan, but changes in the loan environment have killed the backup loan). Matter of fact, usually all of the contingencies have expired, leaving you without anything to excuse not consummating the transaction. Therefore, any good faith deposit is at risk, not to mention that the transaction may well be dead. The seller only agreed to give you that exclusive shot to buy the property for so many days. If you want to extend escrow, most sellers will require some additional consideration in the form of cash in order to allow the extension. In fact, many agents and loan officers have gotten very lazy and lackadaisical about deadlines, with potentially severe repercussions to you, their client. Once those contingencies have expired, usually on day seventeen, you typically are stuck. Consult a lawyer for the exceptions, but there really aren't very many. This is one of the many reasons why being successful in real estate is about anticipating possible problems and taking precautions. If you wait until the problem crops up, it's usually too late, and often, the best thing to do is sign the loan documents even though they are nothing like the loan quote that got you to sign up with that company, because otherwise the consequences of not signing are even worse than signing. Many loan companies target the purchase money market with this in mind.

The second major case is if you are refinancing, which leaves you in pretty much the same boat you were in before you started the transaction. You own the property already. You have a loan now. Unless you have a balloon loan coming due, you just continue on with what you were doing before you started the process of refinancing.

There are two major reasons why people refinance: Better terms, or cash out. If you are doing it for better terms, and the new loan doesn't deliver, there pretty much is no reason to sign those documents. This includes if they are actually willing and able to deliver the rate, just not at the cost they indicated when you sign up. There is always a trade-off between rate and cost in mortgage loans. Usually, the lowest rate will not be worth the costs you have to pay to get it, but if they lie about what it really costs to get you to sign up, those final loan documents are going to have a rude surprise if you look at them carefully. All but the worst scamsters will usually deliver that rate and type of loan they talk about. Where they fall short, or actually, go over, is in the costs department, because a loan with $5000 more in costs will likely have a lower payment than the loan where they don't hit you for those extra $5000 in costs, but do give you the rate that the costs they talked about really buys. Most people shop and compare and choose loans by payment. It may be short-sighted and the best way there is to end up with a bad loan, but they do it anyway. They are more likely to bail out of a loan where the monthly payment is $60 more than they were initially told but has the same costs, then they are to back out of a loan where the payment is $40 more because an extra $8000 in costs "somehow" appeared at closing, never mind that the former is probably a better loan for them.

Refinancing for cash out is a more nebulous area. Since it's a refinance loan, you probably don't have a deadline, so you can go back to the beginning and start all over if you want to. Sometimes, however, rates have shifted upwards since you started the process, and so it can be to your advantage to go ahead and reward the company that lied to you in order to get you to sign up. If rates are the same, however, dump that problem provider and see if you can go find someone less dishonest! Furthermore, sometimes people have absolute deadlines as to when they need that cash, or it saves them so much money that they are better off signing those documents anyway, or the improved cash flow means they don't have to declare bankruptcy. Most often, there is plenty of time to go back to the beginning and try again, but there are exceptions. Once again, I used to advise people to apply for back up loans, but neither I nor anyone else can productively do back-up loans any longer due to changes in the lending environment. Meanwhile, all of this rewards the company who lies to get you to sign up - something you really don't want to do.

When you don't sign loan documents, if you have put down a deposit with the lender, you are going to lose it. Low cost ethical loan providers who really can deliver what they talk about, and whose rates really are competitive, do not typically ask for deposits, and are willing to work without them if they do ask. They know their rates are competitive, that they intend to deliver what they talked about and that there are any rates significantly better out there. It's only when the company fails one of these tests that they have a real need for a deposit, in order to commit you to their loan.

One more item needs to be covered: Irrelevant documents aren't needed. I don't need anybody except those folks who are getting a negative amortization loan to sign a negative amortization disclosure (assuming I ever did one, which I didn't). The same thing applies to pre-payment penalties. If they don't apply to your loan, they shouldn't be required. If they can't fund your loan without it, there is a reason, so don't sign disclosures you aren't willing to accept the implications of. If you sign a negative amortization disclosure, the legal presumption is going to be that you realized it was a negative amortization loan and accepted it on those terms. Ditto a pre-payment penalty rider. Of late, unscrupulous companies seem to be asking people to sign these after loan funding "for compliance". Consult with your lawyer, but I wouldn't sign them at all. If they were able to fund your loan without them, they are obviously not a necessary part of the loan structure. If not, why did they fund your loan without them? The only "compliance" aspect is to this is complying with them getting paid more money. Admittedly, it's small-minded to refuse to sign the pre-payment rider when you were informed at sign up that the loan had a pre-payment penalty, but bottom line, they shouldn't fund your loan if they aren't willing to accept it as it sits, and that's not the situation most folks are running into. They are asking the questions and being told the answer is "no," only to discover later that the answer was really "yes," but by lying to their prospective customers, some loan providers can get paid large amounts of money and pawn bad loans off on most of their customers.

Caveat Emptor

Original here

This is part and parcel of the system that's abused. Here are sample rates from one A paper lender, picked at random, that were in effect when I originally wrote this. Rates are lower now, but it's a good example nonetheless. These were Fannie and Freddie conforming 30 year fixed rate mortgages with full documentation of the loan. The first number is the cost for a 15 day lock, the second for a 30 day lock, and the third for a 45 day lock. A positive number means it costs that number of discount points to get the rate. A negative number means that the lender will pay that many discount points for a loan done on those terms. I want to make the point that these are wholesale rates, but I didn't feel like translating them to retail. I don't work for free any more than you do, nor does any other loan provider.

5.625% 1.50 1.75 2.00
5.750% 1.00 1.25 1.50
5.875% .375 .625 .875
6.000% 0.00 0.25 0.50
6.125%-0.50-0.25 0.00
6.250%-1.00-0.75-0.50
6.375%-1.50-1.25-1.00
6.500%-1.75-1.50-1.25
6.625%-2.25-2.00-1.75
6.750%-2.50-2.25-2.00
6.875%-2.75-2.50-2.25
7.000%-3.50-3.25-3.00


As you should notice throughout, there is a 0.25 spread in costs between locking in any particular rate for 15 days as opposed to 30, or 30 days as opposed to 45. This is because it costs them money to have the money standing around doing nothing waiting for your loan to fund. The difference in costs between a 15 day lock and a 45 day lock at the same rate is half a point. When I wrote this, the column you wanted to pay attention to was the thirty day column. Due to regulatory changes and market changes, that's not the case any longer. In point of fact, nobody actually locks the loan with a lender any longer until they have at least every 'prior to documents' condition satisfied with the underwriter, meaning the lender has agreed that there appear to be nothing in the borrower's financial condition that would result in them rejecting the loan, and are prepared to draw up a final loan contract for signature. It costs the loan officer - and their company - too much if a loan is locked but not delivered.

When I started in this business, I locked every loan as soon as the customer said they wanted it. That meant a thirty day lock if you (the loan officer) were on the ball. You can't do that any more without losing your shirt, because if you don't fund at least seventy percent of what you lock, the lenders are going to refuse to do business with that loan officer, and they have surcharges on the loan officer if they fail to actually fund at least eighty percent of what they lock. Given how paranoid lenders have gotten, you're going to have a certain number of applicants who flat out cannot qualify, and in at least one case out of ten, that failure is unpredictable just because nobody is the cookie cutter picture of an ideal underwriting scenario any longer.

Given regulatory changes, a loan officer has to be on the ball to get a refinance funded in two weeks from lock. Even if everything is ready to go, the lenders want a final redisclosure 7 days before signing documents, and with the three day right of rescission on refinances it takes another week after signing to actually fund the loan. That's once everything else is ready to go. You want the rate locked as early as practical, or you really have no idea whether it will be available when you get to the end of the process but other changes to the business make it prohibitively expensive to lock your loan at all before you have an underwriting commitment. Many providers work on a "promise the moon and wait and hope" basis, hoping the rates will drop. They get one loan for sure, when they lure you in with a low quote they cannot currently deliver, and if they get lucky and rates drop, you think they walk on water.

Now this is a fairly broad spread rate sheet, as the company was willing to take clients through a large range. On the other hand, at a 5/8ths of an additional point hit for 1/8th percent rate below 5.875, they were telling you that they really would prefer to keep their customer's rates locked in for 30 years above that. On the other hand, since most people dispose of their old loans about every two years, most folks shouldn't want to pay those costs, which will take much more than two years to recoup from the lower rate. It's much the same phenomenon as insurance companies guarding against adverse selection (only those folks who have major health problems buying health insurance, for example).

Which loan is the best for you? Don't know without more specifics. It depends on approximate loan amount, your life plans, your proclivities, and your financial situation.

But the devil is in the details, and one of the worst and most common devils is details is a provider "forgetting" the adjustments. Adjustments generally mean that the loan will be more costly than the basic rate/cost tradeoff outlined above, so "forgetting" to post the adjustments on a Good Faith Estimate is one of the easiest and most effective ways to lie in order to make your loan look more attractive by comparison. Since most providers don't guarantee their estimates, they can do this with basic impunity, but make no mistake - they know what the price is really going to be. If they won't guarantee their estimates, ask them why not. Here are the possibly applicable adjustments for this category:

Loan amount under $60,000: half a point
Loan amount $60k up to $100k: quarter of a point
cash out loan, 70-80% LTV: half a point
cash out loan, 80-90% LTV: three quarters of a point
Investment property 50-75% LTV: one and a half points
Investment property 75-80% LTV: two points
Investment property 80-90% LTV: two and a half points
No Impounds fee: quarter point
2 units 90-95% LTV: half a point
Manufactured home: three quarters of a point (they also have an absolute maximum CLTV of 80%)
Loan distribution
80/15/5 quarter of a point
75/20/5 quarter of a point
Interest only one and one eighths points
if CLTV over 90%: additional quarter point
97 percent of purchase price financed: three quarters of a point
100 percent of purchase price financed: one and a half points
2/1 Buydown two and a half points
Stated income FICO 680-699: half a point
Stated income FICO 700+: quarter of a point
(Stated Income loans are not available from any provider I'm aware of at this update)

So let's see. If you are doing a cash out to 75 percent loan stated income and have a credit score of 690, you add one point to the costs listed above. (half a point for stated income at 690, half a point for cash out to 75%)

If you have an investment property duplex at 90 percent LTV, you would add three points (investment property loans are relatively expensive, as you can see, and it isn't restricted to this lender. They are riskier loans)

Doing 100% financing on a $50,000 home: Two points. (when it was available)

One hopes you get the idea. To leave these out is a tempting omission for the less ethical providers. Just because they are left out does not mean you won't pay them. You will. Usually they will spring them on you with the final closing documents and hope you don't notice. Surprise!

(Between this profession and being a controller for twelve years, people should not wonder why I think that's one of the ugliest words in the language).

Indeed, during my six weeks at the Company Which Shall Remain Nameless, I had no fewer than three screaming arguments with my supervisor over telling prospective clients the truth about adjustments. They didn't want me to. I have this thing about telling clients the truth as best I know it.

Why do they do this? At signup, you have little emotional buy-in. At final loan docs, you are signing so much stuff that even a marginally skilled person who's trying to distract you will be successful a lot of the time. The industry statistics say that over fifty percent literally never notice, at least until much later, after the transaction is irrevocable. And somewhere around eighty five percent of those who notice do just want the process to be over so badly that they will sign anyway, not to mention the fact that in the case of a purchase, they probably don't have any choice at that point. They need the loan to get the house, without which they lose the deposit, and there is no more time remaining in the contract with which to go out and get another loan.

Caveat Emptor

Original here


Right now, due to the problems we had with unsustainable loans, nobody wants to consider anything but a thirty year fixed rate loan. I understand why, especially as I've been preaching the dangers of things like short term adjustable interest only loans and negative amortization loans here for nine years now. The trick is one of balance. The negative amortization loan not only has a higher interest rate than other loans (aka cost of money) but you're adding to the balance you owe every month. This has compound interest working against you. If this were not the case, you could afford a better loan (there are no worse ones). For such things as an interest only 2/28, once again you're setting yourself up with a loan that you cannot afford and a short time during which you need to be able to refinance. The balance of that interest only 2/28 may not be growing, but it isn't going down much either. In only two years, you're going to not only need to refinance it, but almost certainly roll a bunch of closing costs into your balance as well. Suppose rates are higher? Suppose prices are lower? These twin facts describe the situation lots of folks are in right now, and my article on Refinancing When You Owe More Than The Home Is Worth is one of my most popular pieces of search engine bait, despite the fact that it is very much in the way of hoping you can make something a little less bad out of a horrible situation. Two years in real estate is fairly short term. Considering a two year window, I'm more certain today than at any time in the last ten years that property values (at least local to me) will be significantly higher two years from now (at least 10%), but confidence in that prediction is only in the 90 to 95% range. Two years just isn't enough time. Like when I was a financial advisor. The market is up in about 72% of all 1 year periods, and a higher percentage of two year periods (I remember 85%, but I'm not certain of that). But over a ten year period, it was a practically sure bet, historically, that the market would be up, and up significantly. The same thing applies to real estate. "Time in" is so much more important than "timing" that they don't even play in the same league. At this update, the government messing with the economy in pursuit of an agenda has managed to make things even worse than they were - and that is no trivial achievement. Eventually, we're going to get adults in Washington and Sacramento, but I have no idea when that will be (and in the case of California voters, what it's going to take to wake them up and the serious question of whether there will be any adults left in the state when they do)

When you get out to five years, I'm as certain as possible that my local market, at least, is going to be up and up significantly. Considering the state of most markets, this is a very reasonable bet. For that matter, it's pretty reasonable at any time, as five years is enough for sentiment of the moment to be outweighed by fundamental facts of the market. Furthermore, most people get at least one substantial raise (or a series of smaller ones) over a five year period, increasing what they can afford. More importantly, in five years with a fully amortized loan, you'll chop some significant money off the balance (about 7% for most mortgages out there), just by making the regular minimum payments. My point is this: you have a smaller balance on a property that is worth more. Your equity situation has improved, and by enough that unless you take significant cash out in one way or another, you're in a strictly improved situation.

What are you giving up by accepting a 5/1 instead of a thirty year fixed rate loan? The answer is twenty five extra years worth of insurance that your rate won't change at the end of your loan, which most borrowers never use anyway. The median time to refinance or sell a property was about 28 months last time I checked (for a while it was down to sixteen months). That's fifty percent above, fifty below. Add another 28 months, and before five years is up, at least seventy five percent of everybody has refinanced or sold. Question: How much good did that extra 25 years of insurance that the rate wouldn't change do these people? Answer: Absolutely none. They let the lender off the hook before that part of the guarantee began.

Let's look at some numbers that were available the day I originally wrote this - the differences are larger at the update. Full documentation, A paper loans, rate/term refinance between 75 and 80% loan to value ratio, with a credit score of 720 (national median).

Now the loan request that started this all off was a $600,000 loan. Here in San Diego, that's less than the temporary Conforming limits (aka Jumbo Conforming, a phrase that makes about as much sense as plastic glass),

30F Rate30F Cost5/1 rate5/1 Cost
5.5%2.65.25%1.5
5.875%1.85.5%0.9
6.25%0.25.875%0

(Making certain I emphasize once again the tradeoff between rate and cost for real estate loans)

So, for less than the cost of a 30 year fixed at 5.875%, these clients could have had a 5/1 ARM at 5.25%. For a $600,000 loan - almost to what was called Super Jumbo territory a few months ago. the 30 year fixed costs roughly $14,500 in total costs, the payment is $3635, and interest is about $3009 the first month, assuming all costs are rolled into the loan. The 5/1 costs about $12,700 grand total, the payment is $3386 ($250 less!) and interest is $2686 ($325 less!). You pay the balance down to $556,000 over 5 years if you just make the minimum payment on the 5/1, as opposed to $570,000 if you make that higher minimum payment on the 30 year fixed rate loan. And if you happen to be the sort who makes that payment they could make on the thirty year fixed rate loan, but chose the 5/1 instead, your balance will be down to $547,000. Under such circumstances, even if you refinanced that 5/1 at the same cost, you'll be over $10,000 better off than some hypothetical twin brother who chose the 30 year fixed, even if he didn't refinance which the odds are at least 3:1 against. Given consumer habits in this country, that thirty year fixed looks like a losing bet to me at the usual rate differential between the two loans.

The same numbers apply just as strongly at conforming rates:

30F Rate30F Cost5/1 Rate5/1 Cost
5.5%1.54.875%1.5
5.875%0.25.5%0
6.25%-0.95.875%-0.3

The difference between the thirty year fixed and the 5/1 narrows appreciably at the lower cost end of the spectrum. But it's a far cry from the days of last year when sometimes that thirty year fixed rate loan was actually less expensive for the same rate.

Some people are likely to ask about varying periods of ARM. What about a 3/1, for an even lower rate? Ladies and gentlemen, even when rates are normal, the differential is usually less than an eighth of a percent for a 3/1 as opposed to a 5/1, while you're cutting off 40% of your fixed period guarantee - the period that lets you make all that lovely profit? As for the 7/1 and 10/1, when rates are more normal, there's typically more difference between them and the 5/1 than there is between 3/1 and 5/1 - plus you're getting well past the territory where reasonable fractions of the populace keep their loans without refinancing. You're paying for insurance you're extremely unlikely to need, and hybrid ARM rates are more stable than rates for thirty year fixed rate loans.

A Caveat: Since I originally wrote this, the loan market has changed in some significant ways. Anything except A paper full documentation loans are basically gone right now. This means that if you don't fit into the cookie cutter molds imposed by such loans, getting a loan may be very difficult or even impossible. So if you're self-employed or in an unstable field where income varies widely, you can easily find yourself in a situation where refinancing can be impossible - perhaps for up to two years. Changing from employed to self-employed will also make it difficult to get a loan for two years. So if you're in such a situation rather than (for example) a government employee, I am strongly advising such clients to select thirty year fixed rate loans even though they are more expensive until the current loan market relaxes a bit. Right now the investment markets are very scared of anything but A paper full documentation, and the rating agencies who gave negative amortization loan packages AAA ratings when they should have been at the bottom of whatever rating scale used have no credibility with the investment markets, which means the investment markets aren't investing in anything but A paper, which means nothing but A paper gets institutional funding. (Hard money aka private money loans are still being made - but most people don't have 25-35% equity or more, and don't want to pay 12% plus)

Hybrid ARMs aren't for everyone. If you're going to obsess about your expiring fixed term every night for five years, the difference in daily interest works out to about $10 per night, even for our example with the $600,000 mortgage. My family being able to sleep well is worth $10 per night to me, and I presume it is to you, as well. There is an element of risk here, and there's no pretending there isn't. A very small risk that real estate and loan markets go completely weird in violation of all historical precedent for the next five years, and those choosing the 5/1 are somehow stuck with needing to refinance in a worse situation than when they started in. But I've been saving myself lots of money with the 5/1 for over fifteen years now, in all sorts of markets. Why shouldn't I mention it to other people, including my clients?

Caveat Emptor

Original article here

In many transactions when I originally wrote this, the buyer has absolutely no money, or an amount that was not sufficient to pay the costs that they would traditionally be expected to pay in order to close the transaction. Today, unless they're eligible for a VA loan, there is no such thing as a "no down payment" loan, but the trick is to stretch the cash they do have to make the transaction work. In a buyer driven market, often the seller still wants to do business with them.

The usual way it's handled is in Seller Paid Closing Costs. The Seller gives the buyer an allowance to cover their share of the costs

Lenders have become somewhat tolerant of the practice, at least so long as the appraisal comes in at or above the official sale price. Many of them were starting to revert to the treatment this trick traditionally got, which is to say, if the sale price included a rebate to the buyer, then the sale price as far as the lender was concerned was the official price less the rebate. In other words, seller's net. Remember, lenders value real estate the same as accountants, on the LCM principal - Lesser of Cost (which is to say purchase price) or market (which is to say the appraised value). If the seller is giving the buyer money back, then the official price listed on the transaction isn't really the price, is it? Do advertisers tease you with the gross price of stereo or computer gear before the rebate, or the net price after the rebate? Same principle here. The lenders traditionally took this stance, although it has been more relaxed in the highly competitive lender's market of late, and although they were starting to change back, the dearth of qualified buyers with extra cash has made them reconsider that. The lenders are (typically) not going to lend more money than the lesser of those the two variables, cost and market, and they will base the loan parameters on whichever is less. You can always buy a house for more money than the value, as long as you have the cash to make up the difference.

The Sellers get their house sold. That and the ego thing of the official sale price seem to be the benefits to them. I would certainly rather sell for the seller's net in the first place, if I'm a seller, without an allowance, because I have to pay commission on that higher amount. A $10,000 allowance (as has become common here) costs the seller $700 to $800 or so in increased costs - agents commissions, title insurance, escrow fees, transfer taxes - even if the sale price is $10,000 higher because of it. This is neglecting the potential effects of taxes due to exceeding the $250,000 (or $500,000) maximum gain exemption from the IRS code Section 121. I recommend against it for sellers unless there is a substantial deposit, as it is often indicative of a not very qualified buyer. Even then, it's a real good idea to talk to your tax person. Furthermore, with the lenders in full blown panic right now, the only loans being accepted with little or no down are VA and FHA, both of which carry government guarantees. VA can do true 100% financing, but buyers eligible for VA are uncommon. For FHA, the zero down enabling down payment assistance programs are dead, but having 4-6% down for an FHA loan is a lot easier than 10%+ for anything conventional.

The Buyers get a deal, or so it appears at first blush. A piece of property without having to save for closing costs. When I originally wrote this, in many cases they didn't have to put a penny down, either. Pretty cool, eh? Get a house and actually skip a month of writing a check (due to the allowance covering prepaid interest), so effectively putting cash in your pocket. Keep in mind, however, that a competently advised seller is going to inflate the sales price to match, where (if they were smart) they would rather have accepted the net sales price without rebate. Furthermore, at least here in California, property taxes are based upon official original sales price, so you'll be paying for it as long as you own the property. Finally, because your purchase price, and therefore your loan, is going to be higher, your payment is going to be higher, you'll pay higher loan costs every time you refinance, and your eventual net on the property will be lower. If it is the only way to get into the property, and the deal otherwise makes sense, that's fine - but don't kid yourself that you got free money. Chances are that you're going to pay far more than the amount of any allowance because you got it.

If it's bad for the seller, bad for the buyer, and risky for the lender, why does it keep happening so much?

Well, it's a sale for sellers. The property has now been disposed off. It's also an ego defense for sellers. Instead of $470,000, they can tell everyone they got $480,000. So long as they don't mention the allowance, it sounds like a far better price to their friends, family, and soon to be ex-neighbors. In short, bragging rights. Buyers, it gets them into the property, formerly often without coming up with a penny in cash and still allowing them to save one month's rent or payment, effectively putting cash in their pocket. Mind you, that unwillingness is going to be costing money for as long as they own the property, but that's their choice.

Real Estate and Mortgage folks, get bigger commissions. $10,000 in sales price gets translated to $100 per 1 percent of commission. This is anywhere from an extra $100 to an extra $300 or $400 for each of the offices, buyer's, seller's, and loan. Furthermore, I know of loan agents who extract larger commissions because "it's such a hard loan." It does make the loan harder, but not by another point of origination's worth. Wouldn't you like to have extra money for essentially the same work? I assure you that your average real estate agent and loan officer are no different than most folks.

These days, the spoke in the wheel that prevents this from happening is usually the appraisal. With Home Valuation Code of Conduct, most agents in most transactions no longer have the option of steering business to the appraiser who will inflate value as much as possible. I'm not having problems on my purchase money transactions because if appraised value isn't likely to be there, I advise my clients of that fact. But it's putting a real crimp on the transaction mills.

There is nothing wrong with the practice of seller paid closing costs, so long as everybody knows what's going on. But it's certainly not something you want to do if you have a choice.

Caveat Emptor

Original here


As with anything you find on the internet, the critical thing to keep in mind with internet real estate is that it is subject to input control. In plain English, you only see what they want you to see. If they don't want you to see it, it's not going to be put into the internet so that you can see it there. The vast majority of the time, there is no check upon this simple fact of life. If the owner or listing agent don't want you to see something, it's not going to be available to you on the internet. You're going to have to get out and look at the actual property.

What is put onto the internet is a representation. It could be a good accurate representation or it could be an intentionally distorted representation. The online information is never all there is to see. Kind of like a facade - front facade, back facade, and now, internet facade. Online pictures, home for sale websites, virtual tours - they're all subject to any number of tricks that alter how the property is perceived.

You should never put an offer in without having looked at the property in person. I'm very good at what I do as a buyer's agent. Nonetheless, it is most disconcerting on those rare occasions when someone sounds like they might be intending to put an offer in without looking at it themselves in the flesh. Since I originally wrote this article, I have now done so - very successfully according to the family I did it for - but it was a very special set of circumstances and even so I was so nervous I couldn't sleep until they did manage to make another trip to physically see it. I have had to talk other people out of doing this. There is no such thing as a perfect property, and it's very difficult to point out all of the things I believe buyers need to be aware of when they're not there to see me point.

A lot of the most important things are never online. Even if there is a floor plan (rare), it's very difficult for people who are only looking on-line to get a good grasp of internal sight lines. It's also very hard to convey the full sense of the external environment. What can you see? What do you hear? Are there other environmental distractions? Do airplanes fly right over the house on departure when the wind changes? What's the neighborhood like, are there any obviously disturbed neighbors, what are traffic patterns like, how close and how good is freeway access, where is (are) your grocery store(s), and anything else that might be important to you? How accessible is the neighborhood via public transport? Note that some of these questions are double edged swords by definition. Public transport means your friends who don't have a car can get there, as well as making any public transport excursions you may have need far more bearable - but public transport is also a common conduit for undesirable visitors.

Nor can you really only visit one or two properties. The key to relative value is how the various properties on the market compare to each other, and that includes that whole list in the previous paragraph. No matter how much you make, if you figure you're going to visit an absolute minimum of ten properties before you put in any offers, the probability is pretty much 100 percent you'll end up glad you did.

The internet can profitably be used to narrow your search, by throwing out all of the obviously unsuitable properties. Doesn't have what you need? Asking price way too high? From the pictures, there's no way your family could live there? There's no reason to waste time and gas going to see those properties. You still need to go out and look at not only the properties that are left, but enough properties to give them context. I don't know how often I've heard from people who only wanted to view one property, but in such cases it always seems to be a property I wouldn't buy if the owners paid me to take it off their hands.

The internet can also make it easy to find properties to look at. It certainly beats driving around all the neighborhoods you might like to live in trying to find "For Sale" signs. But it cannot replace physically going to look at properties that might fit the bill. If you're short on time, might I suggest a buyer's agent (or several)? That time is their job, the mileage is a business expense, and nothing is so precious as the time people give us to look at property. It's quite likely that a good buyer's agent will narrow your search a lot more, because going out and looking at property gives a lot more information than the internet, and we do it constantly. Getting a good buyer's agent first will make more difference than anything else to how happy you end up (Here's how to find a good buyer's agent)

Property always needs to be evaluated in the context of the area it's in. A lot of what might sell for $500,000 in my area might be less than $100,000 in other locales. This doesn't mean San Diego is overpriced. It means that there's a lot of people who want to live here very badly, these people make comparatively large amounts of money, it's hard to get permission to build, and the prices for the area reflect those factors. If you've decided you want to live in a particular neighborhood you're going to have to pay about the prevailing prices if you want housing. A good buyer's agent can make a big difference, but nobody can find you something that doesn't exist, and in order to really understand what a good bargain is, you've got to go and actually look at some properties that aren't bargains before you understand what a bargain looks like.

Caveat Emptor

Original article here


When it comes to mortgage loans, people get distracted by the darnedest things.

Let's look at Wal-Mart. You think they got to be the largest retailer in the world by making less money than their competition? I assure you that is not the case. In fact, they're legendary in manufacturing circles for using their size as an inducement to get the lowest possible price out of their suppliers. With that leverage - the fact that whether or not Wal-Mart stocks your item will be a significant predictor of your success manufacturing consumer goods - they can get outrageously low prices out of their suppliers. To this, they add all of the economies of scale and function consolidation that they can possibly come up with, to the point where Wal-Mart makes more on the same item than almost any other retailer, let alone the mom and pop store that everyone complains Wal-Mart has driven out of business. How the heck do you think they can afford to build dozens if not hundreds of new "Super Centers" worldwide every year?

Their main attractiveness to consumers is one thing. Price. They deliver whatever it is, from breakfast cereal to makeup to cell phones to automotive supplies at the lowest final price to the consumer. They've also got a huge selection of merchandise so you've only got to make one stop (thereby saving on gas, if you don't count the three gallons you waste getting in and out of the parking lot), but that's not why most consumers go there. They go for price. I may hate the thought of going to stores that are even in the physical vicinity of a Wal-Mart, but you've got to give them respect for what they accomplish.

People don't shop Wal-Mart because Wal-Mart doesn't make anything on the transaction. If that were the case, we'd all be shopping government stores and paying much higher prices. No, people shop Wal-Mart because the total cost, aka purchase price, is lower there even thought they may be making more money per transaction than the Mom and Pop store that used to be a couple blocks over. Lest anyone not understand, this is a good and rational thing, not just for Wal-Mart but (as far as it goes) for society as well.

The same principle applies to loans. Shop loans by the lowest total cost of money . To know what that is, or even make a reasonable estimate, you've got to have some idea how long you intend to keep the loan. There is always a trade-off between rate and cost, because lenders have to work with the secondary markets, and that's the way the secondary markets are built. Know for a fact you're going to sell the property in two years? Then look at the costs of that loan over a two year period. In such a case, it probably doesn't make sense to choose anything with a fixed period longer than three years, and lowering the closing costs is likely to be more important than getting a lower rate, even if the payment is lower on a lower rate. That's pretty much a textbook case example of higher rate being better because it's got a lower closing cost.

If you're certain that you're going to stay in this property forever, and never ever refinance again, a thirty year fixed rate loan where you spend several discount points buying the rate down will verifiably save you money - if you're right. If you're wrong, and six months from now you're looking to sell and move to the French Riviera (or simply refinance because you need cash out), all that money you spent on points and closing costs was essentially wasted. You're not going to get it back - it's a sunk cost, used to pay the people who do all the work to make a loan happen, and to pay the rich folks who work the secondary mortgage market to give you a lower rate than you could have gotten otherwise. It's not their fault you chose to let them off the hook from that contract you negotiated. You're essentially betting a lot of money upfront that future events will happen the way you believe they will, and if you're right, you reap quite a reward. However, most folks lose this bet, which is why the (rarely followed) admonishment not to pay points for a loan gets repeated so often. That's also why people hedge their bets most of the time, by choosing an alternative that costs less, and therefore risks less, while covering a lot of future possibilities in a decent manner, if not quite perfectly.

All of this is good information to have. But there is one piece of information required of brokers but not direct lenders that distracts consumers from what is really important: How much they're making for this loan. I think it's good information to have out there providing the consumer knows enough not to give it more weight than it deserves. And it really isn't important information, because it does not impact the bottom line to you, the consumer. It's really no more important than knowing where the airplane for your flight just flew in from. The point is that it's going to cost you X number of dollars (and a known amount of time) to get on that plane to where you're going, just like the important thing for consumers about their mortgage loans is that it's going to cost them $X total to get the loan done, and they're going to have an interest rate of Y% that they're going to have to pay for as long as they keep that loan. But if it's important for brokers to disclose how much they're going to make, why isn't the equivalent disclosure required of direct lenders?

The Federal Trade Commission prepared a report, The Effect of Mortgage Broker Compensation Disclosures on Consumers and Competition: A Controlled Experiment. The upshot? Consumers will choose the loan where the company providing it makes less money, or, even more strongly, choose the loan where the company's compensation isn't disclosed at all. I think it's reasonable information for someone to want to know, but if it's important to know the information when you're dealing with a broker, and the government therefore mandates such disclosure, then why isn't it required for direct lenders? (The answer is politics, to put brokers at even more of a psychological disadvantage as far as the average person is concerned. Lenders make a lot more money than brokers, so they have a lot more money to bribe politicians contribute to campaigns). To quote from the report:

If consumers notice and read the compensation disclosure, the resulting consumer confusion and mistaken loan choices will lead a significant proportion of borrowers to pay more for their loans than they would otherwise. The bias against mortgage brokers will put brokers at a competitive disadvantage relative to direct lenders and possibly lead to less competition and higher costs for all mortgage customers.

Focusing upon what the provider makes actually hurts you. If you just focus upon how much the loan officer makes, there's no incentive for them to shop around looking for a better loan. As I've written before, if I can find a better lender for that loan, I can both make more money and offer a better loan. But if you're just going to shop by how much I make, there's no incentive to do that. I make my $X, regardless of whether you get a 30 year fixed at 5% without a prepayment penalty or a 2/28 at 8% with a three year prepayment penalty. There usually isn't that much difference, but the principle is the same. You want your loan person motivated to find you a better loan, which shopping only by how much someone makes frustrates. And if you choose a loan at a higher rate of interest and higher cost just because the company offering it is not legally required to disclose what they make, it doesn't take a genius to figure out that you're doing nothing except hurting yourself. It's the equivalent of passing up the store with the lowest price because the law requires that store (but not their competition) to hang a big sticker on it that says, "The store makes $12.98 if you buy this toaster oven." Me, I like it when people make money from my custom, especially when the bottom line cost is as good or better. It means they're motivated to work hard and do a good job so they get my business again next time I'm in the market. The principal is the same whether it's a big box retailer, a mechanic shop, or a real estate loan.

Finally, at loan sign up, the prospective lender can lie, just as much as any other item, even on the new good faith estimate. The government may tell you they can't lie on the form, but the form itself is effectively lying because what it really means is that it can't change without being redisclosed with a new Good Faith Estimate. Indeed, the government and changes in market conditions are making it more difficult, not less, for consumers to intelligently shop their loans.

The best solution for consumers: Have a real problem solving discussion with prospective loan officers. If you just ask the rate and hang up, the one that low-balls you the most blatantly is likely to get your business, and it will be too late to change when you discover the truth. But if you pay attention to the process they use for putting you into the best situation going forward, then you stand a better chance of discovering their real intentions.

Caveat Emptor

original article here

The general public may not understand this, but the most critical parts of a listing agent's job all take place before the property hits the market.

The most difficult task of an agent who wants to successfully list property is one of those. No, it isn't the pricing discussion, although it's closely related and usually done at the same time. It's educating the owner as to what a good offer for their property would be.

The weaker the overall market, the more important this is. In a strong seller's market, if you blow off a good offer, you're likely to get another almost as good. In a buyer's market, telling a good offer to get lost is a great way to lose lots of money. I'm paid on commission. Believe me folks, I'd like to be able to get two million dollars for a not particularly attractive five hundred square foot condo in "the 'Hood" . The fact is that buyers look for the best property at the lowest price. I can market in such a way as to catch the attention of the people likely to be willing to pay the most, but I can't get more than those people are willing to offer. You can try to sell a property for more than it's worth, but it's not going to happen, and trying is the best way I know of to fail to sell at all, or to be forced to sell for a lot less than you could have gotten, and have to pay the carrying costs for the property for a much longer time than if you know a good offer when you see it.

You can't really have the pricing discussion until the owner understands what a good offer would be. The correct asking price is central to a successful transaction. People look at properties based upon asking price, and you are competing with other properties of roughly the same asking price. If you ask too much, your property will be competing out of its league. The people who are looking for something in that price range will have superior alternatives. If the choice is your property or, for the same asking price, a freshly remodeled house with an extra bedroom and bathroom and a lot that's twice as big in a better location, which do you think the average buyer is going to make an offer on? Ladies and Gentlemen, even if your own mother is looking for a property and knows you need to sell, that's going to be a hard sale for your property. On the other side, if you're not asking enough, people will line up to buy, but then you (and your agent) end up with less money in your pocket, and that's not going to make anyone happy except the buyer.

Furthermore, you've got to understand the market you're trying to sell in. In a strong seller's market, you can probably afford blow off offers below a certain threshold. In a strong buyer's market, you need to try and work with anything even vaguely in the right ballpark, to see if you can talk them into something more in line with reality.

Some agents won't do this. They'll either accept whatever the owner wants to ask or even actually inflate the asking price. This is called "buying a listing," because owners who don't know any better get dollar signs in their eyes and sign up with that agent. It isn't really "buying" anything - it's more like a political candidate's insincere campaign promises to repeal laws of economics and give voters everything their little hearts desire. Anybody old enough to vote should know better than to believe this, but it works, for the same reason Nigerian 419 scamsters are driving around in Ferraris: People want to believe in easy money. In point of fact, as I have written before, this actually sabotages any chance of actually getting the best possible price. Your time of highest interest is right when it hits the market, and the longer the property is on the market, the lower the sales price is likely to be, and when you over-price real estate, you're not only going to end up getting less money in the end, but you'll have to pay carrying costs for the property for a longer period of time. In short, this approach reliably costs sellers money. Large amounts of money. There is no reason but greed and ignorance to do this, but many rotten agents make a very good living conning people who don't know any better. One of the reasons why bargains are hard to find is that the definite majority of the listings out there have been the victim of such an agent. The property isn't going to sell for that price, or anything like that price, but by over-promising on the listing price, they get a signed listing contract, and when all these properties eventually sell for tens of thousands less than they really could have gotten, that agent gets paid (when the agent who tried to tell them what the property was really worth doesn't), and the con artist even looks like a "top producer."

Waiting until the property is on the market is too late. Everybody has already seen that initial asking price. Not to mention the owner still believes the nonsense they've been sold in the above paragraph. Waiting until you have an offer is definitely too late. The agent has been telling them up until this very moment to expect tens of thousands of dollars more, and now the agent is going to try to talk them into accepting what really is a good offer? Not likely to work, and not good for the relationship even if it does. Furthermore, one of the things you learn in this business is that the first offer you get is more likely than not to be the best. Oh, it's not rare or even that uncommon for a better offer to come later, but the most typical pattern is for each subsequent offer to be successively lower. And now you've lost what is likely to be the best offer you're going to get because your agent couldn't explain to you what a good offer was? Run that one by me again: Why are agents supposedly getting paid? I get paid for listings because I really do know how to sell them more quickly and for a higher price than any "for sale by owner". But why in the world would you want to pay someone who doesn't do that, and makes the sale take longer and causes you to have to settle for a lower price? I understand why it happens. I just can't understand why people would want to, other than a combination of ignorance, laziness and greed. Somebody once said, "Too bad ignorance isn't painful." Ignorance is painful, but it's financial pain, and the kind most of those burned by it never realize they felt, because they couldn't recognize the symptoms, and they have no idea how much better they could have done.

For a successful listing that's going to fetch an optimum sale, understanding what a good offer looks like, so the owners know how to react when they get it, and setting the correct asking price so that you do get such an offer, is critical. Failing to do so will put you in that group of people who don't get what they could have for the property, and since you don't understand how and why the problem happened, you're likely to repeat it every time you decide to sell a property. When the market rises rapidly for many years, as the San Diego area among many others did, you can even delude yourself into believing that you were "successful." But when the market returns to something more closely approximating normality, believe me when I tell you you that you'll find out in a hurry that you weren't as successful as you thought.

Caveat Emptor

Original article here

A while ago I wrote an article called, "What Happens When You Can't Make Your Real Estate Loan Payment." This is kind of a continuation of that, as I got a search that asked, "What is necessary to persuade a bank to accept a short payoff on a mortgage"

Poverty. In a word, poverty. You have to persuade the bank that this is the best possible deal they are going to get. You can't make the payments, and if they foreclose they will get less money.

A "short sale" or short payoff is defined as a sale where the proceeds from the sale will not cover the secured obligations of the owner. The cash they will receive from the sale is "short" of the necessary amount. The house is no longer worth what they paid for it.

When I originally wrote this article, I was looking ahead. There were more and more of these happening, but the big wave had yet to hit. That wave has now mostly passed. There are always people that lost their good job and can't get a replacement nearly as good. But there were also people that were put into too much house, and approved for too much loan, suddenly discovering their situation was not sustainable because they suddenly couldn't make the payments. Unscrupulous agents that wanted a bigger commission, loan officers going along, and nobody acting like they were responsible for the consequences to their clients. My concern for lenders who do stated income and negative amortization loans (and a lot of loans that are both!) is kind of minimal. Okay, it's very minimal. Like nonexistent smallest violin in the world playing "My Heart Cries For Thee" level sympathy. I forecast years ago that many lenders were going to go through bad times, using a forecasting method that's about as mysterious as rocks that fall when you drop them.

On the other hand, for the people who were led into these transactions by agents with a fiduciary responsibility towards them, I have great heaping loads of sympathy and I'll do anything I can to help. Yes, they're theoretically responsible adults, but when the universe and everyone is telling them all the things that buyers were told these last couple of years, it's understandable. Sure there's a greed component in many cases but when they're told by both loan officers and the real estate agents that they "wouldn't have qualified for the loan if you couldn't afford it," they are being betrayed by the same people who are supposed to be professionals looking out for their interests. I really do suggest finding a good lawyer to these folks, as those agents who did this to them (and their brokerages) better have had insurance which said lawyer can sue to recover money they never should have been out.

I'm going to sketch it out in broad terms, but there are a lot of tricks to the trade. Short sales are not something to try "For Sale By Owner," or even with a discount agent.

First off, you need to draw a coherent picture of the loan payment being unaffordable. If you were on a negative amortization approaching recast, or hybrid ARM (usually interest only for the fixed period) that is now ready to adjust, you're facing a much higher payments. Even if you were able to afford the minimum payment before, now you can't and you've decided to sell for what you can get before it bankrupts you to no good purpose because you're going to lose the house anyway. You're going to have to prove you can't afford your loan. The bank isn't just going to accept your word, but several late payments or a rolling sixty day late that looks headed for ninety have been known to be persuasive. If you can afford the payments but have merely convinced yourself you don't want to, please read Why You Should Not Walk Away From Upside-Down Real Estate. Nonetheless, there are a lot of tacks that you don't want to take. Remember, lenders want to be repaid and they've got a couple of pretty powerful sticks to shake at you. They are not going to agree to sacrifice money merely because to make the payments would be uncomfortable for you. You're going to have to persuade them it's impossible.

Second, you're going to have to persuade the lender that this is the best possible price that you are going to get, and that even if they think they'll get more by going through foreclosure, it will be more than offset by what they'll lose through the expenses involved. Not to mention that they might end up owning the property, which they don't want to do because then they have to spend more money selling it.

Third, you've got to be on the ball about the transaction itself. All the ducks have to be in the row from the start, which is when you approach the lender with a provisional transaction. If they're not, the lender is just not going to go through the process of approving a short sale until they are. Since this takes time, it has the effect of dragging out the transaction. Every missed deadline means the lender will look at the whole thing again, possibly changing their mind about approving the short sale. You need a qualified buyer. Furthermore, most short sale buyers end up bailing out of the transaction at some point, most often because they don't think it's going to get approved on terms that are acceptable to them. You need a full service listing agent who knows what they're doing to prevent this from happening.

Fourth, just be prepared for the fact that the lender is not only not going to approve the transaction if you get any money, but that they're also going to send you a form 1099 after it is all done. This form 1099 will report income for you from forgiveness of debt. This is taxable income! (There is now temporary federal legislation in place changing this) Many agents eager to make a sale will not tell the sellers this, and when you get right down to it, there is no legal requirement to do so, but I've always thought this was one of the ways to tell a good agent from a not-so-good one. It does seem like something you should be told about before you've got the 1099 form in your mailbox, right? At that point, you are stuck with all of the consequences, where if you had known before, you might not have been so complacent. It is to be noted I've been made aware of ways to circumvent the "no money to the owner" requirement, but they are FRAUD, as in go to jail for a while and be a convicted felon for the rest of your life FRAUD. It can be tempting, but committing fraud is one of the most effective ways I know to make a bad situation worse.

For the buyer, short sales can seem attractive for any number of reasons. Typically the seller is in a situation where they have to sell, and everyone knows it. The option of waiting for a better offer really isn't on the table if what you're offering is anything like reasonable. They can't bluff you, they should know that bluffing you is a waste of effort, and somebody should have explained to them that they really just want out now (and why this is so) before it gets worse. What's not to like? The answer is the fact that there's a third party with veto power over the transaction. The sellers don't have must motivation to bargain hard because they're not getting any money anyway, but many lenders are stuck in the land of Denial.

Your competition will also make things difficult. Because people think there's fast money to be made, these folks are the target of "flippers" everywhere. The large city, highly inflated markets more so than most. A couple weeks before I originally wrote this, we put one on the market and got three ugly low-ball offers within 48 hours, and this is part of why you need an agent to sell one. Remember, the seller isn't getting any money, but they are going to get a 1099 form that says they have to pay taxes. Don't you think most folks would rather it was for less money, and therefore, less taxes, instead of more? The more money the lender loses, the higher your liability. Had any one of the three made a better offer in the first place, they would have gotten the property at a price to make a profit, but they had to prove how rapacious they were, or something. As it was, we jawboned the first three vultures and two other, later entries, into a quasi-decent price, with minimal later tax obligation to our seller, and (eventually) got the lender involved to see reason.

In summation, "short sales" are a way to cut your losses for sellers, and a way to maybe get a good price for buyers, but you have to know how to convince the lenders to accept them, and how not to overplay your bargaining position, lest you get left out in the cold.

However, lenders are basically in denial for a variety of reasons, and they do not want to admit that their underwriting was at fault for lending more than the property was likely to be worth, and more than the borrower could really afford. For that reason, short sales are a long hard slog, and many times lenders are rejecting the transaction no matter how much sense it makes. So be advised before you even start that this is an uphill battle, and if the listing agent is not on top of the game, you may be wasting your time making an offer. Quite often, the lender simply says no - that they're not going to accept this transaction unless someone comes up with more money to make them happy.

Caveat Emptor

Original here

UPDATE: You may also want to read my new article on Mortgage Loan Modification

Copyright 2005-2015 Dan Melson All Rights Reserved

Search my sites or the web!
 
Web www.searchlightcrusade.net
www.danmelson.com


The Book on Mortgages Everyone Should Have
What Consumers Need To Know About Mortgages
What Consumers Need To Know About Mortgages Cover

Buy My Science Fiction Novels!
Dan Melson Author Page

The Man From Empire
Man From Empire Cover

A Guardian From Earth
Guardian From Earth Cover

Empire and Earth
Empire and Earth Cover

Working The Trenches
Working The Trenches Cover

--Blogads--

blog advertising
--Blogads--

blog advertising --Blogads--
**********


C'mon! I need to pay for this website! If you want to buy or sell Real Estate in San Diego County, or get a loan anywhere in California, contact me! I cover San Diego County in person and all of California via internet, phone, fax, and overnight mail. If you want a loan or need a real estate agent
Professional Contact Information

Questions regarding this website:
Contact me!
dm (at) searchlight crusade (dot) net

(Eliminate the spaces and change parentheticals to the symbols, of course)

Essay Requests

Yes, I do topic requests and questions!

If you don't see an answer to your question, please consider asking me via email. I'll bet money you're not the only one who wants to know!

Requests for reprint rights, same email: dm (at) searchlight crusade (dot) net!
-----------------
Learn something that will save you money?
Want to motivate me to write more articles?
Just want to say "Thank You"?

Aggregators

Add this site to Technorati Favorites
Blogroll Me!
Subscribe with Bloglines



Powered by FeedBlitz


Most Recent Posts
Subscribe to Searchlight Crusade
http://www.wikio.com

About this Archive

This page is a archive of recent entries written by Dan Melson in August 2014.

Dan Melson: July 2014 is the previous archive.

Dan Melson: September 2014 is the next archive.

Find recent content on the main index or look in the archives to find all content.

Dan Melson: Monthly Archives

-----------------
Advertisement
-----------------

My Links