Dan Melson: March 2022 Archives

Here are the facts of the situation, whether you're talking about San Diego or Manhattan, the Bay Area, Los Angeles, or any of the other densely packed, high cost areas where all the employment and career opportunities are.

Fact 1: Land is expensive. The cheapest unimproved little 8000 square foot irregular lots in the area I work most - no tests done, no utilities on the lot, even though they may be close, no permits whatsoever and zoning R1 at best - run just under $200,000. Matter of fact, I consider that one basically unsuitable for housing due to the freeway that runs through where the back yard would be. Here's the worse news: Prices are going to get higher. They're not making any more land. Demand is increasing. More people want to live in those high density areas every year. More businesses want to open. Not far from my office, there's a 9500 square foot R1 lot someone is buying for about $250,000 with a condemned residence on it. He's going to have to scrape it himself, and assume all risk of the city issuing the permits for new construction, and he was glad to get it, even though he knows the soil needs to be repacked also. (Manhattanites may jeer at the low price if they'd like - for now). Land is a scarce good in high density areas - the very places where everyone wants to live, needs to live, because they have to live within commuting distance of their career. Lots like this are where we're going to get buildable lots in the future, and usually, those purchasing them are going to pay for the single family residence that happens to sit on it now. There. Is. No. More. Dirt.

Land with residential structures, specifically, 8000 square foot lots that happen to have one residential structure are equally costly, in and of themselves, as the 8000 square foot lot next door which happens to have six residential structures, Or a commercial warehouse, manufacturing facility, office building, etcetera. They use the same amount of area on the earth's surface. With the exception of location and the soil that happens to be there, everything else that's been done to that land is completely artificial. This starts with the utilities that may or may not be there, extends through zoning and conditional use permits, and arrives at specific structures that may be in existence. All artificial. Absolutely nothing to do with any natural virtue of one parcel over another.

The first statistic I find says that cost of construction per square foot is roughly $150, while commercial buildings sell for roughly $300 per square foot locally. So, you can pay $200,000 for that lot, build one fifteen hundred square foot building, and sell for roughly $450,000, having made $25,000 net (450-225-200), and that's providing there's no existing structure. Second Choice: You can build a huge 3000 square foot house that relatively few people can afford at $700,000, netting twice as much (700-200-450=50). Or you can build six twelve hundred square foot two story buildings (or six one story units, three upstairs and three down), still have space for some kind of communal outdoor area, sell for $360,000 each, and make $2,160,000, leaving $880,000 net, still maybe $600,000 if you had to pay for the single family residence that used to be on it as well. I'm intentionally neglecting transaction costs, by the way, which swing the figures even more decisively in favor of the high density alternative. Question: Under which of these two scenarios is it more likely that they'll cut the price? Under which is it more likely they'll raise it? Question: Even if the price isn't cut, which of these two alternatives can more people afford? Which is a more efficient use of the land? Which ends up giving the better return on investment, indicating that more of them will be built? There's hardly an infinite supply of either, but which is likely to remain more affordable, as builders build more and more of them in relation to the alternative? Shared lots, particularly when paired with communal outdoor areas, make a whole lot more economic sense than single family residences, they will always be more plentifully available, and the more demand is placed upon a given amount of land, in the form of people wanting to live, work, and play there, the more strongly the economics will favor shared lots. New Yorkers have been used to this for decades. Now, some other areas of the country are becoming just as solidly built upon, if not yet nearly to the depth Manhattan has seen. In fact, by the standards of most cities worldwide, Manhattan isn't particularly dense. Many affluent old world cities have it beat like an dirty old rug when it comes to density per square mile. It's just that it seems dense by comparison with the rest of the US, where we have long been accustomed to lebensraum.

Corollary: The closer to commercial and recreational opportunities a particular parcel is, the more desirable it is. For those skimming this in their sleep, this means the price of that land is raised by people competing more strongly for it. This is one of those things everybody knows (ask people whether the lot by the beach is more expensive than the one twenty miles inland), but few people stop to think about all of the implications. The closer you want to live to the commercial zones, the closer you need to live to all the commercial zones, the more valuable the underlying land is and the more likely it will have some sort of communal lot arrangement. It doesn't matter if you don't drive, can't afford a car, or what, any more than nature cares how badly you want to fly in applying the force of gravity to you. It's nothing personal, any more than the saber tooth picking out one of our ancestors for dinner was after payback, movies or no. It's just a fact of the universe, and the fact that it's economics, measured in dollars, does not make it any more mutable than if we were talking about the thrust of the rocket, measured in Newtons.

For those reading this whose response to the above is governmental in nature, you cannot mandate the building of more affordable detached single family residences. The economics is not there to support it. Developers will build what can make them a profit. They won't build what won't make them a profit. Putting up regulatory hurdles only makes the affordability threshold rise further - if they have to pay an extra $100,000 to get the permits, they need to make $100,000 more in order to build anything. You can have the city, the state, the federal government subsidize individual people into them, but that amounts to giving a band-aid to a decapitated body, economically, because the number of people who can be thusly accommodated is microscopic as compared to the number of people there are who can't afford where prices are now, let alone where they are going if you try this route. Furthermore, limitations on the benefits when these people sell such units short-circuits all of the economic reasons why people should get into home-ownership. It amounts to creating, not a class of homeowners, but a class of privileged renters! It's not even permanently privileged renters. Those units of these "low cost housing" I've been involved in have clauses where if the bureaucratic or political masters can manufacture a reason, you can be dispossessed. If there are no such restrictions on the sale of the unit, then the lucky recipients get a windfall at the expense of taxpayers and/or everyone else who buys within the development! Kind of like forcing taxpayers to buy hundreds or thousands of dollars worth of lottery tickets per year at the point of a gun, with the suckers getting about their current fifty cents per dollar back, only in the form of real estate rather than cash to those few lucky winners. Except, such winners won't be random. It's like if the bureaucrats and politicians could pick the lottery winners, because they can. But I digress.

My point is this: in high density areas, single family detached homes are going to get less and less affordable from this point on. So, for that matter, is everything else. Go back to supply and demand. Demand, which is to say, population of people who want to live there, is increasing. Supply is constant. If I have three apples to sell, and there's only two people who want one, the price is very low. If I have three apples to sell, and there's three hundred people who want one, I set up an auction and the three people willing and able to pay the highest prices get apples, while I get a lot more money than the first case. Same principle with real estate. It doesn't matter that the other 297 people can't afford apples. It matters only at which point that 297th person drops out of bidding, leaving the remaining three winners.

(Some people are going to note that we have to put those 297 people somewhere, which is true, but that's not the concern I'm addressing here, although I will state we can plan to do so in a way that's economically logical, or it will happen anyway, no matter what the law and the planning commissions may say. The first way will be a lot more pleasant for everybody.)

If you're in a high density area, you can leave or stay. If you are able to leave, as for instance, retirees can, you're not who I'm planning for here. If you're one of those few who are sufficiently affluent to be able to afford whatever the economic costs are, you don't really care. Real Estate is still going to be every bit as fantastic an investment as it has always been. In fact, the higher the demand goes, the better the investment it's going to be. Real Estate does not increase, over the long term, at the same rate as wages. It increases at that rate plus an additional factor to reflect increasing demand in a constant supply market.

Suppose in my previous example, that I have some magical way to convert one apple into ten oranges? Persons 288 through 297 get together and outbid number 298. They can't have an apple. They decide, however, that it they can't have an apple, they do want an orange and are willing to pay for it. Between them, they outbid person number 298 for that third apple, and have me convert it into ten oranges so that they each can have one. I make more money, and persons 288 through 297 are happy, also. The only person who's unhappy is person 298, who then decides that if he can't have that apple, either, he at least wants an orange, and so he goes and trades some of his money to person number 288, who, if he doesn't have an orange after he makes the deal, does have more money than he started with, assuming it's a willing sale. So now I'm not the only person who has made a profit. Person 288 has also made one. Similarly, person 299, who observed person 298's experience, and still has his apple, voluntarily decides he wants to convert his apple into ten oranges, and offers me something I want in exchange for doing so (remember, I'm the one with the magic trick, aka the construction industry). Person 299 now has ten oranges, and proceeds to sell them to persons 279 to 288. This nets him enough to buy the remaining apple from person 300, who goes and buys person 279's orange with some of the proceeds, while person 299 decides that at this point they're happy and wants to keep this apple for themselves. Look at all of the people who made a profit and came out ahead because I could convert one apple (detached single family residence) into ten oranges (condominiums). Every single choice of every participant here was purely voluntary, and would not have been made if the recipient had not been made happier thereby. Note also, that there's eighteen people who have a place to live, where they would have been homeless if I (the construction industry) couldn't convert apples into oranges. These are all cold hard facts.

Like it or not, Manhattan and the surrounding area represent the way that other high density areas in this country are going to go. Let's leave all the non-essential stuff out of this, and consider only the economics. When the cost of land is high because there's a fixed amount, the only way you can create more space is along the vertical axis. You can go down, or you can go up. You can put multiple units on the same space where there was one. You can stack them fifty high or more. In any of these cases, it's no longer single family detached housing. The better you plan for your city's density, the more of your citizens have a home and the fewer that go homeless or have to relocate. My transform apples into oranges ability in the example raised the number of people who were able to afford housing by a factor of 7, but that's hardly the maximum possible.

If you don't have the money for an apple - single family residence - now, it's going to take some kind of major change in your circumstances to enable you to afford one. Get your law license, your medical license, win the lottery, make several million dollars in business, get a professional sports contract, something. Your circumstances are not going to change by magic. If you're a shoe salesman, even if you're making $20 per hour, and you're not doing something to change that, it's not likely to happen on its own. Matter of fact, it's going to keep getting more difficult. Right now there's 300 people who want to live in your area. What happens to the price when there's 500? A thousand? Ten thousand? This is an easy answer, straight from the pages of your first economics lesson. The price goes up, and not just in relative but in absolute terms.

If you don't have the money for an apple - single family residence - now, you can choose one of two options. You can decide not to play. Stay a renter forever, or at least until you realize what a mistake it is. Rents go up, and landlords have to pay mortgages and property taxes also. They can also decide to stop playing the landlord game and sell for what they can get at any time. I've heard from a lot of bitter renters who were displaced when their former landlords decided to take the money and run when the market was hot. Furthermore, the rental market is going to keep getting more expensive as the population, and therefore demand, increases also. Right at this moment, there's even more upwards pressure on the rental market as people who lost their properties through foreclosure need a place to stay. The vacancy rate locally was 2.6% when I originally wrote this. There is no way around one cold hard truth: Renting leaves decisions about your future in the hands of others, and of random fate.

Your second alternative is that you can decide to buy an orange - a condominium. Condominiums are going to see every bit of the long term gain single family detached housing will, at least proportionally. So you've only made $300,000 when your $300,000 condo doubles in price, as opposed to your $500,000 house doubling in price. Actually, I'll bet you that from this point on, in areas like San Diego, they see just a little bit more appreciation than single family detached homes. Right now, there's still a very large proportion of renters telling themselves they're going to own a house someday, but they're not interested in a condo. As that becomes more and more out of reach for them the majority of them - all of the rational ones - are going to switch their goal to the closest practical equivalent. Condos are never going to be as expensive as single family detached homes, but more people can afford them, and they're going to be more expensive per square foot of living space. Why? Because of the implicit cost of all that land that the single family detached home is not using for living space, which isn't taken into account. Because so many more people can afford a tenth of the lot than can afford the entire thing. When you've got the last single family residence on its own quarter acre lot on Manhattan, someone who sees the profit to be made in higher density construction is going to make you an offer you won't want to refuse, and eventually, you will sell voluntarily. Maybe that person will even be the owner, themselves, converting the lot into higher density housing.

This doesn't happen all at once. It happens piecemeal, over time, but it does happen. Already, I can take you back to the neighborhood I grew up in and the surrounding area. I can show you all of the buildings that weren't there thirty or thirty five years ago, and San Diego hasn't been completely built up anywhere near that length of time. Some of them were vacant land then. Most, however, have been converted from lower density to higher density. I cannot point to a single place that's gone from higher density to lower. People who are middle aged now or older have watched it happen in slow motion, so slow that all of the implications haven't sunk in to most of us, yet. Indeed, the slowness has allowed a lot of people to keep pretending it isn't happening. This doesn't change the fact that it is happening.

Some people don't like oranges (condos). For that matter, some people don't like apples (single unit detached housing). The ones who can afford single unit detached housing but prefer condos don't have a problem. The ones who can only afford condos but prefer single unit detached housing do. I've gone over the most obvious solution to this problem before, in Part 2 of Save For A Down Payment or Buy Now?. There are others, but they all involve similar principles of solution.

The bubble everyone (including me) was talking about a while ago is gone. In fact, it's more than gone. San Diego experienced a strictly temporary depression in prices, caused by psychological factors and fueled by governmental idiocy. When everything shakes out, the only thing that can cause it to be permanent is governmental idiocy. Mass media always paints things as being better than they are when they're good, and worse than it is when they're bad, causing people who believe mass media to over-react. This means opportunity, while it lasts, until a critical mass of people figure out that things aren't so catastrophic as they have been painted. Some people will see this article, and instantly decide to try to time the market. Don't. You'll mis-time it, with results worse than if you just acted. There are any number of studies that confirm this. When I first wrote this I had debated, in person and via email, three bubble advocates in the previous week. Every single one of them tried to start moving the goalposts on me, citing prices of college for the kids, prices of cars and this and that. These extraneous factors have been there for decades. They've never been absent. They're been living in the equation so long that people forget they've already been taken into account, even though they've been there all along. But that's the only way these folks with so much emotional investment in the bubble can pretend that prices are going to keep going down.

The condominium market, in particular, has been hit hard for several years. Stuff that was legitimately worth $300,000 several years ago declined in price to where $150,000 was a good offer. There are condo owners who wanted to sell four and five years ago who still have their units, but no one's been making offers. Part of this was "too much, too fast" - converting apartments to condominiums and building new condominiums, in the hope of cashing in on the rush, but the rate got above what were the current market requirements. This doesn't mean condos aren't going right back up in price once the housing market snake has digested that lump, especially with increasing demand as more people figure out their options are a condo or nothing.

The larger part, however, at least in my estimation, has been "elephant hunting." This is a well known phenomenon in just about any sales occupation, but real estate had been rewarding turning squirrels into elephants these last few years. The hardest part of making money as a loan officer or as an agent is getting clients to work with you, and it takes about the same amount of effort. When you've got a set of buyers (or borrowers) in front of you, the temptation is there to sell them the a larger home with a larger loan than they can really afford, so you get a larger commission. The sort of warm body loans that were available the last few years facilitated this practice. The people want to buy, but can't afford what they want? Instead of trying to talk them into limiting their budget to what they can afford, which risks them leaving your office and going to your competitor, sell them what they really want, with a stated income loan. If you need to lower the payment, make it a 2/28, spread it out over forty or fifty years, add an interest only period at the beginning, or just scrap all that and put them in a negative amortization loan from the get-go, further inflating your loan commission. I've seen estimates that over eighty percent of the sales locally at the peak of the market used one or more of these tricks in support of it. Like I said, turning squirrels into elephants so you can hunt elephants. These people should almost certainly have been buying condos, but weren't. Given the state and shape of the socio-economic pyramid locally, there should have been more condominiums bought and sold than single family detached housing, by a factor of about 3 to 2. That was not the case. The ratio was over 2 to 1 the other way. And if that's not quite a sufficient indictment of the ineffective regulation of the real estate profession (and financial ignorance of the American public) to measure up to Emile Zola "J'accuse!", it'll nonetheless have to do.

(I should mention that with all the political posturing about this, nothing has been done by the government to actually fix the problem. What actual change there's been that might repair the issue has been introduced solely by lender and investor policy)

In case you haven't been paying attention to the financial news lately, the loans that enabled these tricks are now gone. History, and they're not coming back for years at least, until the lenders develop collective amnesia again. Meanwhile, agents and loan officers who are used to hunting elephants are complaining that they're all gone. Well, they weren't really elephants in the first place, but the lax loan standards made it possible to get an elephant's worth of meat off them, at least for the agents, the loan officer, and the seller. The buyer and the lender, of course, ended up holding the sack. My sympathy for the lenders is non-existent. They knew better. My sympathy for these buyers, on the other hand, is great.

So the condo market has been dead due to the loans situation, while agents and loan officers hunted elephants who were really squirrels. Now that it's rectified, agents won't have a choice. If folks can only afford the price of a condo, It's condo or nothing. There are ways to come up with a down payment if you want to. Lack of down payment is not an insurmountable issue for responsible people, and objections to this amount to "I don't want to". Ability to afford the payments on the loan, however, is a question that cannot be dodged without dire consequence.

Let's hypothetically consider an FHA loan of $221,000 loan on a $225,000 condominium with homeowner's association dues of $250 per month. When I wrote this, for one point total retail, I had a thirty year fixed rate loan at 5.25%, with PMI of 0.55%%. Total payment on the loan is $1321.67, of which $1067 is tax deductible. Property taxes, at 1.25% (assumed - the base rate is actually lower), add $234.38 per month and are also deductible. Total: $1806 per month, and most buyers are going to get a significant amount of that back from lowered income taxes (married: roughly $150 per month, single, roughly $250 because the standard deduction is lower). Income needed, $4200 gross salary per month, or from just under $50,400 household gross per year, at most. This is well below area median income for 2006 of $64,900, and it's done with a sustainable loan, without any stated income tricks, without any special limited availability government programs for first time buyers, or anyone else, no MCC, nothing. These buyers are doing it completely on their own, without a large down payment. If they have a larger down payment, it gets a lot more affordable than this, fast.

Tell me you don't want a condominium, and I'll tell you that's fine, but I'm not going to let you pretend I didn't warn you about the consequences. Don't have the down payment for the costly single family residence? The fastest way to get it is to buy that condo, and I can prove it!

I've been aware for some time that I'm probably going to sell more condominiums than single family detached houses for the rest of my career. No, I don't have any objection to hunting elephants and in fact, yes, I would rather do so. It's just that there's more people who are going to be buying and selling condos out there than there are single family detached from now on, and I'd rather have the money from helping them than not have it, so I might as well hunt squirrels along with elephants. Not only will I make more money, those of my clients who do what is necessary to become elephants will likely come back with more business. And the fact that they listened to me about how to do it (and that this advice worked!) will be the obvious primary reason behind their ability to buy something bigger and more expensive later, making it even more likely they'll come back to me. Not that a commission on that $225,000 condo is squirrel feed, but when it leads to 2.5% of $600,000 to sell it in a few years as well as 3% of $1,000,000 when they can afford to buy that property they can't afford right now, my clients won't be the only ones smiling from ear to ear.

Caveat Emptor

Original article here

Today and tomorrow, Preparing The Ground will be 99 cents for the e-book, at Amazon and all of the Books2Read retailers (Books2Read also covers three library services so you can ask your favorite library to get it instead, in paperback or e-book).

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He becomes a Missionary of Civilization on a primitive planet caught between massive empires - and the enemy has to think it's all native ingenuity!

Amazon link

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Okay, I did an article called Why Renting Really Is For Suckers (And What To Do About It). Fairness demands that I do a companion article on situations where buying is not a good idea.

There actually are some. First off, the math just plain works against it for less than about three years, as the transaction costs to pay for the acts of selling and buying can eat up more than your proceeds. If you know you're going to have to sell in less than three years, chances are that you shouldn't buy. This is not to say that professional speculators are stupid, just that they are playing with different assumptions than most people. If one victim isn't desperate enough to sell for thirty percent under the general market, they'll go find someone who is. But they don't buy for a place to live. They're buying with a professional eye towards making a profit, and sometimes they don't. If your situation is that you're looking for a home to live in, and you're going to have to sell it instead of renting it out after less than three years, chances are you shouldn't buy. In this instance, it's not the idea of being a property owner in general that is the major factor in the decision, it's how long you're going to own that property.

This is not to say that nobody has ever made money buying for less than three years. The decade long seller's market right here in California is the counterexample to that contention. But real estate appreciation happens when it happens, and you never know until afterward what it was. If people could predict the market with that much certainty, then it would make sense to try and time the market. They can't, and it doesn't, at least not for the ordinary person.

You shouldn't buy a particular property if you can't get a sustainable loan that you can afford. Setting your sights lower, for a property that can be obtained within your budget, is a better idea. If you don't have at least three years of a fixed rate on an amortizing loan you can afford, you should probably not buy. Five is my real comfort level, and it's better yet if you can afford something fixed rate, even if you choose a hybrid ARM in order to save money on your interest rate. The market returns 5 to 7 percent per year on average. That is a very different thing than five to seven percent every year. Some years see values shoot up 20%. Other years end up twenty percent down. If you have a sustainable, affordable loan, you'll pay some principal down and you should be able to refinance when the adjustment hits if there is one. This doesn't apply with negative amortization, interest only, or shorter term loans. Particularly if there's a prepayment penalty, you'll likely eat up all the principal payments you made with that prepayment penalty. Now suppose you got caught in a twenty percent down year? Over longer periods of time, things even out, trending towards the average return of 5 to 7 percent per year. But that's no comfort whatsoever to those people who bought into unsustainable loans on overinflated properties in the last few years and are now facing huge problems because they can't sell for what they owe, and they can't refinance into a payment they can make. I didn't do it to anyone; I could have made a lot more money if I was so willing. But that doesn't mean there aren't a lot of them out there.

The market is unpredictable. The cycle always turns. I cannot tell you precisely when, and neither can anybody else guarantee a time frame. Economic models are a lot more precise as to what than they are as to when. All I can tell you for sure is what is happening right now. The only time the value of your property is important is when you sell or when you refinance, but if you haven't got a stable loan, you're looking at what is essentially a mandatory deadline for refinancing, which is one of two times when your value is important. If the market doesn't support the refinance you need before that time, the eventual market upswing will be of no comfort. Eventually, I'm confident you'll make a better profit from real estate than you could anywhere else. But eventually can be quite a while, and if your time constraints don't stretch far enough, that's a problem. A big problem.

Third group of people who shouldn't buy is those without a sufficiently stable income, particularly if their available cash isn't enough to smooth out the bumps. If you need $6000 per month, and you make $24,000 in one whack about every four months, that might appear to be enough, but consider what happens if for some reason it is six months between paychecks? Once you're a couple of months behind and your credit score is toast, it doesn't make that go away if your next check after that is only two more months.

I think I've been clear enough on the evils of buying too much house for your income. People should not overstretch financially to buy a home, but the majority do. You get a month behind on rent, and it is a problem, but if you get a month behind on your mortgage, that's part of your credit score for ten years, and puts you in a whole different class of borrower for two. Plus you're likely to be behind on your next month, and the one after that. This is a lot less of a black mark for renters than it is for owners with a mortgage. If you find this out the hard way on a mortgage, then when you're ready and can otherwise really afford a mortgage, you can't get one or you can only get one on prohibitive terms. So save up enough to smooth out the bumps, and it certainly doesn't hurt to have a down payment also, as that will make the hurdles you have to get over with irregular paychecks that much lower.

That's basically it. If you think you have another one, I'm interested in it, but those are the only three I can think of. The mathematics and economics do generally favor home ownership, even without that generous tax allowance given for the interest deduction and state property taxes, but there are cases where the general rules get overridden. Contrary to what many people were saying not too long ago, you can lose money in real estate, as the fact that property values locally are down about 30 percent from peak should attest. You can also become financially crippled for years. Nonetheless, if you take care to keep it within the realm of what you can afford, and what you can afford to make payments on indefinitely, then the worst that is likely to happen is that you'll owe more than the property is theoretically worth for a while. If you don't need to refinance or sell during that period, that's just unimportant. In cycles stretching back hundreds of years, real estate has always come back to higher prices than before, even accounting for inflation. The critical thing is to make certain you can wait it out.

Caveat Emptor

Original here

The die is cast.

The Empire has caught the fractal demons marshalling troops for assault, and there is no avoiding the decisive Armageddon between humanity and the fractal demons. Both sides have their strengths and there is no certainty about the outcome. While the Empire is free-falling towards open war, Grace is tasked with nudging the odds a little bit, ferreting out traitors to humanity, bribed with the seeming of the most precious gift possible but with a nightmare catch.

Then at the moment of the first skirmishes, personal tragedy strikes, clearing the way for a long-delayed impulse, which results in horror and more personal tragedy.

But out of the disaster, a new Grace emerges - one ready to stand on her own, fully realized as a potent force in her own right.

It is available in both e-book and paperback from Amazon and all of the Books2Read retailers and library services (Apple, B&N, Kobo, Overdrive, etcetera)

The link for Amazon purchase is here

The link for all of the Books2Read retailers and library services is here

It was my intention to offer it for 99 cents in e-book for 24 hours. Unfortunately, I couldn't get Amazon to accept the promotion until the evening of the 14th, but the Books2Read retailers have. It takes Amazon a while to make things effective, but I'll leave it up for at least 24 hours once I see that it is effective.

Legally, immediately. This also applies to refinance loans.

With that said, there are economic reasons why it may not be a good idea for you to refinance.

If you have a prepayment penalty, you're going to have to save a lot of money to make it worth paying that penalty. Suppose you have a rate of 7 percent, and an penalty of eighty percent of six months interest, that's a prepayment penalty of 2.8 percent of the loan amount. So, in order to make it worth refinancing in that instance, you have to save at least 2.8 percent of your loan amount in addition to the costs of getting the loan done, all before the prepayment penalty would have expired anyway. So if it's a three year prepayment penalty, you have to cut almost a full percent off your rate just to balance out the prepayment penalty. The higher the rate you've got now, the bigger the penalty and the more you've got to save in order to make it worthwhile. On the other side of the argument, the longer the prepayment penalty is for, the easier it is to save enough to justify paying it. If you've got a five year prepayment penalty, you're likely to get transferred or need to sell or somehow end up paying it anyway.

Second, your home has not appreciated yet, especially not in the current market. You bought for $X, and your home is still worth $X, and you haven't paid the loan down much yet, so your equity situation is essentially unchanged. In fact, since relatively few loans are zero cost, you're either going to have to put money to the deal or accept a higher rate than you might otherwise get. Don't get me wrong; Zero Cost Refinancing is a really good idea if you refinance often. But when you go from a loan that takes money to buy the rate down to a loan where the lender is paying for all of the costs of getting it done, you're not going to get as good of a rate unless the rates are falling. Loan rates went through a broad and more or less steady increase in 2004-2006, although they seem to have leveled off after that, but then they plunged off a cliff for completely predictable reasons I won't go into lest you think I'm talking politics, although they are set for major increases now. If you or someone else paid two points to get the rate on your current loan, you are not getting those two points back if you refinance. They are sunk costs, gone forever when you let the lender off the hook. If rates had dropped, it might be a good idea to refinance (like at this update), but prior to that refinancing wasn't going to save most people money. Still fine to do so if you had a sufficiently good reason, but those are a lot more rare than "I can get a lower rate without paying a cent or adding a nickel to my balance!" One reason it takes so long to refinance right now is that just about everybody who can is doing so, and therefore the lenders are backed up like the worst traffic jam you've seen in your life.

If you got your current loan based upon a property value of $400,000 and total loans of $380,000, that's a 95 percent Loan to Value Ratio. So your property is still worth $400,000, you've only paid the loan down $400. That's still a ninety five percent Loan to Value Ratio; more actually, as doing most loans is not free. So unless your credit score has gone way up, you can now prove you make money where you couldn't before, or you have a large chunk of cash you intend to put to the loan, chances are not good that refinancing is going to help you where it really counts, in the cost of money. If your credit score has gone from 520 to 740, on the other hand, or you now have two years of tax returns that prove your income, or you did win $100,000 in Vegas and you want to pay your loan down, then it can become worthwhile to refinance, even in a market like this one where the rates are generally rising. Unfortunately for loan officers like me, that does not describe the situation most people find themselves in.

One more thing that can influence whether it's a good idea to refinance is your rental and mortgage payment history. If when you got your current loan, you had multiple sixty day lates on your credit within the past two years, and now they are all more than two years in the past, that can make a really positive difference in the rate you qualify for. On the other hand, if you had an immaculate history before and now you've had a bunch of payments late thirty days or more, then it's probably not going to be beneficial to refinance.

Cash out refinancing is one thing many people ask about surprisingly soon after they close on their home. If you have a down payment, it's better to put aside some of the down payment for use in renovations rather than to initially put it towards a purchase and then refinance it out, as it saves you the costs of doing a new loan. Furthermore, "cash out" loans have generally less favorable rate/cost tradeoffs than "purchase money." If the equity is there and if you have the discipline to take the money and actually do something financially beneficial with it, it can be a very good idea. If you're just taking the money to pay off debts so you can cut your payments and run up more debts, it's probably not a good idea, even if your equity situation supports getting the cash out. It often can and does in a rising market. In the current market where values have been retreating and are ready to stabilize, not so much. If you bought any time in the last few years, it is unlikely that you have significantly more equity now than when you bought, making the whole situation unlikely to be of benefit.

A lot of situations have something or other that makes them an exception to the general rules of thumb. The only way to know for certain if the general rules apply to your situation is have a good conversation with a loan provider or two.

Caveat Emptor

Original here

Be prepared for trouble before it happens, know how strong your position is or isn't, and don't ever overplay your hand.

Real estate transactions are the largest transactions most folks get involved in. Even small percentages of $500,000 or more are lots of money. A 1% difference in the purchase price, or cost of repairs, means more money than a lot of folks take home in a month. People will lie, cheat, and steal for much smaller amounts that that. It's a bad bet in general, and a worse one in real estate, but people do it. The new siding that hides the clues that say cracked foundation. The new paint that hides the water stained ceiling. New, well padded carpet over old wood where rot has set in. These are just the tip of the iceberg.

The most common game, though, I call the chiseler. Someone who comes into the transaction and may actually negotiate the initial contract reasonably, then proceeds to demand more than is reasonable every time there's the least little item for possible concern. There's another agent in my office has one for a client right now. I've told that agent that I'd drop that client at least half a dozen times. Even if the transaction gets finalized, this chiseler is going to come after this agent as soon as there's anything he can manufacture a complaint about. The other side is a desperate seller, or they'd have told this guy to get lost long since. The chiseler is getting a screaming deal just from the basic contract, and he's wanting hundreds of dollars in concessions to fix stuff that costs a dollar nineteen. My opinion is that before the transaction closes, he's going to ask for one thing too many and they're going to tell him no, and the transaction will be off, no matter how desperate they are.

"If you want peace, be prepared for war." Ancient wisdom. I'm not advocating war for real estate. Wars are expensive and usually a net loss, whether they're waged with bullets and bombs or lawyers and contracts. There's always another property for sale, always another buyer. You never have any more power over the other side in the transaction than they choose to grant you. It may be intelligent for them to grant it, but you can't make them. Similarly, they never have any more power over you than you are willing to grant them.

A quick lesson from the annals of real warfare. In 279 BC, Pyrrhus of Epirus fought the Roman legions at Ausculum. He won the battle, but when congratulated upon doing so, replied "One more such victory, and we shall be undone." The Romans could afford the losses much more easily than his army. It set the scene for the Battle of Beneventum, after which he gave up fighting the Romans. From the experience of Pyrrhus comes the term, Pyrrhic victory. He was supposedly a brilliant general, but if he was so brilliant why couldn't he win a battle without catastrophic casualties?

Any time lawyers get involved in a transaction, it's a reasonable bet it has become a Pyrrhic victory at best. Chances of recovering actual money in your pocket greater than your legal fees are slim, no matter how rotten their case or how much worse off than you they end up. You still don't have the transaction you wanted, and meantime, you've likely scared off other buyers or missed opportunities at other properties.

Knowing when a transaction is broken and being willing to counsel a client to get out of it are two of the hallmarks of a good agent. Recognizing it before it has become undeniable is crucial. Precisely when the transaction is broken is itself a function of the market. A buyer's market certainly allows buyers to drive much harder bargains than seller's markets, but there is a point at which even the most desperate seller should tell them, "No," to further demands. Of course, a really good listing agent won't let it get that far, any more than a good buyer's agent will. I'm perfectly willing to tell my clients in private that they're on the verge of messing up a contract that gets them the best deal they can reasonably expect, all because they tell themselves they want a little bit more. But if that messes up a good transaction, nobody ends up with what they wanted. See the chiseler, above. In order to know what's broken and what's not, you have to really understand the market.

None of this is to say that capitulation is the first order of business, any more than scorched earth. Both are the province of the agent that needs to get fired. What is necessary is judgment and market knowledge and an understanding of what a good compromise really is. A good agent has contingency plans for everything in negotiating, and throughout the transaction. If they do X, we'll do Y. If they want A, we want B. If they don't want to go for that, we'll offer D for C instead. The other side does not necessarily have to lose for your client to win. Indeed, it's the good agent that knows how to substitute other things for money, and the good agent who knows how much of the clients agenda to reveal. Information is always power, but sometimes knowledge of the other side's agenda enables us to craft a compromise that makes both sides happy.

Cutting corners is always bad, as is the agent who doesn't stay on top of the transaction. Listing agents should negotiate individually with each offer, and respond to every offer within a week at the most. The transaction coordinator should not be used in lieu of individual agent involvement, or as a "talk to the hand" type shield from the other side. That's a good way to lose some of the best offers you'll get on the listing side.

Time on market is a killer for the seller's pocketbook. I don't know where the urban legend about "The longer you wait the higher the sales price" got started, but it is a counterproductive myth. If research found some kind of positive correlation between lengthened time on market and sales price, it must have been conducted in a market going up 20% plus per year. Time on market turns buyers off. "If it's so great, why hasn't it sold by now?" is a quote I've heard from pretty much every buyer client I've ever had. In point of fact, the longer a property is on the market, the further the seller will have to cut price in order to sell (and the more desperate they likely are), and the better the deal it is possible for the buyer to get. In a normal market, the longer a property takes to sell, the lower the eventual sales price will be. The idea of putting it on the market overpriced "just to see if we can get it" is a good way to cost yourself money. Price it competitively out of the gate. If there are better properties for less, your property won't sell until after theirs does - and there will be more better properties for less on the market then.

The proper response varies with market conditions and the response you're getting to the property from the market. When I originally wrote this, if a given seller wouldn't recognize that desperation is the only valid reason for marketing a property when there are 40 plus sellers per buyer, a good buyer's agent doesn't need much reason to abandon a property. Just the fact that this seller or their agent was trying to act like it's still the seller's market of a few years ago is enough, and the sooner the idiots doing anything to get listings including misrepresentation of the market realize this, the sooner this will change. My most important questions have been and will continue to be concerning their need to sell and what possible alternative plans there might be. When things are bad for sellers (and wonderful for buyers), the only reason for a property to be on the market is if there is no other reasonable alternative. I told several people, everyone who had a reasonable alternative, "I'd love to sell your property, but given the state of the market right now, the kind of sale you want is not going to happen. I can list your property for sale, but it's not going to sell in this market unless you outcompete all the similar properties that are already for sale. All it would do is frustrate both of us, and get you angry at me, and for good reason. Here's my card, and if you decide you need to do what it's going to take, please call me. Otherwise, I'll check back in a few months and we'll discuss the state of the market again. I'm confident that waiting will get you more than enough extra money to be worth it."

Later on, the buyer's market that we had when the bubble burst went away. Bidding wars and price increases were the order of the day. Sellers didn't have the kind of power they did when the bubble was going gangbusters, but they had a lot more than they had during the burst, providing their property is priced correctly and in a desirable micro-market (e.g. Central San Diego, but not Escondido or El Cajon). The more people want your property, the more power a given seller has and the less power would-be buyers do. Nobody can force them to come to grips with reality, so if they're not going to listen to reason, it may be the listing agent's fault but the owner is the one who's going to suffer the consequences. Similarly on the other side. If the buyer's agent doesn't understand the market, their clients are either going to end up frustrated or rooked.

You can't learn this stuff on the fly, by the way, nor can you prepare retroactively - you have to be ready when the offer comes in. If you don't hire a sharp enough agent, you can't go get them when it drops in the pot. First off, you won't be able to recognize that it has dropped in the pot, and that you're now roast. Second, because the reason it doesn't drop in the pot with a sharp agent is because they're prepared, and they never let it get that far.

Don't ever confuse "sharp" with "experienced," or "high producer." Yes, a certain amount of experience is helpful and I learned a lot on my first few transactions. But the only times I've ever heard anybody say something like, "I've been in the business for three geologic eras" is when they were trying to defend something indefensible. The last time it was a woman who I found out didn't have a valid listing agreement (and it wasn't a small technicality, either!) bragging about her forty years in the business. And often the reason that someone is a high producer is the willingness to throw their client under the bus in pursuit of an immediate commission check. Ask what problems they've dealt with lately and how they handled them. There are always problems to be dealt with; it's the nature of the business. Sometimes it's the property, more often it's the people. Not every transaction, but if they don't have a certain proportion, it's more indicative of inability to recognize a problem than it is of not having any. On the loan side, I've done more loans than 99 percent of the loan officers out there, and I deal with problems by recognizing them and fixing them before the underwriter sees the file. It's not my experience - there are plenty of loan officers who've been in the business thirty years who still insist upon doing it the hard way. It's not the fact that I've done X number of loans in a month. I've learned more since the month I closed 100 loans than I knew then, by an order of magnitude. As a matter of fact, high volume is incompatible with significant problem solving, either in loans or in sales. There's only so much time in the day. It's that I've learned how to recognize this stuff and deal with it before it bites my client, even if I have to work much harder or do more work or wait a little longer than I originally thought I would. That's what makes a good agent or a good loan officer.

Caveat Emptor

Original article here

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