Dan Melson: June 2022 Archives

I just moved into a rental house with an option to buy. I figure I can probably save up around $40-45k for a down payment in three years. how should i save? The Roth IRA tax loophole for first time home buyers maxes out at $10k and takes 5 years anyway. It sounds dumb, but the best safe short term investment I can think of is savings bonds. There has to be something better!

When I originally wrote this, a down payment was not a requirement. For people with not too horrible credit, who could document enough income to afford the loan, at or below a conforming loan amount, 100% financing was available. Unless you've got access to a VA loan, that is no longer the case. Every other loan requires one. I'm confident lenders will start doing 100% loans again within a few years, but if you wait until then, you're going to miss the appreciation that's going to convince them to bring it back.

As to the possibilities: A Roth IRA, along with traditional IRA, 401k, etcetera, are special accounts with tax advantages which are mostly forfeit if you intend to use them for relatively short term goals. More important is your choice of investment vehicle.

Your major constraints here are a relatively short time frame and you want a certain amount of safety. The idea of investing the money is that you want to get more money, not lose your investment savings.

So if you're going to move outside the realm of guaranteed investments for this purpose, you are going to worship at the altar of diversification. Stocks generally go up, but can go down (roughly 28 percent of all years since records have been kept), and indeed, are not anything like a panacea. Therefore, if you're going to risk the stock market or the bond market in order to obtain their higher returns, you're going to want to diversify, diversify, diversify in order to prevent anything short of a general market decline from ruining your investment.

With that firmly in mind, individual stocks are probably not a good idea. If successful, the idea is that the income will be mostly capital gains, which are taxed at a lower rate. Unfortunately for this idea, it's hard to get efficient and diversified individual stock investment for less than $100k. At $100,000, you've got a down payment to be extremely proud of.

The same with individual bonds to an even greater extent. When most bonds run in $10,000 to $50,000 denominations (or higher), diversifying is not really an option when you're just trying to save up for a down payment. If one of your bonds suffered a significant downgrade, bond price would take a hit, and therefore a very large part of your investment would suffer a setback.

Next on the list is government savings bonds and bank CDs. These offer a guaranteed return. The problems are that it's a mediocre return at best, and it's all ordinary income. Still, 2.5% or so for bank CDs is safe and secure, even if it reduces to about 2% after taxes. US Treasury securities have a four year minimum holding period to get their guarantee. Me? I stopped loaning the government money decades ago.

All of the various insurance products are a bad idea. You're saving for something you want within five years, not something forty years away or trying to insure a possible loss. Nor does the tax treatment help. Secure commodities investment is one of those oxymorons like "plastic glass".

Finally, there are mutual funds. These are diversified by their very nature. In fact, my usual complaint is that they are too diversified, but in this case, that's actually good due to the short timeline (only a few years, one hopes). Pick a good fund family that covers all of the major asset classes, including bonds. Yes, you pay management fees (and advisement fees or a sales load if you are smart to help keep you from over-reacting to short term market events), but you can average nine to 13 percent per year, pretax, seven to ten afterward. A large portion of gains will be capital gains, taxed at lower rates than ordinary income. This isn't a certain or guaranteed investment, and can lose some of your principal, even all of it in theory. Nonetheless if you're comfortable taking what is in my estimation a small amount of risk, it can really pay off.

Caveat Emptor

Original here

My husband and I bought a golf course-view house in DELETED. We closed 5 days ago; moved-in 4 days ago; and 2 days ago found out that the golf course is scheduled to close. It was announced by the golf course management 2 years ago at the home-owners' association meeting, and the seller and her realtor most likely knew. But they did not disclose it to us, even though they had ample opportunity to do so. They had advertised the house everywhere as golf course view. We definitely would not have bought the house if we had known that the view is there only for 2 more months. We paid for the view and know that homes without a view like that go for a lot less.

Now a school or more homes are scheduled to be constructed in its place. What are our legal rights? Can we "return" the sale of the house?

Please advise. Thanks.

First off, I'm not attorney, so this is layman's perspective. Get an attorney who specializes in real estate in your state, and ask them. Each state has its own law.

Here in California, agents and sellers are liable for disclosing not only what they knew, but what they reasonably should have known. They are required to disclose all such information that a reasonable person might consider in their decision on whether to buy a particular property, and by well precedented legal extension, whether to pay a particular price. Cases have been decided based upon an increased water bill, that the court ruled the increase should have tipped the owner off to the fact that there was a leak somewhere, and water is notorious for its erosional capability, among other things. Were you in California, it appears as if you might have a very strong case. I have no idea whatsoever about whether it's worth pursuing, even if the law in your state is similar. For that, you need to talk to a local attorney.

The first question that attorney is likely to ask you is what evidence you have that the former owner knew, or should have known, that the golf course was closing. Announced at homeowner's meeting is good. In the minutes is better. HOA informing all of the residents directly would be better yet. Neighborhood vows to get together and fight the closure? Probably best, especially if your home's former owners were somehow listed as being members or directors. That's the evidence they knew part.

Evidence that a reasonable person might not have bought that property at that price is pretty easy to come by in this case. Golf courses are highly desired, highly sought after neighbors on the part of many people, and golf course views are valued. Schools, not so much. People want good ones close, but they don't want to deal with playground noise, or high school football stadium noise for that matter. Advertisements of the property as being next to a golf course, or looking out over a golf course, would likely be good evidence to have, because it would show that the owners knew that golf course view was a part of their value, and they were committing this deception maliciously.

Then we get to the real crux of the matter: How certain are you that they didn't slip one piece of paper that says, "The golf course is closing so they can put a new school in" into that ream or four of paper you signed at closing? Or a few sentences on one of the standard disclosures? Not only whether they informed you, but also when and in what manner can be important. If they had a marching band blowing a fanfare to attract your attention to this fact before you had come to a final agreement, that likely blows any case you might have out of the water. If they slipped it into your stack of papers at closing, that might be a horse of a different color. Talk to your lawyer about that.

Now as to remedy. No matter how egregious it was, you're unlikely to get a free house out of it. Possibly, if the agent knowingly misrepresented the situation and you can prove it. Less likely if all you can show is that the seller know, but the agent may have been acting in good faith accordance with the seller's wishes. They shouldn't do this, but let's stipulate that nobody is perfect, and maybe they weren't being paid for that part of a listing agent's services. You may also be able to sue your agent, if you had one, for failure to protect you from these scalawags and perform their due diligence. Then again, if you didn't have a full service buyer's agent, you're not likely to be able to sue them successfully. If you're stuck with the former owner as your only legal target, you may still be able to get not only damages, but legal fees and possibly punitive damages out of it. Alternatively, you might also be able to force them to buy the property back, if you so desire, instead of the other remedies. Talk to your lawyer.

Caveat Emptor

Original article here

Over the last couple of decades, there's been a rising movement, mostly on the part of those who want a piece of real estate agents business, to sell agents as a toll booth. Tollbooths sit there, guarding the entry to the road you want to travel on. Once you've paid, you get access to the wonderful world of MLS and making offers on real estate - or having offers made upon your real estate. This movement has accelerated in the last ten years or so, with the universal advent of broadband internet connections and ungated sites with all of the listings for sale in a particular area.

Even a large number of allegedly "full service" agents and brokerages have sold themselves based upon the tollbooth model. "Sign up with me, and you get access to all of these wonderful things along this road to where you want to go."

Unfortunately for these agents, there's always someone willing to provide a cheaper tollbooth.

The bar to get into the real estate business, when you really look at it, is absurdly low. I've seen good arguments with valid points for both making it much more difficult or eliminating licensing requirements altogether. Score seventy percent or above on a multiple choice test that doesn't have math any more complex than multiplication and without any practical applications whatsoever, pay a toll of $100 or so to the state of your choice for licensing, and another $100 or so for MLS access, and you're in business! They even let you use a calculator for the math on the test!

It shouldn't be any great surprise that we have large numbers of agents who think that's all there is, let alone members of the general public. Therefore, agents who pretend to be agents - and look like they might be, on paper - can cut the toll to access MLS and the world of making and receiving offers on real estate. They pretend that they do something important, sitting in their offices with a fax machine and ZipForms. It even looks impressive enough, on the surface. "I went into this lady's office, and she fired up a computer and it spit out this contract for me to sign, and she faxed it off to the other agent and now I'm in escrow! Best of all, she's going to give me 2% of the purchase price for doing business with her!" So all of the friends and relatives, who according to the way they think are making $5000 or $10,000 by using this person, drop by, and she makes $2500 to $5000 on every single one of them, by pretending to do something valuable, that can really be done by any high school graduate capable of using a word processor. Alternatively, "I went to this guy's office, signed a listing contract that pays him 1% up front instead of 6% when it sells, to put my house on the MLS, He even let me pick the price I wanted to sell it for!" Now every agent worth their license knows what's wrong with both of these scenarios (and if you are an agent who doesn't, you need to learn before you talk with any members of the public), but the average person who doesn't know what they're getting into. They don't even know what they don't know, and they think they're getting a real bargain.

Lest it be said that I'm being all holier-than-thou, I'm perfectly willing to make $2500 to $5000 acting like a high school graduate with a word processor and fax machine. And a license, can't forget that license! I'm even happy to do this work! And if all you need is someone to grant you that access, like paying toll to access that road, I'm perfectly happy to collect my little toll and send you on your way. Instead of one full size toll that takes me dozens to hundreds of hours to earn, I can earn one of these half-size tolls every couple hours. People who come to me for this level of service may wonder why I never try to "upsell" them on the more expensive package, or at least the majority who don't understand what's really going on do. Furthermore, the probability of such tolls coming back to bite me, legally, is practically non-existent. I made no representations as to the state of the property - I didn't even go visit! I advised them of their responsibilities ("get an inspection!", "fill out this TDS!") and have their signature on documents that say I did. And I never promised their property would sell, or that the property they're buying was worth what they were offering. Whether or not they realized that's what they were doing, they were saying they were perfectly capable of handling all those aspects for themselves, and they signed that piece of paper that says what I am and am not going to do for them.

But once again, there's always someone who's willing to build a cheaper tollbooth. That's not the future of a successful real estate agent, to get paid less and less for doing nothing, anymore than that's the future of a successful software company, a successful health insurance plan, or a successful anything. And for those people who think they're getting a some kind of bargain, would you be happy paying a word processor that kind of money for a couple of hours of work? There's always someone willing to operate a cheaper tollbooth, but unless you really understand what you're up to, a tollbooth is not what what you are really looking for.

What's going on, of course, is people who don't understand what they're not getting are just thinking in terms of cost. If you don't understand what you need to, if you don't even understand that there is more to what a good agent does than MLS access, a word processor and a fax machine, if you've dealt with agents who expected full pay for being MLS access, a word processor and a fax machine, then you think you're getting a deal when someone offers you a discount. But if you're an agent, you have to ask yourself why people should be willing to pay you that much money when people are willing to take less. If you're one of those discounters, you should be asking yourself why people should continue to be willing to pay you 1% when there are people who will do it for 1/2%. And if you're one of the latest wave of internet based super discounters, making money hand over fist, you should be wondering why they should continue to pay your half a percent when someone starts offering it for 4 tenths of a percent, 3 tenths, or less than one tenth. They can still make money at that level, but anyone can do nothing just as well as anyone else, and with a little more time, we get down to the economically stable point where you have people in a sweatshop in Bangladesh typing and emailing a contract they took over the telephone for $10 per transaction, all working on one license that the owner of the company got 15 years ago. Or completely automated, without human interface at all. No service, no knowledge, no liability, and no protection for the consumer, but they certainly are cheap. That's the endpoint of the tollbooth model of business, and it's visible from here.

If you want to know how this shortchanges the consumers, check out any one of dozens to hundreds of domestic real estate forums. Every day, you see people talking about having already made a mistake that is going to cost them a dozen times what a good agent would. These people generally want to know how to get out of the situation unscathed, but you know and I know that's not likely to happen. You've got to be ahead of the curve and not make the mistake in the first place. There are sharks out there for whom such people are nothing more than their lawful prey. Some of them are the agent sitting on the other side of the transaction. Others are investors, hoping to snare someone who doesn't understand everything they're doing. The uneducated buyer thinks "It's a beautiful house, we love it, somebody says they can do the loan - what could go wrong?" The list of tricks that get played on sellers is, I believe, probably longer than the list that gets played on buyers if less common individually. More tricks, smaller market shares, although the most common - offering to buy the house if it doesn't sell - has ballooned in popularity recently.

One of the things I keep harping on is the fact that real estate deals are for large amounts of money. Numbers big enough so that 10% is more than a lot of people make in a year, and I've seen at least a gross of 10% coups - or bigger - pulled off in properties I have actually been in and compared to others on the market within the last year. What does this mean? If you're a shark who can pull off one 10% coup per month, you're in Fat City. You've got the Manhattan penthouse, the private jet, and the rock star lifestyle - more and more so as your deals get bigger and more frequent. If you pull off one 10% coup per year, instead of making $60,000 per year, you're making $100,000 per year immediately, and with just a few years like that, you're living the rock star lifestyle also! And you know the best part of all? Most of the suckers think they got a bargain! I went and talked to the guy that got taken worse than anyone else I knew of a while back, who paid over 40% more than he could have had a basically identical property for a quarter mile up the road, and he's happy as a clam, because he likes the property and he got 2% of that 40% back in the form of cash! Nor do you have to make 10% per transaction to be profitable. If you can consistently pull off 5% coups, or 2%, you're still in the money.

When I'm acting for buyers, my business model is that of a big game hunting guide. For this, you need to know the lay of the land (market), where the most desirable game is, the tricks to spotting its trail, the ruses it may use to escape, etcetera, etcetera - and all before some other big game guide leads their client to bag my client's trophy. You've also got to know the traps laid by the dangerous predators and avoid them. My goal is to make a 10% net difference to my client's final position, Either 10% cheaper, or a property comparable to one that might legitimately fetch 10% more. Buddha forbid my clients don't end up with anything, but that's preferable to shooting some farmer's prize cow, or the farmer themselves! Meanwhile, the people who don't understand this are singing Tom Lehrer's Hunting Song, whether they realize it or not. The problem is that in the real world people who figuratively shoot "Two game wardens, seven hunters, and a cow" instead of the deer they were after face some pretty severe and ongoing consequences.

Before the new appraisal standards, considering appraised value, the lowest difference I had made the previous year was a little over 15%, and that's just negotiating capability and market knowledge. I had got a couple of strictly honest appraisers, and not one of those purchase appraisals came in lower than 115% of purchase price. Even with all the problems the new standards are causing and the fact I have to take whatever turkey the appraisal management company assigns me, I'm not having difficulty on purchase appraisals. To change the independent element (me negotiating purchase prices for the right property), those same appraisers I kept using torpedoed almost 30% of the refinances I was hoping to do. Add the number of traps I've kept those same clients out of by spotting problems before we made on offer, and it adds up to quite a chunk of change they've got in their pocket, or that they don't owe some lender, because I did my job as an agent, not the least part of which is that I take responsibility for not selling them something they can't really afford.

As a listing agent, the process has a lot more lead time. I can interview buyers in the morning, and if they're as ready to buy as they think they are, get an understanding of their situation in an hour or so, be looking at properties myself that afternoon and showing the ones that pass my muster to them the next day. Listings take longer, and are more like a fishing expedition. First, you have to know what kind of fish you're able to catch with the bait you have available. You're not going to hook a sperm whale with krill. You've got to know where these target fish hang out. Then you've got to figure out how to make the bait look attractive to the target fish, how to get them to notice this bait, how to get them to hit it hard enough that you can set the hook and haul them in. Among the factors you have to understand is how much patience the client has. Just like in fishing it doesn't do any good for the fishermen to keep hauling the line out of the water before the right fish is willing to hit it - but the real trick is working the bait so it gets hit as quickly as possible. Sometimes the situation isn't right - usually because the bait won't catch what the fisherman wants, no matter how much you do. Nor does getting the bait hit (getting an offer) necessarily mean a landed fish (consummated sale), particularly not at the offer price.

A lot of the people I counsel to wait, or who don't like the asking price I want to set on a property will go sign up with someone else who's willing to promise the moon to get that signature on the listing agreement. I've never had one of them call me up to gloat that I was wrong. The ones that I've seen actually sell sold for less than I believe I could have gotten, and it took months. Some were even victims of the "Jaws" phenomenon as well. That is what happens when the homeowner gets desperate for any offer - the big shark comes along and eats them.

You may have noticed that both of these analogies are pretty violent, and the better known activities they emulate tend to end up very badly for the big game, or the fish, at least on a successful mission. Nor is there any kind of "catch and release" program. Whether you realize it or not, that's the way the game is played. The language is normally civil, not something out of pro wrestling trash talk, but it's no less deadly for being played with offers and contracts instead of rifles and gaffes. Military men who intend to kill the enemy if they can are very careful and very respectful of capable opponents - they live longer that way. They know somebody's going home in a body bag, and they don't want it to be them. With the amount of money at stake in real estate, the incentives are there. Look at some of the reality shows on TV, and what the contestants go through for much smaller prizes. The tollbooth model of agency seems to be producing an ever larger number of willing fish and game. Actually, they're eager!

Real estate may be the largest transaction of most people's lives, but most people don't do it very often, particularly not in the same area. People will move cross country to a new city they've never been in before, and expect to buy real estate within a month. They'll expect the rules for sellers now are the same as the rules for buyers ten years ago when they bought - if they even understood the market then. They have been led so far astray by the popularly pushed tollbooth model of real estate (and its media depictions), that they have no idea what they're doing wrong - or what they're not doing that they should be.

There's not only marketing to consider on the listing side, and search on the buyer's. There's knowledge of laws, of procedures. There's negotiating tricks that put you into a better position, or prevent someone from disadvantaging you. There's sucker bait, and being able to recognize it - or far more than someone who doesn't do this for a living can. There's buyer qualification issues and property maintenance issues. Do you know how to spot them? Here's a couple free hints: The answer to the first has nothing to do with prequalification letters, and the answer to the second should not be, "Get an inspection!" The former are a waste of paper and the latter is leaving an issue to be resolved at the final point of no return and hoping it gets caught there, and hoping the other side is willing to renegotiate the agreement in accordance with your views as to what reasonable is. There are location issues, condition issues, amenities issues, price issues, market issues, financing issues, and issues that mix several of these.

There Ain't No Such Thing As A Free Lunch in the real world or in real estate. You can be careful, do your own due diligence, pay the fees for superior service, and get someone who acts as an effective guide to big game, or an effective charter sportfisher, or you can pay your little toll and likely end up as the fish or venison on the table. Yes, it's work. No, it's not easy. If it was, anyone could do it just as well as anyone else. Since that is not the case, then we need to consider alternative hypotheses, and using the one that best fits the facts.

The people who habitually dine well on fish and big game? Either they buy and sell enough real estate in that area that they are effectively agents themselves, or they've learned what a fantastic investment paying a good guide is. Yes, the good guides can also eat very well off their profession. That doesn't change the fact that you end up with a better dinner, even considering the chunk of meat you paid them, and if it keeps you from being the meat on the table, well, you make your own call how much not having your financial antlers nailed to a wall somewhere is worth to you. Think of it as financial evolution in action.

Caveat Emptor

Original article here

Really.

I know that most people who read that title are replying "no kidding" but you would be amazed at how many people act like there is such a fairy godmother.

I got an email yesterday that said, basically, "Help me! I bought with a prepayment penalty and my payment is too high. I've got a 100% loan at 7.125% and a three year prepayment penalty, and I need to drop my payment by at least $500 per month!" As I explained, the only honest responses that really solve this problem have to do with increasing the income, decreasing the other outgo, or, as a last resort, getting rid of the property, because he's not going to get a loan like that. They don't exist. They never did, really, but negative amortization loans allowed people to fool themselves into believing they existed.

The guy referenced above is stuck in a negative amortization loan because it was the only way to afford the property he wanted. He treated it like a fairy godmother waving her wand, and didn't ask what happens on the 12th stroke of midnight when the loan recasts.

Anytime you are signing up for anything other than a fully amortized loan at a fixed rate of interest, you should ask "What happens next?" What happens when the initial period of lowered payments ends? Because each and every one of these loans has a boosted payment when that happens, and many, like negative amortization loans, are adding thousands of dollars onto the balance of your loan whenever you make that special low payment they're so proud of! So in three years, when the loan recasts, you owe about 10% more than you did to start with, and a shorter amortization period means your payments go up even more to reflect that. If you couldn't afford the loan originally, how are you going to afford it later?

(I am not saying don't get any other type of loan. I'm saying make sure you understand what happens when the adjustments start. For my own use, I am a big fan of the 5/1 hybrid ARM, but I understand what happens after 5 years, and have always refinanced before then.)

Real Estate Mortgage Loans are something you've got to get right in the first place. Lenders often allow a higher loan to value ratio for purchase money loans than anything else. Put into plain English, if you bought with a loan for ninety percent of the value of the property, I might not be able to refinance it at all, anymore. If Fannie or Freddie own your current loan, then we can likely refinance you under restrictions noted above, but most of the rotten loans were with Alt A or subprime lenders, not Fannie or Freddie. Second, there are closing costs in every loan. Closing costs are around $3000 or so, not counting origination and any discount you may decide to pay to get a lower rate. You can pay these costs out of pocket, you can pay them through yield spread (and equivalent things) by accepting a higher rate - making it harder for a refinance to get you a lower rate - or you can roll those costs into your balance, meaning that the loan to value ratio gets worse. Even a few dollars over a given level's cut off goes to the next higher level, getting worse pricing. If you were at 86.2 percent loan to value and you go to 87.2 percent, we've still got a ninety percent loan. But if you were at 89.1 and you go to 90.1 (or even 90.001), that puts you into the 95% loan to value bracket, with higher pricing and I've only got one or two lenders who will of do it at all, even purchase money. Unless your current loan is with Fannie or Freddie, I can't think of anyone right now who'll do a 95% bracket refinance loan at all. Not to mention that the appraisal may not come in and there's nothing your loan officer can do about it. So if you start with a bad loan, the practical result may be that you cannot fix it by refinancing because lenders won't do it.

So before you sign on the dotted line, make sure you understand all the nuts and bolts of your loan. Keep asking the question "What happens later?" If you don't understand it, or it is too complex, get some disinterested professional advice. Chances are that something is going on that's going to be bad for you later on. Lenders don't want to compete on price if you don't make them, and they know most people choose loans based upon payment, and they know how to play all of the games with payment and interest rate to make their loan appear good to the casual public.

Ask the hard questions before you sign up. Unfortunately, with new lending environment the best realistically possible answers aren't as good as I'd like, but the answers that prospective loan providers give are still instructive if you pay attention.

Caveat Emptor

Original article here