Dan Melson: February 2013 Archives

An email asked a question I should have thought to answer a long time ago, and the answer may surprise a lot of folks. I've been vaguely aware of this for a couple of years, but I was amazed how strongly the numbers solidified my views!

My wife and I aren't ready to buy a property yet, but we are trying to plan how much to save for our down payment. You've mentioned that there's a spectrum from nothing down to 20+% down broken down by 5% increments, but how do you choose where to be on that spectrum? I can see that there are tradeoffs between the amount you have to save, the cost of your mortgage and the like, but I don't have a good way of thinking about those tradeoffs. And, since we're in the DELETED area, 20% down could easily get into the six figures, so it can be quite intimidating.

Given the way leverage works in even a slightly appreciating market, it is generally to your advantage to buy as soon as 1) You are sufficiently stable in your employment and expect that you're going to be in the area at least another three to five years, 2) You have enough of a reserve that the first minor bump in the road will not lead to disaster, and 3) You make enough to afford the payments. However, what usually happens is that people get a raise, a promotion, or a new job, or more often, they get married or have a baby and that is what sets their thinking on the road to buying a home.

(Note: When I originally wrote this, loans available were different than they are now. But the situation will go back to that eventually, and there are ways to make a minimal down payment work, even today, and the basic ideas I'm presenting are, if anything, more valid than when I originally wrote this)

Let's consider a $500,000 property and an 80% first trust deed with an appropriate piggyback 30 due in 15 second if needed, since that is generally returning more favorable rates than a Home Equity Line of Credit right now. When I originally wrote this, I had 5.875 for about 9/10 of a point plus closing costs, or about $7100 total cost. But there are potential adjusters - and relevant to this situation, having subordinate financing for 100% CLTV added one full discount point ($4000 in this case) to the first mortgage, or you can drop down to 6.25 for the same cost. 95% financing only adds 1/4 of a point in the same situation, or you can get a 6% even for the same cost. At or below 90% CLTV, there was no add to the first mortgage. If we're at 80% with a $100,000 (20%) down payment, the 5.875 first is all there is. Taking dead average credit scores (720) with this same lender, the closing costs are $500 (flat) when you do the second concurrently. 85% CLTV would be an 8% second on $25,000 for a down payment of $75,000 (15%) plus closing costs. 90% CLTV would be $50,000 down payment (10%) and leave you with a $50,000 second at 7.375%, benefiting from a bump down in rate for hitting a certain dollar value. 95% CLTV requires a $25,000 down payment and leaves you with a $75,000 second at 7.75%. 100% CLTV (no down payment) leaves you with a $100,000 second at 8%. It would be 8.25, but you've hit another economy of scale break point.

Here's a table:

So you see that having a down payment is a very good thing. Now this is for a fairly ideal situation. If you were in a stated income situation (when we had stated income loans, which nobody does any longer), the rates were slightly higher and step somewhat more steeply. If your credit is significantly below average, the rates start higher and step up more steeply still. It gets rough if both apply.

However, this doesn't take place in a vacuum. Let's say you can save $10,000 per year, and earn 10% tax free on what you save. But while you do, housing prices are still going up in the aggregate (at least when the economy is healthy, and if the economy doesn't get healthy soon we'll have worse things to worry about then whether to buy real estate). Let's assume 5% per year on average. We will also assume that you can get a 6% loan for the first and 8% for the second whenever you buy, and taxes at 1.2% of value per year, here's the projected situation:

Where payments is the total of mortgage and monthly tax payment pro-rated when you buy. Examining that column, we see that this is an argument against waiting. In fact, assuming a 3% (compounded) raise per year, the property is only 4% more affordable in year 10 with a $167,000 down payment! This neglects rises in rents and other costs of living!

I should mention that smooth raises are not the way any market works over a 10 or 20 year period. Up, down, flat, crash, skyrocket, all happen due to unforeseeable factors, as well as ones you'd have to be a politician to not see. The basic ideas remain sound as a general principle, although the actions of politicians can certainly influence them - upwards or downwards. But in general, over the long term, markets have population increases and increased demands on the land available. Real estate prices increase in the long term, whatever may happen in any individual year (or few years). leverage makes the effects of that increase have spectacular financial effects.

At this update, the only 100% financing that is generally available is if you are eligible for a VA loan, but the principles remain the same. Once you have enough to make a down payment acceptable to lenders, the numbers are very strongly in favor of buying instead of waiting for a larger down payment. FHA loans require only 3.5% down, and are available to basically everyone who hasn't defrauded the federal government.

Original here

(Here is Part 2 of Save For A Down Payment or Buy Now?, which tells one way to increase affordability more and faster)

A while ago a reader gave me a heads up that Illinois HB 4050 was hurting residents of certain poverty stricken Illinois Zip Codes. Now I have to pick on my own state:

California law generally requires special handling of sales transactions to protect homeowners in foreclosure. This law, called the Home Equity Sales Contract Act, generally applies to transactions that meet all of the following four conditions: the property is one-to-four family dwelling units; the owner occupies one of the units as his or her principal place of residence; there is an outstanding notice of default recorded; and the buyer will not use the property as a personal residence. The Home Equity Sales Contract Act does not apply if one of these four conditions is unmet. If, for example, a seller occupies a property in foreclosure, but the buyer will be occupying the property as his or her personal residence, the home equity sales law does not apply.

If all four conditions are met, however, the buyer must use a home equity sales contract, such as the C.A.R. standard form "Notice of Default Purchase Agreement" and attachments. This agreement gives the seller, among other things, a five-day right to rescind the contract. Furthermore, the home equity purchaser cannot be represented by an agent. More accurately stated, the law requires a buyer's agent to be bonded by an admitted surety insurer, but C.A.R. is unaware of any insurer currently offering the bond.

Actual Code Here

This is so brain damaged it has to be the idea of some clueless idiots out to save the world without first stopping to consider the Hippocratic Injunction to "First, do no harm." But then we are talking about the California Legislature.

Now, in the business, the term "equity sale" or "equity purchase" is most commonly used in conjunction with a sale subject to existing trust deeds. So this is a significantly different meaning to a similar phrase. Keep in mind that there are four conditions that need to be met:

1. Residential property (1-4 units)
2. Owner occupies one unit
3. Notice of default recorded
4. Buyer does not intend to occupy.

But what happens with such properties? Who buys them? Investors, that's who. Not people looking for a primary residence. Guess what? The owners want them sold - need them sold! What happens if they don't sell? They go to auction, and the owner basically gets nothing, whether the property sells at auction or it doesn't, in which case the lender now owns it.

Furthermore, they're requiring that the buyer's agent have a bond that is not available, and has not been for ten years. So if whether they're working with a shark or with an investor who is actually going to give the people a decent price, the buyer's agent cannot be compensated. So what are most buyer's agents going to do? Answer: Wait until after the trustee's sale! As the buyer's agent, they have no fiduciary responsibility to that seller, and no ability to get paid. But the owner wants to sell before the trustee's sale. The chances of them getting anything from a trustee's sale or afterwards are about equal to one my grandfathers giving birth to triplets. Furthermore, this creates openings for unscrupulous listing agents to set up lowball offers on the property, or buy it themselves, with even less constraint than usual.

Now, this does theoretically create an opportunity for certain people who might be willing to live in the property to buy for lower prices, since investors are (mostly) out of the picture. So we are robbing Peter (the current owners) to pay Paul (in search of new housing). There are also some truly outstanding issues. What happens if my buyer client is lying to me about whether they intend to live there? The contract is already written, the terms of the transaction set, and the buyer's agent can't back out at the last minute when the buyers change their mind about whether they're going to live there. Also, what happens if everything is fine when the contract is written, but the lender drops a Notice of Default on the sellers the day we're set to close?

In the current market, most of the folks in default do not have large amounts of equity. Matter of fact, the typical seller who is delinquent is really hoping that the lender will sign off on a Short Payoff. This is not shark investors swooping in and buying granny's $500,000 property for $80,000. With the number of people there are pushing Reverse Annuity Mortgages, that's not going to be the case any time in the foreseeable future. Granny can get a RAM, after which she can last long enough to sell for a good price. Instead, what's going on is that the properties are going to foreclosure, costing the lenders more money, adding to the fees the owners pay, and lengthening the odds against the current owners coming out of the situation with anything. They want buyer's agents on the job, finding these bargains for their clients so that the sale gets made before the trustee's sale. Keep in mind that the seller is always allowed an agent, and the seller can always say "no," to the offer. Which is preferable: Not getting as much as you might have gotten for a sale under ideal conditions, or getting nothing?

Henry David Thoreau had some words on this situation:

If I knew for a certainty that a man was coming to my house with the conscious design of doing me good, I should run for my life, as from that dry and parching wind of the African deserts called the simoom, which fills the mouth and nose and ears and eyes with dust till you are suffocated, for fear that I should get some of his good done to me -- some of its virus mingled with my blood. No -- in this case I would rather suffer evil the natural way.

As is always the case, the California legislature was determined to do good, and ended up hurting the people they were allegedly trying to help. There are very few exceptions to Thoreau's rule.

Caveat Emptor

Original here

"How do I remove PMI?" was a question that I got.

First off, a definition. Private Mortgage Insurance, often abbreviated PMI, is an insurance policy that the bank may make you buy in order to get the loan. It is a monthly surcharge based upon a percentage of your entire principal balance. You pay for it, but the bank is the beneficiary. It doesn't make your mortgage payments if you can't, it doesn't keep your credit from being screwed up, and it doesn't even keep you from getting a 1099 for income from loan forgiveness. Net benefit to you: it gets you the loan, and nothing more, ever again.

You can avoid PMI by splitting your loan into two pieces, a first loan for 80% of the value and a second for any remainder. Yes, the rate on the second will be higher, but it will likely save you money starting immediately, not to mention that it's likely to be deductible, whereas PMI is not, in general, deductible. I do not believe that with all the loans I've ever done, I've ever seen one where PMI was preferable to splitting the loan in two, from the client's point of view. Unfortunately, right now second mortgages don't want high loan to value ratios because they're the ones that lose all the money if they go south.

"With all this against mortgage insurance, why does it still happen?" you ask. This is the critical question. Before the changes regarding second mortgage lenders, it was because lenders usually pay yield spread to brokers or commission to their own loan officers based upon the amount of the first loan. Pay for a second is typically (not always) a small flat amount or zero. Your loan provider makes more money by doing it all as one loan. The loan provider wants to make more money and sticks you with the bill. Doesn't that make your heart glow with gratitude? Didn't think so. But for right now, it's because there are no second mortgages available above 90% comprehensive Loan to Value (CLTV) - and most don't want to go over 80.

You can also refinance to get rid of PMI if you have the equity. Unfortunately, this means all the costs of a refinance and triggering any prepayment penalty there may be. Not optimal, unless the rates are enough better to make it worth the cost.

Now one of the things I keep seeing about PMI is the blank admonishment "don't accept PMI!" Ladies and gentlemen, whether or not you have PMI is determined by your equity situation and loan structure. If you have a single loan over 80% of value, there will be PMI associated with the loan. End of discussion. It can be a separate charge, or it can be built into the rate, and they don't even necessarily have to tell you it's for PMI - but it will be there. If you're in a situation where PMI is needed, shopping around for the lender who doesn't charge PMI is precisely the same as shopping for a liar who will hide it in the accounting.

There are two ways PMI is collected. One is as a separate charge, supplemental to your loan. The second is as an addition to the rate.

The separate charge is never deductible (or at least it wasn't until Congress passed a law temporarily making it deductible), but is easier to remove. Most states, including California, have laws requiring the bank to remove it when a Price Opinion or appraisal say that the Loan to Value Ratio goes below 78 percent (or something similar). Depending upon your state, you may or may not be required to pay for an appraisal, a cost of approximately $400, in order to have it removed. Some states require only a price opinion, others, like California, permit the bank to require an appraisal.

Just because the law says that that the bank can require an appraisal doesn't mean that the bank will require an appraisal. If the loan to value is obviously there, they might just have someone drive by to make certain the house is still basically sound. On the other hand, if loan to value ratio is close to the line, the bank has a responsibility to its shareholders not to increase their exposure to loss unreasonably. So if you just wake up one morning with doubled property values, the bank will likely waive the appraisal. If your market is gradually increasing in value and you're watching it like a hawk and make your request the instant you think the value is there, be prepared to pay for the appraisal. Around here, with PMI on a 90 percent loan being a surcharge of about one and a quarter percent per year on a $500,000 loan, you pay for your appraisal by not having PMI in one month - if you're right. If you're wrong and the appraisal comes in lower, you're just out the money.

Suppose, instead that instead of choosing the surcharge option, you choose to have PMI built into the rate. So instead of a 6.25 percent loan rate, you have a 7.00 percent loan rate. Advantage: it's usually deductible, because it's actual interest on a home loan. Disadvantage: You have to refinance (or sell!) to get out of PMI, because the pricing is built into the loan itself as part of the contract you signed. It is to be noted that by itself, this method is usually cheaper than the monthly surcharge for precisely this reason, because in order to get rid of it you have to pay to refinance, and if there's a prepayment penalty in effect you're likely going to pay that also, and so on and so forth.

So if your loan is more than eighty percent of the value of your property, you can expect to pay PMI, although it is avoidable by splitting the loan into an 80 percent first and a second for the remainder if you can find someone willing to do it, and you're likely much better off for doing so. If you're already stuck with it, contact your lender for steps to remove it providing you think the value has increased enough. If you suspect the lender is not abiding by the law, contact your state's Department of Real Estate, although lenders not abiding by the law is both stupid and, in my experience, rare. It's usually the consumer that doesn't understand the law.

Caveat Emptor

Original here

This is something that often happens with highly appreciated properties where the owner can no longer keep up the payments, they get hit with a notice of default, and along comes Joe or Jane seemingly riding to the rescue on a noble white steed, offering to buy the owner out of the property "subject to" existing deeds of trust.

This is a terrific position for the buyer to be in, and a rotten position for the seller. Nor are the prices usually very good for the seller - that white knight usually ends up looking a lot more like a thief. So why does it happen? Why does the seller agree to it?

Here they are sitting on this highly appreciated asset, with loads of theoretical equity, and they cannot make the payments. If they go through the foreclosure process, chances are better of flying to the moon by flapping your arms than of getting any of the equity back out. Yes, in California it's got to sell for at least 90% of appraised value or it doesn't sell at auction, in which case the lender owns it. But those appraisals are intentionally low, because the lenders don't want to own them. Furthermore, all of the payments that weren't made, and the interest on them, all gets piled into the loan, as do fees for the default process and the trustees sale. If you have a mortgage loan, read your contract. Sight unseen, I'll bet you a penny there's a clause in there saying they can sock you for "reasonable" fees in the event of default or foreclosure.

So you have a $450,000 property which you paid $120,000 for and owe $320,000 on, but something has happened and now you can't make the payments. You put it on the market for $450,000 and don't get any takers. Then along comes someone and says, "I'll take over your payments and pay you $20,000 if you sign the property over to me."

This is certainly a gray area, legally. The loans have "due on sale" clauses, and the lender can call the notes as due in full in such situations. The buyer basically tells them, "tough", knowing that if they foreclose, the lender ends up in the situation they didn't want to be in in the first place, of owing the property, not to mention that the person who bought "subject to" can cost them a lot more money by delaying it in court, and there's a good chance they can win the case. Meanwhile, if they don't act quite so hard-nosed, this new owner is making the payments. They have the option of refusing the payments, but then we're dealing with the foreclosure process, and in the meantime, the checks for payment are there every month. What do you think most lenders will do? They will accept the payments!

Notice, however, that I didn't say the payments get there on time. This is the second raw deal that the seller has to swallow. The buyer's cash flow is a little tight, and the payment gets there 40 days late on a consistent basis. Who gets marked late? Whose credit gets dinged every time this happens? Not the buyer's. That buyer never applied for a loan with that lender on that property, the lender doesn't have their signature on a contract that says, "I agree to pay..." It's the seller's credit that gets hit. Kind of a nice situation to be in, no? Make a late payment any time you feel like it and your credit doesn't suffer! Not only that, but since the loan is still in the seller's name, the payments don't hit the buyer's debt to income ratio, allowing them to qualify for more loans, with larger payments, than they really should. Trying to leverage their investments like that is one reason why the folks who make a habit of "subject to" deals usually have tight cash flow. They don't want to let the property go into default, but as long as they don't get to the stage of being 120 days late (90 in some places), they have the best of all possible worlds!

Suppose, for whatever reason, it becomes a short sale? Well, since the seller is the one that violated the loan contract, there will be recourse on them, not the buyer. Many times the buyer makes side deals for "pay me" type stuff and manages to make money, or at least get their money back, even though the property doesn't sell for enough to pay off the existing liens.

If you are getting the idea that agreeing to a "subject to" deal isn't the smartest thing in the world, why do buyers agree to them?

Desperation and Panic. They listened to the agent that told them that they could get more money than was likely by market conditions, or they listed with the cheap bump on a log agency that really doesn't do anything to market the property, or they just sat in denial until far too late. Nothing happens instantly in real estate; it always takes several weeks at a minimum to get a property sold, even if you get a fantastic offer on the very first day. When I first wrote this, If I had to I could get a loan done in one or two days, but that's not a situation you want to be in, because I don't know anyone who won't charge more in such a situation, and all of the usual loan caveats apply. But for whatever reason, the owners let the situation go too long, let themselves get behind the power curve, and suddenly realize that they are not going to catch up. They are looking at losing the property and getting nothing, so they panic. This is only one of the many reasons why staying ahead of the situation in real estate is so important. At the point where you're looking foreclosure square in the face ten days from now, there's not much else that can be done. I can offer you entire supertankers full of sympathy, and it won't make any difference. So if you're in this kind of situation, get the property on the market quick, price it attractively, and find an agent who will market it effectively, so that you avoid getting into the situation where the shark's offer is the best one you're going to get.

Caveat Emptor

Original here

If you haven't heard about the thirty year fixed rate mortgage, welcome to planet earth and I hope we can be friends.

The thirty year fixed rate loan seems to be the holy grail of all mortgages. It's what everyone wants, and what they're calling about when they call me to talk about refinancing a loan.

Well, it is secure, and it is something you can count upon today, tomorrow, and next week, etcetera, until the mortgage will theoretically be paid off.

The problems are three fold: First, it is the most expensive loan out there. It always has had the highest rate of any loan available, and always will (Except for the 40 year loan which was making a comeback for no particularly good reason). This means you are paying more in interest charges every month for this loan. Second, according to data gathered by our government, the majority of the public will refinance or move every two to three years, whether they need to or not, paying again for benefits they paid for last time, and didn't use. This is essentially paying for 30 years of insurance your rate won't change, and then buying another 30-year policy two years down the road, then another two years after that, etcetera. Finally, because it is always the highest rate and this is what everyone wants, many mortgage providers will play games with their quote. They will quote you a rate on a "thirty year loan", meaning that it amortizes over thirty years, not that the rate is fixed the whole time. Or they'll even call it a "thirty year fixed rate" loan, but the rate is only fixed for two or three years. Every time you hear either phrase, the question "How long is the rate fixed for?" should automatically pop into your mind and proceed from there out of your mouth.

The fact of the matter is that there are other loans out there that most people would be better off considering. In the top of the loan ladder "A Paper" world, there are thirty-year loans that are fixed for three, five, seven, and ten years, as well as interest only variants and shorter-term loans (25, 20, 15, 10, and even 5 year loans). The shorter-term loans tend to be fixed for the whole length, but of course they require higher payments.

Until recently, I personally would never have considered a 30 year fixed rate loan for myself, and here's why. First, the available rates go up and down like a roller coaster. They are the most volatile rates out there. Given that I will lock it as soon as I decide I want it, it's still subject to more variations that any other loan type. Back when I bought my first place, thirty year fixed rate loans were running around ten and a half percent. Five years before that, they were fourteen percent and up. Second, having some mortgage history, I can tell you I refinance about every five years. Why would I want to pay for thirty years of insurance when I'm only going to use about five?

Even in the summer of 2003, when I could do a 30 year fixed rate mortgage at 5 percent without any points, I could do a 5 year ARM (fixed for five years, then goes adjustable for the rest of thirty) for four percent on the same terms. Rates are even lower at this update, but that's because the market is sick and few people can qualify. I keep using a $270,000 mortgage as my default here, so let's compare. The 30 year fixed rate loan gives you a payment of $1449, of which $1125 is interest and $324 is principal. The five-year fixed rate loan gives me a payment of $1289, of which $900 is principal and $389 is principal. I saved $225 in interest the first month and have a payment that is $160 lower, while actually paying $65 more in principal. What's not to like? If I keep it the full five years, I pay $51,549 in interest, pay down $25,791 off my balance if I never pay an extra dollar, as opposed to paying $64,903 in interest on the thirty year fixed rate loan, while only paying down $22,062 of my balance - and I've got $13,500 in my pocket, as well as the $13,300 in interest expense I've saved and $3700 lower balance. If I choose the five-year ARM and make the thirty-year fixed-rate payment, I cut my interest expense to $50,539 while paying off $36,426 of principal (remember, every time I pay extra principal it cuts what I owe, and so on the amount of interest I pay next month.). If I then pay $3500 to refinance, adding it to my balance, I have saved many times that amount. I still only owe $237,074, as opposed to the 30 year fixed rate loan, which has a balance of $247,938. That's over $10,800 off my balance I've saved myself, plus over $14,300 in interest expense, simply by realizing that I'm likely to refinance every five years. And the available ARM rates are more stable as well as lower. From the first, I haven't had one with a rate that wasn't in the sixes or lower. Finally, if I watch the rates and like what I see and so I don't refinance, I'm perfectly welcome to keep the loan. And all of this presumes that the person who gets the thirty-year fixed rate loan doesn't refinance or sell the home, which is not likely to be the case. Statistically, the median mortgage is less than two years old, and less than 5 percent are five years old or more.

At rates prevailing when I first wrote this, I could get the same loans at 5.75 and 5.125 percent (without points), respectively - which was at that time about the narrowest I've ever seen the gap. Assuming a $270,000 loan, for the 30 year fixed rate loan that gives a payment of $1576, which five years out means that I have paid just under $74,996 of interest, $19542 of principal and have a balance of $250,457. If I choose the 5 year ARM, my payment is $1470, so if I keep it five years I've paid $66,581 in interest, $21,626 in principal, and my balance is $248,373. Plus I've kept $6300 in my pocket, or alternatively, if I used the $106 per month to pay down my loan, I've only paid $65,713 in interest, have paid $28,826 in principal, and have a balance of $241,174. Even if I then add $3500 in order to refinance and the thirty year fixed rate does not, I'm still ahead $5700 on my balance plus the $9200 in interest I've saved, and the chances of the person who chose the thirty year fixed rate loan not having refinanced is less than 5%.

ARM mortgages are not for everyone. If you're certain you are never going to sell and never going to refinance, it makes a certain amount to sense to go for the thirty year fixed rate loan. And of course, if you're going to lie in bed awake every night worrying about it, the savings work out to a few dollars a day and my sleep is worth more than that to me, and so I'm going to presume it is to you, as well.

The final factor is the current paranoia of the loan market. I do not believe it's going to last, but even people with long term jobs and businesses are finding it difficult to refinance under some circumstances - most notably if they're in a group that gets a lot of deductions on their taxes due to business expenses. There has got to be a niche created to serve such people, and I believe that there will be, but I don't know when and it isn't here yet. The last such niche, Stated Income Loans, was horribly abused, but right now as much as 20% of the population has difficulty persuading lenders they can make the same payments they've been making on time for years, and that percentage is rising as career W-2 type jobs travel in the direction of the Dodo and Great Auk, being displaced by self employed or 1099 contract positions. If you are among this group and can qualify now, a thirty year fixed rate mortgage is something you should strongly consider.

Furthermore, investors are cutting their own throats with their current overemphasis upon safety, which is why rates are so low. When nobody who's not in the perfect situation can qualify for the loan, the current situation amounts to too much money chasing too few borrowers, with wonderful consequences for those who are in a position to qualify. High supply low effective demand for money means low price, or in plain english, low interest rates that can be locked in for 30 years. I seriously doubt we're going to see sub 5% rates on real 30 year fixed rate loans ever again once the market normalizes.

But what most people should be trying to do is cut interest expense while not adding any more than necessary to the loan balance. As I've gone into elsewhere, money added to your balance sticks around an awful long time, usually long after you've sold or refinanced, and you end up paying interest on it, as well.

So even though various unethical loan providers tend to quote you rates on loans that aren't really what you are looking for if you want a thirty year fixed rate loan, in normal times they're actually doing you a favor in an oblique and unintentional way, and somebody who is up front about offering you a choice between the thirty year fixed rate loan and an ARM is quite likely trying to help you. Consider how long most people are likely to live in their home (average is about nine years right now), how long they're likely to go between refinancings (less than three years), and your own mindset. It is quite likely you can save a lot of money on ARMs. Why pay a higher interest rate in order to buy thirty years of insurance that your rate won't change, when you're likely to voluntarily abandon it about two years from now anyway? Why not just buy less insurance in the first place?

Caveat Emptor

UPDATE: I had someone question the numbers in the paragraph comparing the 4% 5/1 ARM against the 5% 30 year fixed rate loan, both of which were available at the same time in the summer of 2003. Now I have had it pointed out to me that I made a mistake in calculations somewhere. The numbers for interest and balance savings are correct, but those for payment savings are $9623, not counting the time value of money. Your savings are not the sum of the three numbers. It depends upon your point of view as to which is most important to you. The interest savings on one hand and the dollars in your pocket plus lowered balance on the other are essentially the same dollars. They are two sides of the same coin. It's just a question of what you're most interested in. Not that $13,000 plus is chump change, even on this scale, and no matter how you look at it, you're $13,000 plus to the good. You've either got $9623 in payment savings plus $3670 in lowered balance, both of which are "in your pocket" in one sense or the other. You wrote checks totaling $9623 less, and you've got $3670 in lowered balance, which translates to increased equity - not to mention that you're not paying interest on it any longer. Or you could look at it as simply 13,000 plus in interest you didn't pay. Most folks will lose some of the interest in the form of taxes they don't pay, but 1) That's never dollar for dollar and 2) I wasn't going that deep when I wrote this article.

UPDATE 2: We have also had a period since then where there was only about a quarter of a point difference in cost between 5/1s and thirty year fixed rate loans - with 7/1s and 10/1s being more expensive than the fixed rate loan at the same rate. In that situation, as I said at the time, it makes sense to get the thirty year fixed. Why not if it's essentially the same rate for the same cost? But that sort of narrow rate gap is not typical, and it has since widened back out considerably.

Original here

One of the things the place I work does to attract clients is advertise foreclosure lists to our clients. Several times a week, people call and ask for the lists, and we say, "Great! Just come on down, fill out a loan package and an agency agreement, and we'll get them to you fresh every morning, and when you see one you might be interested in, we'll help you get it!"

Before the end of the sentence, over 95% of the people have stopped us, saying they are already working with someone. "I just want the foreclosure list. Can't I get it?" Well, we pay money for that. Why should we give it to someone who is not our client and has the ability to pay for it on their own? Why didn't the agent they're already working with get it for them? (Everyone can get a weekly list for free from the county - but that list is worthless except as a time waster, because that list is three to ten days out of date and they've already been swarmed.) If they want to work the foreclosure market, they should have signed up with an agent who has daily foreclosure lists. They haven't even found a property they are interested in yet, and already they know their agent isn't cutting the mustard for their purposes. But they are still stuck with them.

Another trick high margin ("expensive") people use is social groups. Nothing wrong with social groups and using people you know there, but make certain you're not paying three or five times the going rate for a loan, and that your agent really knows what they are doing before you sign on the dotted line. Church groups, soccer coaches, scoutmasters - I can't tell you all of the social acquaintances I've rescued people who became my clients from. These predators look at other members of the group as a captive audience. It isn't so, of course, those people have the option of going elsewhere - it's just difficult socially, and many of them are unwilling to make the effort.

One of the worst of these is family. Your brother, sister, aunt, or nephew is in the business, and your family makes it difficult not to choose them. "You simply must use your sister Margaret!" Well, if subsidizing Margaret to the tune of two points more than anyone else would get is your cup of tea. Around here, that's $8000 or so for the average transaction. You are not writing the check for the extra to Margaret directly, but you're paying her just the same.

Lest I be misunderstood here, there is nothing wrong with using friends, family, members of your social group. Please do check with them. The mistake is not in giving them a shot; it lies in giving them the only chance. That's what you call a monopoly situation, and the chances of you getting the best possible treatment are horrid. But if Aunt Marge or Uncle Bob know you're shopping around, they have more incentive to do their best work. If they know you're not, well I hate to break it to you, but the average person is looking for a bigger paycheck for the same work, and this includes friends, family, and social acquaintances, particularly because you are not the one writing the check, but you will pay for it, guaranteed. The worst mess I've ever had to clean up was caused by my client's uncle, who had been in the business twenty years, and was trying to extort just a little too much money for the deal to work.

On the other hand, when my cousin calls me out of the blue, I can cut him a deal because here is a transaction that I didn't have to spend time and money on wrestling it in the door; it walked in of its own volition. This is far and away the toughest part of any transaction, and one of the most expensive to any real estate practitioner - getting a potential client into your office. It's why the "big names" spend so much on advertising nationally, and give their folks half (or less) of the cut a smaller place will give them. (Hint: just like in financial planning or any other service, what's important is always the capabilities and conscientiousness of the individual performing the service, not the company).

So here's how you live up to the social expectations. Give them a shot, but not the only shot. If you are looking to buy and they are an agent, sign a non-exclusive buyer's agreement with them. This gives you free rein to work with other folks as well; just don't sign any exclusive agreements. Most agents, unfortunately, want to lock up the commission that your business represents and so they will present you with an exclusive agreement. The harder they argue for an exclusive agreement, the more you should avoid them. All that an exclusive agreement does is lock you in with one agent. If they are a lazy twit, you either have to wait until the agreement expires, use them for your transaction anyway, or hope you can get them to voluntarily release you. There is no way for you to force them to let you go. I get search phrases like "breaking an exclusive buyer's agreement" hitting the site every day. The only two ways to break an exclusive agreement are 1) wait for it to expire, or 2) get them to voluntarily let you go. I've never heard of the latter happening. So don't sign an exclusive agreement in the first place. Sign a non-exclusive agreement. This puts all of the motivations for work on your side, where they belong. The one who finds the property you are interested in will get the commission, but they have to work for it, as your business isn't locked up.

This also gives you an out if Aunt Marge or Uncle Bob doesn't cut the mustard. You can tell anybody who gets their nose out of joint, including them, that you gave them the opportunity to earn your business, and somebody else did a better job. The other guy saved you money, the other guy found you the property you wanted, the other guy got you a better loan. You wanted to do business with them, but they didn't measure up. Case closed, and Aunt Marge or Uncle Bob will drop it if they are smart, because the more stink they raise, the more likely it is that another family member, friend, or social acquaintance will pass them by in favor of "Could you give me the name of that guy who helped you?"

The only exception to the non-exclusive buyer's agreement is if they are giving you a service that you would otherwise have to pay money for. I am not talking about Multiple Listing Service - those are free and plentiful. I'm talking about real time information not available to the general public - like daily foreclosure listings. Our office pays hundreds of dollars per month for that as a way to bring in business. It is reasonable for someone working the foreclosure market thusly to be asked to sign an exclusive agreement, because otherwise there may be no way to determine who introduced you to the property (Lawyer's Full Employment Act strikes again!)

For sellers, unfortunately, you've got to make a commitment to list with one agent. It's just the way it has to be, economically, in order to get them to commit to spending the kind of money it takes to get a good result. But you can interview more than one agent. What are they going to do to sell your property for the highest possible price? Put it in the contract when you do sign. Everybody can put it in the MLS, and during the bull housing market we had for years, where unless the property was obviously overpriced you'd get multiple offers within a week, a lot of monkeys masquerading as agents made a good living doing that and only that. That doesn't cut the mustard any more. I work more with buyers than sellers, but there are venues that sell the property, venues that bring people to open houses, venues that generate people looking for the cheap bargain (which you don't want) and venues that generate people looking for property like yours in your neighborhood (who is your ideal buyer). Especially in a major city, these are all different venues, and the agent who knows which one is which is worth more than you will pay them, and the cheap agent who doesn't is likely to cost you a lot more money than their cheap asking price saves you.

For loans, I've written about this before, but shop around, ask the same questions of every loan provider you interview, beware of red flags, and stick to your guns. Until very recently, I used to volunteer to do back up loans when I knew the prospective borrower was being sold a bill of goods by someone else. The question I asked myself before volunteering to put in the work of a backup provider. "Could the loan they are telling me about be real?" If the answer was no, I volunteered to act as backup. Every single time, it was my loan the person ended up getting. I don't do this any longer due to changes in loan lock policy from all the lenders, but it used to work very well. Your prospective loan providers should know the market if they are competent. Make use of that knowledge. And lest you be tempted to quote something at those loan officers that is not real, it's a self-defeating strategy. Honest loan officers will tell you point blank they can't do that, while the scamsters are going to get into the spirit of the situation, by which I mean saying anything it takes, no matter how fanciful, to get you to sign up. And those who are knowledgeable about the state of the market always know what is likely real and deliverable, and what likely is not.

Caveat Emptor

Original here

The original appeared in April 2006, but has been updated for changes

I am hoping to buy in the (city) area and am reviewing the possibilities. While I fear that the local market may be peaking, I intend to live in the home for at least ten years, so I am not trying to time the market.

My questions have to do with the down payment. I expect to shop for a property in the $450,000 range, and currently have $60,000 available for a down payment. I make a decent salary and receive an annual bonus of $35,000 - $40,000 each February. The bonus, while not guaranteed, is very dependable. After taxes and deductions, I should realize about $20,000 - $25,000 from it.

Do you think I would be wise to wait until February, by which time I will be able to make a down payment of $90,000 and perhaps avoid PMI and pay less interest over the life of the loan, or seek to buy now and lessen the taxes on the bonus? (I itemize, am single and am in the 28% bracket). Will the greater down payment help me to capture a better interest rate on the loan? (My credit scores are right around 800). Also, if I buy now, is it possible that I will be able to negotiate a mortgage in such a way that I can pay my realized bonus in February as a lump sum towards the remaining principal without incurring penalties? Ideally, i would like to use my bonus each year to pay down principal, as I can afford to balance my budget, including regular mortgage payments, without touching the bonus.

While on the subject of credit scores, I am reminded of another question - does an 800 score do me any good as contrasted with, a 740 or 750? Thank you again for your consideration. Your writings have been invaluable to my education.

I would expect the property taxes to run about $5,000 annually and association dues to be another $350 monthly. As I don't have a car, parking fees will be inapplicable. My closing costs should be somewhat reduced as I work for a bank (parent company) and they offer employees favorable mortgage rates with no points and no origination fees. Of course if I go elsewhere for the loan that would not apply, but I would only expect to do so if I received even more favorable terms.

As for an equivalent property, the market would price the rent at about $2,200 a month, although I am only paying $1,520 now (for a less desirable place than what I am shopping for).

First things first. You are easily A paper. When I first wrote this, A paper was A paper - someone who just staggered over the line got the same rates as King Midas. That has now changed and there are cost differentials between people who just make it and people whose credit really shines. That said, focus on the bottom line to you, not how much of a differential you get over lesser customers. Which is really more important: getting a better price on the loan - better rate at a lower cost, or paying less than a prospective lender's next customer? It's not important that they give you a quarter point incentive if their basic tradeoffs were more than that above the competition. Look for a loan based upon the bottom line to you, not a little tweak that says you get treated a little better than the next guy.

A paper does differentiate between credit scores now, where they did not formerly - but much less so above 740 credit scores. Someone with a credit score below 720 who still qualifies A paper can expect a discount point surcharge on a lender's basic rates. At high loan to value ratios, this can be two points of difference - $5000 on a $250,000 loan, $10,000 on a $500,000 loan more than the higher credit score pays. Anyone reading this think $5000 isn't important? On the plus side, it's way better than going subprime (if you can even find a subprime lender that will take you with as tight as standards have gotten). One thing never changes about loans: shop by the bottom line to you.

Second, split your loan into two pieces to avoid PMI if you can. Current market conditions at this update are that second mortgages won't go over 90% of total value loaned, so you will probably have to pay PMI if you can't come up with 10% down. One first loan for 80% of the value, and a second for the remainder, whatever that is. The second will be at a higher rate, but better that than paying PMI on the whole balance. It's likely to save you a lot of money this way. If you intend to pay it down, be very certain that there will be no prepayment penalty.

Now, let's look at now versus basically a year from now. One thing I'm going to look at is whether your location may be above sustainable levels. My rule of thumb is that if a 20% down payment won't break even on rental cash flow, your area is likely to be overpriced. With current rates (6.25% for a thirty year fixed rate loan at par for the first, something like 9% for a 10% second), payment on $360,000 runs about $2215, plus taxes of $420 per month plus association dues of $350 plus an allowance of $50 per month for insurance. Total $3035 per month. As opposed to $2200 rent. An investor would be down $835 per month even if the place was never vacant and never needed repairs. Prices would need to drop $100,000 at least to cover that. I'm also going to assume you need $10,000 for closing costs out of your own pocket, reducing your down payment to $50,000. Now, I'm going to look 10 years out based upon this situation.

Now, let's look at suppose prices have come down that same $100,000 in a year, but rents have gone up by inflation - roughly 4%. However, rates are a bit higher - let's say 7 percent (actually, they are slightly lower now). Furthermore, you have $90,000 less $10,000 for closing costs leaves $80,000 down payment. I'm assuming property taxes are based upon purchase price, as they are here in California, but if they don't go down when prices go down, that's going to make a difference of about $100 per month to start and more later on. Let's look 9 years out for an equivalent time frame.

When I first wrote this, the picture looked much better by waiting a year for the market to get rational. If it hadn't, all you've done is taken that last year of benefits off the first chart, or worse, as perhaps the prices continue to rise for another year. Nor have I assumed that you paid extra on the loan. Quite frankly, once you've killed off that second trust deed, leverage is your friend, and you are better off investing the difference.

When I originally wrote this, the question was "When is Wile E. Coyote going to look down?" Okay, not all that funny, but it has applicability to the situation, and at this point it has happened, as you are aware unless you've been living as a hunted animal in a cave. As long as everyone was in denial, and there was a market of folks willing to pay those prices, the market could defy gravity. When people wised up, that ended. When prospective buyers "looked down", and they didn't like what they saw. There is no convincing reason why highly paid jobs have to be even more highly paid so that they can afford local housing here, whereas a large proportion of the jobs in certain cities like Washington DC or New York don't really have the option of leaving, as they are where they have to be. The government isn't leaving Washington DC unless it gets nuked, and the big guns of the financial industry aren't leaving New York unless every other big gun does so. You know better than I to where your city lies on that spectrum. My impression is that where you are is closer to the inelastic employment point. Nonetheless, if the rest of the country "looks down," so will those places that are relatively insulated.

If a 20 percent down payment doesn't pencil out as an investment property, as it doesn't in your case, the question is not likely to be "if?" the market is going to adjust, but "when?" and "how?" Here locally, you could almost hear the "pop!" If things are relatively inelastic, employer- and jobs-wise, a long slow deflation may be what occurs. You may even keep current prices while inflation makes things catch up, or keep going up but at a lower rate, taking longer to adjust. It's hard to say when I'm not as familiar with your city's economic engine as I am with my own, but here's what happens if prices stay stable for ten years:

As you can see in this case, you build up a fair amount of equity, but would have been better off renting and investing the difference. However, the odds are against this sort of market reaction.

At this update, my local market has seen all the crash we're going to unless the employment situation gets even worse. There is a premium for beaches, tourist attractions, and weather that's at least decent and usually wonderful all year long. People want to live here if they can, which means demand is high, supply is fixed, and if you won't pay it, someone else will. There is also upwards pressure on rents of single family housing, as landlords are looking at long term cash flow rather than flipping the property in a year, and the local market has mostly worked its way through excess inventory and there isn't as much "shadow inventory" here as some people seem to think (doesn't matter how much there is nationwide. The question is "How much is here?" There is no such thing as a national market for real estate, and anyone who thinks there is has just labeled themselves a bozo. Even a unified commuting area market is pretty much an occasionally useful fiction. Look at zip codes or even neighborhoods if you want an accurate picture of what is going on in an area - but that's too much detail for talking heads on national television programs)

Caveat Emptor

Original article here

My general rule of thumb is "Remodel for your own enjoyment. If you're lucky, you'll get some of your money back when you sell." The remodeling industry has made a very large amount of money seducing people into believing they will recoup their investment, or more than their investment. But as you can see here, it's a rare remodeling project that returns more than the cost. Therefore, don't remodel with the idea of making a profit, because you won't. Not a single one of those multipliers is greater than 1.

But there are times when remodeling to sell makes dollars and sense.

Mostly, it's when the existing stuff is so outdated that Ms. Newlywed takes one look and flees in terror from the Uranium Yellow or Art Deco Pink and Blue that's been out of favor since before her mother was born. Maybe it was fine thirty years ago when you bought it, and you've gotten used to it, but now it's fifty years old and you've just never motivated yourself to do anything about it. If the kitchen is straight out of 1955, and the bathrooms look like they were last decorated when Hawaiian kitsch was the hot new fad (memo to the young: Eisenhower was President), it's probably a good idea to do something about that before you try to sell - "Try" being the important word. Because people looking for their dream home aren't interested, and these properties sit on the market. If they eventually sell, they will sell for way below everything else on the market, first because of the visible age, second because it sat on the market and you had to reduce the price further and further while paying carrying costs for months. These are the sorts of homes rehabbers and flippers look for, because they can make a profit on them. If you have the money, why wouldn't you want that profit for yourself?

For buyers, if you're willing to buy something that's solid but older, you can get one heck of a deal as well as being able to remodel at whatever pace you're comfortable with. Truthfully, most folks I talk to have at least some plans for as soon as they buy, anyway. If you're planning to install new kitchen cabinets and granite counters anyway, what does it matter if what's there is ancient, ugly, or poorly laid out?

The first level of remodeling is to clean, shine, and repair any surfaces that need it. This is a straightforward extension of the "carpet and paint" principle. New paint and carpet are cheap, and have a great return on investment. If the formica is burned or chipped, if the tile is broken, if it's dull and dingy, make it shine. It always amazes me that people with hardwood floors will leave them looking like they haven't been polished since they were laid down in 1932. Strip them, sand them, polish them - before you put the property on the market. It's a lot cheaper than replacing or laying new carpet. They will look beautiful. They will make people want your house. Not everyone, of course, but how many buyers do you need? If you've got something lots of people see as desirable, flaunt it by making it beautiful. Hardwood floors are very high on that list.

Sometimes, there just isn't any choice but to take it to the next level. Stoves built in to the countertop and cooking ovens in the cabinets are so 1958. If there aren't any good matches for marred, gouged, or broken surfaces, you probably want to re-do the whole surface. Keep in mind that labor costs are pretty much a constant, and the largest expense of most jobs. You want to spend $4500 resurfacing the bathroom in plastic and linoleum, or $5800 resurfacing it in Travertine and nice tile? Add a moderately upscale toilet for a couple hundred bucks, and you've got a bathroom that looks like it comes out of Sunset magazine rather than an episode of the Flintstones. Somebody who flees in terror from the latter is likely to be attracted to the former. Even if they don't flee in terror from the Flintstones bathroom, most folks are going to be much more attracted to the Sunset magazine bathroom.

Keep in mind, also, that the new stuff you put in has to go with whatever you're keeping. If you've got a Mediterranean paint scheme, Art Deco counters are not going to work for most prospective buyers, and they're the ones you're trying to please at this point. Just sayin'. The more vanilla you keep it, the fewer prospective buyers you will alienate.

Don't go overboard. It can be a real temptation to spend $25,000 or more on new kitchen appliances, but you're not going to get your money back. Keep in mind that most appliances are personal property, so (in the absence of the contract specifying otherwise) you can take them with you when you go. However, in cases like that it's more common than not that those appliances remaining will be written into any purchase offer, and if you agree to leave them, you have to. If you don't want to leave them, away goes the purchase offer to no beneficial effect. If two-thirds of the gourmet kitchen that attracted a buyer is going away when you move out, it's not likely to do you much good in selling your property. I always ask my buyers why they're willing to pay more for the kitchen when most of it is going away. There are idiots who insist they don't want a buyer's agent, but betting on that is a bet you don't need to make - and almost always lose.

Poor lighting can kill a sale without the buyers ever realizing why. It's dark, it's cavelike, it feels old - they don't want it. Just leaving the drapes open makes a huge difference. Replacing the lighting - particularly if you use CFL so you don't have to necessarily have to rewire for a bigger load - can be very cost effective.

If you're going to remodel anyway, clean up your lines of sight and floor plan if you can. The longer the uninterrupted lines of sight, the bigger the property "feels". The less complex the floor plan, the more open and larger it will feel. If you have to go through three switchbacks to get through the kitchen, that's a bad thing. Separate but connected "areas" are better than room dividers which are in turn better than walls, at least in the public areas of your property. If you're remodeling anyway, fix it.

One of the overlooked and relatively cheap remodels is the closet. Basic closets from fifty years ago are tiny by modern standards. People today have more stuff, and they want places to put it. People who get very interested in modern new kitchens and beautiful new bathrooms can just as easily get turned off by small closets. If they see a standard post-war closet arrangement (a three foot space between walls of two bedrooms, with half going to one bedroom and half to the other), they'll quite likely think that isn't enough closet space. "Next property! These closets are too small." Put a modern closet design in, with shoe holders drawers and cabinets and half size hanging spaces that efficiently use the space, and for most people, that's a horse of a different color. Closets are a bigger concern with more people than most folks give credence to, and they're way cheaper than most other remodels.

In some cases, remodeling may not get your money back, but it may be the difference between selling quickly and not selling for months, if at all. It's very hard to track this sort of information, and harder still to assign a dollar value to it. Keep in mind that a $200,000 mortgage at 6% costs $1000 per month, and property taxes and homeowner's insurance add to that. Not to mention that the longer it's on the market, the more you have to mark the property down in order to sell. At these prices, four months make a difference of about $6000 in carrying costs alone, never mind what you have to mark the property down to interest people in it with over a hundred days on the market!

Remodeling isn't the license to print money it's been portrayed as - except for the remodeling industry. Small budgets are more likely to recover large fractions of what you spend than larger ones. Unless the property is significantly behind the times, remodel for your own enjoyment, because you won't get as much back as you spend.

Caveat Emptor

Original article here

A while ago, I wrote Top Ten Reasons Your Home Isn't Selling. It was well received so I thought I'd take it from the buyer's perspective. Once again, I'll try to inject as much humor as I can. And in case a few people don't realize it, the real purpose of this article is to help you look ahead before you make these mistakes.

Number 10: The Commute: It never ceases to amaze me the number of people who will commit themselves to living in a neighborhood they've never lived in before without a real evaluation of how to get from there to everywhere else they need to be. Don't just drive from the house to work once when there's no traffic. Try to drive back and forth at the times you'll be driving it every day. Or if you're a public transportation person, figure out what that's going to be like before you're stuck doing it. Take into consideration that the commute is going to get less enjoyable as time goes on. Be certain in your own mind that you're going to be okay doing this as often and as long as you have to. If the commute is intolerable, then as certain as gravity you're not going to be living there or not going to be working there. For genius IQ points (or at least subgenius), try the paths you're going to have to take to your other common destinations. Grocery stores, the mall, your Tuesday night class in whatever, the kids' scout meetings. If you have to travel or work in different locations, do those trips also. An good agent should ask about all this, and be aware of the effects. An Evil Agent, will, of course, induce you to buy property where you'll have to sell it - generating more commissions.

Number 9 Beautiful Surfaces: They've just put Travertine and Italian Marble all through the room you want for the nursery! Too bad about that six inch wide crack in the foundation they covered up! Still, it's obviously the house you've got to have! At least until the first time your toddler breaks multiple bones falling on those tiles. Unfortunately, by then it's too late. And just wait until the old cast iron plumbing fully closes up or springs a leak, but at least it puts out the fire caused by plugging too much into eighty year old wiring! Yes, beautiful surfaces are nice - and one of the best ways to get novice buyers to pay too much.

Number 8 Insufficient shopping: You looked at one house and fell in love. Unfortunately, it was the crummiest most overpriced house in the neighborhood. Other people trying to get out before the new needle exchange program opens down the street are going to be praising you for paying so much that their house will appraise for whatever value they need it to! If you don't look at ten to fifteen properties, you're definitely short of market information, even with the best agent in the world. I have seen people shop more for $20 toaster ovens than half-million dollar real estate. Scary.

Number 7: Skimping on Services: Trying to do without title insurance or inspection is a recipe for disaster. I've said this before, but title issues really do happen, and it's not always with the person who may appear to be the current owner. Ditto the inspection. I don't think I've ever had a property where the inspection didn't reveal anything I didn't know about the property. I've had the stuff the inspector found be trivial many times, but never non-existent. Here's one thing that seems to be a rule: if you're getting a good bargain, there will be something you want an inspector's opinion on before the sale is final. People understand cash, and many don't understand the concept of insurable risk. By the time you join the ranks of those folks out half a million dollars worth of property and still on the hook for the loan, you may have a different opinion.

Number 6: Location: Backing out of your driveway onto the high-speed expressway, your spouse's vehicle is flattened by the bus returning this week's escapees to the maximum security prison a quarter mile down the road - past the explosives factory, the toxic waste dump, and the chemical plant. She's taken to the emergency room at the hospital for the violently insane across the street, and neither you nor your lawyer ever do come up with conclusive proof of what happened after that when the airliner landed short of the runway. Seriously, there are many things that can rule out a location, from the above through several milder forms of ambient environmental issues, down to misplaced improvements. You might be able to move a building. Nobody has ever figured out how to move the land it came on.

Number 5 The Loan: The only way to qualify for the dollar amount you need is to take an unsustainable loan or a loan that is guaranteed to self-destruct. I'd like to be humorous here, but this is somewhat less funny than the most politically incorrect joke I've ever heard, let alone what I'm willing to print here. Betting on rising values and falling rates to enable you to refinance more favorably is literally putting your home and your future on a craps table. This leads into-

Number 4 Didn't Adhere To Budget, and not having a known budget in the first place is the ultimate case of this. I've written at least one two three articles directly upon the point of figuring how much you can afford. Figure out your budgetary limit first, and shop by purchase price, not payment. This isn't to say you have to spend the maximum, but the worst ways people shoot themselves in the head (not the foot) is by falling in love with the property that's too expensive for what they can really afford. In How to Effectively Shop for a Buyer's Agent, I tell you to immediately fire any agent who wants you to look at a property that cannot be obtained within the budget you tell them about. The asking price can be a little higher than your limit, with the understanding that if you can't get the price down that far via negotiation, you're not interested.

Number 3 Assuming Something That Isn't True: Josh Billings was correct. It's not what you don't know that gets you - it's what you know that ain't so. I've been the unwitting victim to this, and I've seen enough other transactions to have come to the conclusion that people who deal in real estate without an expert fall into two categories: Those who know they got taken, and those who don't realize it yet. There are so many tricks and traps that get played upon the unwary that there is literally no way to write about all of them because new ones are invented continuously. You have to be someone who deals with these issues every day to have a prayer of realizing the pitfalls of some of them. Consider that if some trick motivates a buyer to pay 10% extra for a $500,000 property, that's $50,000 extra in the seller's pocket and out of yours. I've learned to question everything, and to ask, "What are the possible explanations for this?" Unless you're an agent yourself, you probably wouldn't believe the grief this saves my clients.

Number 2 Failure to Plan: A good agent has contingency planning in effect for everything, and those plans don't include permanent vacations in countries without extradition. If you're seeing all this stuff for the first time, how likely is that to happen? Even the second or the third? The reason I do so well for my clients is that I've got a solid plan from the time they contact me for the first time, and I have plans to deal with everything I don't control. This includes everything from if they get their hearts set on exactly the wrong property to negotiations before and after the contract to what happens if the inspection reveals something major, and how to lay the groundwork in case stubborn negotiating partners don't see it may way, or the universe decides to jump in with an unpleasant surprise . If you don't have this sort of plan, may I suggest you hire someone who does. Because failure to have a plan in place will cost you large amounts of money.

Number 1 Not Having a Strong Buyer's Agent. This is the first thing you need to shop for, before you so much as look at online listings. Have at least one in place before you look at any property, even new development. You want one who's going to go digging for both good and bad. There is no such thing as a perfect property, because if everything else is perfect, the price certainly won't be, and if you're only willing to settle for the perfect deal, you're either wasting your time or asking someone to take advantage of your ignorance. If you use the seller's agent, they have a fiduciary duty to present that property in the most favorable light. Given the choice between an agent pretending problems don't exist until the small print disclosures and an agent who fails to do their legal and contractual duty, which would you choose? If you don't like this choice, then you want to apply the information in How to Effectively Shop for a Buyer's Agent. Having a good buyer's agent will make more difference than anything else in your real estate experience.

Caveat Emptor

Original article here