Dan Melson: June 2021 Archives

With many people pushing various "cash back to the buyer" schemes in real estate, a note of caution is needed. Actually, it's more like an entire symphony of caution. Because if there is a loan involved, you run the risk of committing fraud.

Some people reading this won't care. "What the lender doesn't know won't hurt them," is something I've heard and seen too many times to count. After all, that lender is just some nameless faceless megacorporation, not anybody they care about.

To those people, I say, "The FBI will make you care." Given the spate of abuses, and the current level of panic at many lenders and investment houses, even if your transaction comes off without a hitch and the lender gets repaid in full, you may find yourself on the business end of an investigation. The kinds of real estate and loan places that are willing to pull so-called "harmless" fraud are also willing to pull no holds barred fraud where the entire idea is to defraud the lenders - or you. Where you have the lenders losing money, and a pattern of abuses, you have potential for the FBI to become interested in all of a businesses transactions, and once the FBI starts looking, rebate fraud is so easy to spot that a seven year old could probably do it. They find a known shady brokerage or a lender branch where management doesn't care, and it becomes what military pilots call a "target rich environment." It's worth the resources to investigate all of that brokerage's or office's transactions.

Here's what happens. A wants some cash to fix the property up, and so arranges with B to jack the price enough higher so that B can rebate the difference to A. A then procures 100 percent financing on the increased price, B gets the increased price, and rebates it to A.

Alternatively, A writes an offer with a real estate licensee who rebates part of their commission, while providing lesser "services". Usually, the question I want to ask those rebaters I encounter is "Why do you make more than minimum wage?" The answer is because suckers who think in terms of cash in their pocket don't understand what they're getting into.

In either case, this cash back somehow doesn't get disclosed to the lender, and it needs to be. Because if the official purchase price is $X, but B is giving A back $Y under the table, the real purchase price is $X-Y. If the lender knows about the cash back, they will treat the purchase price as being $X-Y. At the very most, for 100% financing, they will only lend $X-Y. Since this defeats the purpose of the cash back, the sorts of people who do this predictably will not disclose it to their lenders.

This is fraud. Even so-called "harmless" fraud where the people fully intend to repay the entire loan (and eventually do) is still fraud. The lender doesn't have to lose a single penny in order for you to have committed fraud. The definition of fraud is "An act of deception carried out for the purpose of unfair, undeserved, and/or unlawful gain, esp. financial gain." The legal definition is a little more complex, "All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated," but is essentially similar. Had you told that lender about the cash back, they would have treated the purchase price as being less than the official price. Hence, fraud.

There are all manner of crooks out there encouraging people to do this (and other things). I've seen numerous advertisements for various "real estate investment systems", and people who represent themselves as real estate professionals and real estate investors and real estate authorities and even real estate licensees who urge people to commit federal felonies for various reasons on the surface that always reduce to "So the crook can make money." Whether it's through a commission they wouldn't have because the client can't be persuaded to do it the legal way, or money they intend to make selling their "Foolproof System!" to thousands of pure deluded fools, they do a lot of damage. Nor does it get you off the hook if you were following the advice of alleged professionals, as lots of people in federal prison can testify. Even if you didn't know it was illegal, even if people you had reason to trust told you it was legal, you are still responsible.

The rebate itself is not illegal, according to my best understanding. Once again, I'm not a lawyer and I don't even play one on TV, so check that out thoroughly, but it is my best understanding. The illegality happens when you deceive the lender, either by omitting information a reasonable person would agree is relevant, or by actively saying something that isn't true.

It's more than possible to get cash back and be compliant with the law - it just defeats the purposes most people have in mind with cash back, which is to make the lender think they paid more for the property than they really did, and so lend a greater amount of money or on more favorable terms, or both, than the lender otherwise would have, had they known about the cash back. In other words, FRAUD

If you inform the lender, they will treat the purchase price as being the official price less the rebate. So if the official price is $400,000, but you're getting $20,000 back, the price the lender will lend based upon will be $380,000, and it doesn't matter if the appraiser says it's worth $400,000, or $400 million. $380,000 will be 100% financing, not $400,000, $360,000 will be 95% financing not 90%, and I'm certain you can figure the rest. Lenders evaluate property based upon the LCM principle, which is Lesser of cost or market. You only paid $380,000 in real terms, which makes it a $380,000 property at most. It doesn't matter whether this rebate is direct from the seller, or some third party. They look at it in terms of "How much of your hard earned money are you actually going to part with?" If some cash is coming back to you, you aren't really parting with whatever number is on the purchase contract, are you?

Where most lenders will cut a certain amount of slack is in closing costs. If the money is not actually coming back into the buyer's pocket, but instead being used to pay for costs of the purchase transaction or costs of the loan, most lenders will give that their reluctant blessing. Because all parts of the transaction are subject to negotiation as to who gets what and who pays what, the lender will usually understand that in order to get that price, the seller agreed to pay this cost or that cost. I don't expect this to last forever because I can point to a lot of abuses that are happening, but it happens to be the case right now. I believe that sooner or later, lenders will clamp down on this practice and refuse to allow it, but for right now, most of them are still willing to do so.

Even the most forgiving of lenders, however, draws a bright and hard line if any of that cash finds its way back into the buyer's pocket. So make certain it doesn't, or that the lender knows about it. And make certain that the lender has been notified in writing of every penny that's paid on the buyer's behalf by anyone else for closing costs. Because you don't have to be directly involved in a conspiracy to get drawn into a fraud investigation, and once it gets started, you can never be certain you won't be sitting in a courtroom somewhere, charged with fraud and conspiracy and anything else they can think of to throw at you. Even assuming you win, it's going to be a big hit to your wallet and a bigger one to your reputation. Not to mention the little detail of some portion of your life spent wearing "special" clothing as a "guest" at Club Fed.

Caveat Emptor

Original article here

I have questions to ask you about the loan for house. I have been work with one broker since DELETED and I just tell her on the phone that I chose her and that she can start to do the escrow but I didn't sign any application and papers for her. Two weeks later, the appraisal had been done. Can I stop to work with her because she promised me to look for lower rate later, but she didn't do anything about it. If I stop to work with her, do I have to pay any fees for the appraisal and bank approval for the loan and how much it may costs? (she had only done the bank approval and ordered the appraisal). Thank you very much for helping me.

This is pretty open and shut. Usually it's less clear. You haven't signed anything committing you to the loan. She probably has civil recourse on the appraisal - if she wants to spend thousands in lawyer fees to recover a few hundred. Since that's silly, I don't think it's likely she'll pursue it. Her case hinges on her having ordered it because of your verbal representation you wanted the loan. One more thing in your favor is that the date on the Good Faith Estimate and California MLDS needs to be within three days of the date she ran your credit report, not to mention the Truth In Lending Advisory and everything else. Not likely, if you haven't signed anything.

Most loan providers, ethical or otherwise, won't start work without a loan application package. Ethical ones because they've got legal obligations to meet, less ethical ones because there will be an origination agreement in there obligating you to pay their expenses if you don't go through with it.

If you have signed such an agreement, there's probably something in there obligating the loser to pay the prevailing party's legal fees. Since you're likely to lose if they push their case, this shifts the presumption as to what you want to do, which is pay the appraiser. You can fight it in court if you want to, but you're likely to end up paying for both sides legal expenses in addition to the appraisal bill. Since the chances of you winning in court are pretty minuscule, you would be well advised to just pay the appraiser.

I've said it before, but it's likely that lenders who promise to pay for an appraisal are going to more than recover those costs elsewhere in the loan. Suppose you've got a $300,000 loan. If all you see is the fact that you're not writing a check for $400, that loan provider can, by being willing to loan you the $400, trivially make two extra points on the loan, or $6000. Just because you're not writing that check directly doesn't mean you're not paying every penny of it via higher rates, or higher origination. Furthermore, they're not likely to pay for the appraisal without an origination agreement that obligates you to make good their expenses.

The true low cost mortgage providers won't pay for the appraisal. If you've got a low cost provider, they're either going to have to absorb the costs of the appraisals that don't pan out, or they're going to have to charge their clients whose loans fund for the ones who don't. In either case, this means a higher loan margin. Usually, there's a good margin there on top of the appraisal. I can point to providers who use the fact that they pay for the appraisal as a wedge to extract thousands of dollars in junk fees as well. Most of the people for whom that is a selling point only understand money when they write a check or fork over cash. They don't understand about how money they roll into their loan balance is every bit as real.

If you do decide you don't want a loan, the appraisal is the vast majority of the money you should be out, because that and the credit report (somewhere between $13 for a single person and about $40 for a married couple) are the only third party expenses. This doesn't mean that the less ethical won't try and soak you for other fees, because they will, and junk on top of those fees. Depending upon the origination agreement you sign, you could be on the hook for thousands of dollars - more than a low cost provider would make if they actually fund the loan.

I need to say this again, also: Just because you paid for the appraisal, and are therefore entitled to a copy, does not mean you are entitled to take it to another loan provider. The appraisal must be in the name of the correct loan provider, and if the prior loan provider does not release it, the appraiser will not re-type it. Even before new appraisal rules rendered it pointless, the games that were played by loan providers who refuse to release appraisals are legion. Most will want money to release it, money such that you may be better off getting another appraisal. Even the most ethical will not likely release the appraisal just because you find a better deal - or think that you have. They've spent anywhere from hours to days of time - time they have to pay for, even if they can't show a receipt - on your loan. Expecting a loan provider to release the appraisal without money is like expecting your mechanic to release your car without being paid. Therefore, you want to be the one that controls the appraisal, if you possibly can (Thanks to the rules within Home Valuation Code of Conduct, this is forbidden). Some appraisers don't like this, because it's in their interests for you to pay for more appraisals, but the law in most states isn't nearly so hard nosed as most appraisers would like you to believe.

One final thing: When I originally wrote this, rates had risen quite a bit in the last few weeks. I had a purchase client whose transaction hit a snag in a property defect that had to be corrected before any loan could be funded, and it was much more cost effective for them to pay for rate lock extensions than it was to re-float the rate. A tenth of a point per five calendar days is a lot less than the almost half of a percent re-submitting the loan to a new lender would make in the rate. In such circumstances, any reasonable loan that's been locked for a couple weeks is likely to be better than anything available today. I can look for a lower rate all I want. It's not likely to be found, unless their current provider is pretty high margin.

Caveat Emptor

Original article here

The answer is yes. Mind you, the only generally available 100% financing left is the VA loan, but few sellers are going to be willing to consider any offer that doesn't have a significant deposit.

Consider the situation from the seller's point of view, and the answer becomes obvious. Here is someone who is proposing to not put any of their own money into the deal. What's their motivation to consummate the deal? Not much, when you come right down to it.

No listing agent in their right mind is ever going to counsel their clients to accept a "zero deposit" offer. It costs money to give this person the only shot at a property for two months or more. (Nobody sane who needs a loan is going to want an escrow period less than 60 days - the time required to fund a loan has more than doubled because of Dodd-Frank). At an absolute minimum, that seller is risking the money to pay their mortgage, taxes, and insurance for thirty days. On a $400,000 property, that's well over $3000, and the amount at risk for the seller is more likely to be twice that. This is money that is gone and they are not going to get back, all based upon the buyer's representation that they want the property. If the buyer isn't putting any cash at risk, there's no disincentive for them in trying to try for a property there's no way they'll qualify for. Meanwhile, the seller is out money on a daily basis from the time they agree to lock the property up in escrow.

Some of you are no doubt asking about pre-qualification or even pre-approval. The problem is that whatever the loan officer said, there's no real way to back it up. It is illegal to require that prospective buyers be pre-qualified or pre-approved with a given lender or loan officer - a strong case can be made that just the simple request is a RESPA violation. I have said repeatedly that the only pre-qualification or pre-approval that I trust is one that I did - but I can't require prospective buyers to do that, and any decent agent is going to learn to ignore the request.

The only thing that means anything to that seller in the way of a guarantee for buyer performance is cash - a cash deposit from the buyer that is at risk if they can not or do not consummate the deal in a timely fashion. This is even more the case than usual if the buyer isn't putting any of their own hard earned money into the deal itself. If a buyer is willing to put 5%, 10% or more into the deal, they ought to understand the effort that that money represents, whether it's through saving it or just through having it not earn 10 percent per year of thereabouts in the stock market. If you're putting up cash you've spent years saving, you understand what that money represents. If you haven't made the sacrifices to save such a down payment and you want to just waltz into a property without putting down a deposit, well, odds are that you've got a rude awakening coming. Because over forty percent of all purchase escrows end up falling apart. So if I'm acting on behalf of a seller, one of the first questions I'm going to ask is "What evidence is there that this person can consummate the sale in a timely fashion, and what are they putting up that they're willing to lose if they change their mind or can't qualify?"

Pretty much every agent who's ever had a listing has had offers come in that were rejected on the basis of "not enough deposit," or that were acceptable in every particular but that. The intelligent thing is counter for a higher deposit or fewer contingencies on it.

Some folks are going to ask about substituting a higher purchase price. The issue that you're going to run straight into is the appraisal. In most cases, offers that include 100% financing are a little inflated anyway. When you add still more money to that, a sufficiently high appraisal becomes difficult. Even if the appraisal comes in high enough, though, we come full circle to the obvious question, "What good is that higher purchase price if you never get it?" If the buyer can't qualify or changes their mind, you don't get that price, and since there is not much penalty for such an outcome, there is no reason for them not to tie the property up in escrow, where nobody else can buy it, either.

For these reasons and many others, nobody sane is going to accept an offer that doesn't include a deposit. Don't waste your time making one.

Caveat Emptor (and Vendor)

Original article here

Every once in a while I get someone who is unhappy with required paperwork for privacy reasons. There are three forms that are the driving force behind this.

The first is the standard form for a mortgage loan application, known in the business as the 1003. Admittedly, the form does ask for rather a lot of information. It's comprehensive, and intended to paint your complete financial picture, so lenders can make a decision on whether or not to grant the loan. It also asks for irrelevant items like ethnicity so that the government can track whether the lender is discriminating (and they are dead serious about requiring ethnicity. If you decline to state, whoever takes the application has to make a guess). This also means it asks for a lot of information that a lot of people would, justifiably, rather not give out. Plus it's a pain to fill out. So some people don't want to, and quite frankly, I understand where they are coming from. Unfortunately, this is a government mandated form, designed to collect not only the necessary financial position data but also additional government mandated information. If you want a real estate loan, filling one out is is a legal requirement. There are only two ways to avoid filling out this form completely and accurately. In order to avoid filling it out completely and accurately, you must either 1) Lie or 2) Buy the property without a loan from any regulated entity. Lying is not recommended. It is a very bad idea. Lying on a 1003 is perjury, and there's likely to be a charge of fraud added into it. You are told point blank on the form that the information required to make a decision on your request for a loan. Misrepresenting your financial position in order to induce someone to lend you money is pretty much textbook fraud. Or you could do without a loan - buy the property for cash, by trade, for services rendered, etcetera. There really are all sorts of possibilities, but even if you put all of them together I don't think they amount to one percent of all transactions. Finally, you could get a loan from an unregulated entity. Basically, this means individuals. Borrow the money from Mom, from the mafia, or from a hard money lender. Unfortunately, even if Mom has the money, she may not lend it to you. And the latter two possibilities charge a lot more interest than the regulated banks, as well as other potential problems.

The second form that often become the issue is form 4506. This is the one that says your lender has a right to look at your tax returns (or a transcript with Form 4506-T). When "stated Income" loans still existed, many people thought that this meant the lender was violating the terms of a so-called "Stated Income" loan whereby they say what their income is, and the bank agrees not to verify the amount, but only the fact of the source of income. Well, the lender always has the right to insist on tax forms for documentation of income, and sometimes they do. But this is a method used to spot fraud after the fact. They don't often use this form to verify income, and it isn't to your advantage to force them to use it. As the form states, the IRS typically takes 60 days to respond to this request. You and everyone else concerned want the loan done before that. If the lender wants your information, they're going to require it whether you've signed this form or not. In either case, if they want the information, it's better for you to furnish it directly and immediately.

If you refuse to sign the form, they are well within their rights to deny the loan. So they are going to require you to sign the form as a condition of getting the loan. I can commiserate with you all you want, but it won't make any difference. Options to get around this are basically the same as for the Loan Application: Friends, family, or Lenny the Loan Shark. One of the 4506 forms is almost a universal requirement for lenders, especially in the aftermath of the Era of Make Believe Loans.

The final form that causes resistance is the Statement of Information. Like the Loan Application, this form has a lot of detailed information, and sometimes people don't remember all of it. This form has nonetheless become a routine requirement, but of title companies, not of lenders. The reason for this is fairly easy. Let's say your name is John Smith. Let's say you live in Los Angeles County. There are going to be a large number of documents in the public database in which John Smith or some close variant (e.g Jack Schmidt, Eoin Smythe, or Jon Smitt, among others). Any one of these could have an effect upon the policy of title insurance. Some of them, like a child welfare lien, never go away. Back when I worked for title companies, I could tell you about having to go back forty years, and in some cases further, looking for documents which might pertain to the person in the transaction. In populous counties, the list of documents alone can go to a hundred pages of single spaced stuff, and the title company has to be certain that 1) it isn't you, or 2) it doesn't effect the transaction for some reason, before they agree to issue the policy of title insurance. Guess what? The reason the document list is so long is because of the commonality of the name, so the long lists come up a lot more often than the short ones. Even if your name is something truly unusual (mine is uncommon), they've got to check out all close variants, anglicizations, and whatnot. So to toss out as many documents as they can, as quickly as they can, the title company requires a Statement of Information. Without that, it can be prohibitive to even run through the preliminary check. These people they are paying to do these searches rapidly become skilled and fairly high paid employees, even if they start out cheap. So the title companies want you to fill out the Statement of Information. It's one of those forms you don't want to lie on or conceal information on as well.

Don't want to do it? The title company will tell you they don't want your business. No policy of title insurance, either owners or lenders. That's your choice if you don't need a loan on the property and you're willing to take the seller's word that they really do own it and that there are no title issues. I wouldn't be. I've dealt with too many properties where there were known title issues. Nor are lenders nearly so glib about it. In order to get the loan, they require a lender's policy of title insurance, and whether it's a purchase or a refinance, you need a lender's policy of title insurance. If you're dealing with Lenny the Loan Shark, he doesn't care that you've lost the property to the forgotten first wife (via a three day marriage) of Mr. Jones, three owners before you, whose brother apparently inherited and sold the property in thirty years ago, but then the former Mrs. Jones just found out about it and sued for possession. If she (or her heirs) can prove her claim, she's going to be awarded the property. So you want title insurance.

Now, there are some protections you have under law. In California, I cannot use information obtained by real estate loan applications to sell your information to third parties. It's illegal, even if I wanted to, which I don't. Once the loan is closed, however, the lender can share your information with sister companies. Heck, I've had lenders I was placing a loan with take the information I've gathered and call the client to offer them a direct deal. Cancel the transaction with me, they say, and they'll give the client what they think is likely to be a better deal. Pretty sweet, huh? Steal my payment for the client I spent my time, money, and effort to find, and then brought to them. Unfortunately for these lowlifes, I do loans cheaper than they usually expect, and instead of canceling, the client reports it to me. Needless to say, these lenders don't get any more business from me. Title and escrow companies can similarly share information for marketing purposes. I always tell people who are concerned to write that they opt out of all marketing on the first form the title or escrow company wants them to sign or fill out. That puts the onus on them not to share your information.

Caveat Emptor

Original here

On a regular basis, I see advertisements for real estate offices that say "discount broker - full service".

This is nonsense. Actually, it is a calculated lie.

A discount broker has consciously chosen a business model whose economics do not permit them to give the same service provided by a full service provider. Here's the rundown.

A discount broker's listing agreement typically calls for them to receive 1 percent of the sales price, and the "selling broker" to receive the area standard, whether it's 2.5 or 3 percent (perhaps higher in some areas). Some few will reduce the selling broker's commission if they end up engaging in Dual Agency, but in most cases, they're after representing the buyers as well, which is bad from your point of view. Assuming your sale price is $400,000, you're paying them $4000 to represent you, and $10,000 of your money will go to representing the buyer. Which do you think has a greater call on their loyalty?

A Full Service broker's listing agreement typically calls for both sides to get the same 2.5 to 3 percent.

So a discount broker is saving you 1.5 to 2 percent of the cost of selling your home, if it sells. However, the majority of the ones I'm familiar with also want to be paid in cash up front, as opposed to making it contingent upon the successful sale of the property.

Let's ask: what does a selling broker or agent do?

They put your property on MLS and put a sign in the yard, of course. And when there is an offer, they serve as "go between" on the negotiations.

This is all a discount broker can afford to do. They have expenses of being in business. Rent, machinery, assistant's salary, etcetera. It's not like they get to freely spend every dollar they are paid, and you're not paying them enough that they can do more. Furthermore, their business model requires them to sell more properties than a full service broker, just to stay in service. The difference in their compensation between a $450,000 sale and a $470,000 sale is only $200. Which would you rather have - the high likelihood of a $4500 paycheck in a couple weeks, or the hope of a $4700 paycheck eventually? They're human too. They are much more likely to advise you to take the sale in the hand now even when you would likely do better to wait. Even though it would make a difference of nearly $20,000 to you (and that may double the money you actually get from the sale in many cases, while making the difference between walking away with money and a short sale in others), it's not important to them. Full service brokers are hardly perfect either, but they tend to be at least somewhat stronger negotiators on your behalf. At least the $20,000 difference it makes to you means $500 or $600 to them.

A Full Service broker can afford not only the Multiple Listing Service and the sign in the yard, but also ads in the papers and other places that people actually see. MLS is the single best way to sell a house, but hardly the only one. Signs in the yard help me find clients and keep my fellow agents from bugging you for the listing, but rarely actually sell that house. Ads in the correct papers at the correct time are the second best way to sell the property, and full service brokers can not only afford them, but they are motivated to do them by the "carrot" of the doubled commission if they also find the buyer. Open houses also help significantly, and full service brokers and their agents have a business model which makes holding frequent open houses worthwhile and advertising them correctly a paying proposition. Furthermore, you're likely to see better offers off of these sale sources. MLS offers are more likely to be people looking to buy on the cheap, whereas advertisements and open houses target people who want to live in your neighborhood. Once you have an offer, full service types tend to be tougher negotiators. Finally, once you accept an offer, the prospect of getting a larger paycheck motivates them to work harder getting the sale consummated, including being at the property for inspectors so that you don't have to. Some discount houses do a decent job of this last, but full service do better.

Which of these alternatives is better? Well that depends upon the state of the market and your situation. In a white hot market where everything that gets listed gets four offers within three days and bidding wars break out between prospective buyers, a discount broker or agent is likely to be the way to go, especially if you mostly care about getting it sold, as opposed to getting the highest possible price. If, on the other hand, the market is a much cooler one like most of the country nowadays, and it takes considerable effort to bring in any offer, or if your property has issues that make it undesirable (less 'curb appeal' than average), you're likely to want a full service broker or agent. Furthermore, if you want to get the best possible price, you want an agent who can and will devote the necessary time to your property.

Your situation also plays a part. If you don't care if the property sells tomorrow, next year, or at all, a discount broker is likely to meet your needs. After all, if you don't get a good offer, you'll just keep the property. On the other hand, if you need the property to sell fast, or if you need the offer to meet certain criteria, and most especially if it would be difficult for you to accommodate inspections yourself (for example, if you're now hundreds of miles away), a full service broker or agent is likely to be the choice for you.

I have seen many sales where paying a full service commission would have caused the seller to end up with more money in their pocket, and I see more every week. They are far more the rule than the exception. Saving that two percent on agent compensation usually means you didn't get 10% or more you could have had on sales price. Or it means the property didn't sell at all, versus selling for a good price. My article Production Metrics versus Consumer Metrics illustrates yet another aspect of this dilemma.

Discount Real Estate Brokers should also not be confused with Discount Mortgage Brokers. The "discount" part of a real estate broker's name usually refers only to listing agreements - people who want to sell a property. For customers who approach them as property buyers, these places usually receive the same full commission that anyone else does. There are exceptions where they rebate part or all of their commission for buyers, which should be disclosed and committed to in writing. But typically if you use them to buy, if it's 3% for the full service folks, it'll be 3% for them (and if you're listing with them in a Dual Agency situation, the difference gets rebated to the buyer, not to you). Furthermore, I have directly encountered several of them who benefit from the presumption that any loans they provide will be as low cost as their real estate services, and this is far from the case. I've had direct dealings with very well known discount real estate brokerages, and their margin on the loan they got their borrower was much higher than mine - from triple to more than four times what mine would have been. My responsibility was to my clients, so I kept my mouth shut and got my clients their money for the sale of the property. But inwardly I was definitely wincing.

Caveat Emptor

Original here

Well, sometimes. Okay, most of the time. But not always.

Foreclosures: Bargain hunters beware!

Myth no. 1: A big spike in foreclosures is right around the corner...
...That's because in most of the country, anyone who has owned a home for even a year or two is likely sitting on enough equity to sell or refinance if the loan payments become unaffordable.

Used to be true. Not so much any more. When prices are going up 20% per year, this is true. When prices have slid, anybody who bought for peak or near peak prices is in trouble, not to mention the folks in negative amortization loans that got into a situation where they can't afford the real payment, and now they owe thousands of dollars more than they paid. Nonetheless (as the article mentions) the banks want the loan repaid. They don't want to own the house. A "hard money" lender will foreclose fast and hard, but a regulated lender wants the loan repaid, and they'll pretty much take a loss anytime they foreclose, and it's always bad business, because it's always someone who won't use that bank, and who tells all their friends and family. The bank isn't going to have a representative there to tell their side of the story, so no matter how justified they were in foreclosing, it's bad for business. They will put it off as long as they possibly can.

It can take a couple of years after payments start being a problem before the lender decides to cut their losses and foreclose. Sometimes the individuals concerned go to heroic lengths to stay out of foreclosure, drawing out all their savings, even their retirements to meet the payment. They are usually ill-advised to do so; nonetheless I understand the emotional attachment that occurs. The peak for foreclosure is usually somewhere around the fourth year of the loan. Foreclosures have been falling for years in my local area, as the option ARMs really became popular in 2004 and the trouble really got bad in 2007 have been mostly dealt with.

Myth no. 2: Foreclosed houses sell for far less than their market value.

In a study of foreclosure sale prices in more than 600 counties nationwide in 2005, Christopher Cagan of data provider First American Real Estate Solutions found that, on average, foreclosed properties sold for about 15 percent less than comparable homes in the area that were not distressed. But in states where real estate prices have risen the most, including Arizona, California and Virginia, foreclosed properties sold for within 5 percent of full market value.

This is true. Furthermore, many foreclosure homes have maintenance and repair issues. If I can save myself several tens of thousand dollars of equity by fixing the property up a little bit and cutting the price a little in order to sell it before foreclosure, I'll do it. On the other hand, if I bought it for $500,000 with a 5% down payment on a negative amortization loan, and now it's only worth $420,000, my investment is long gone, and any work I do and any money I spend is helping nobody but the bank. Some people may even strip the copper out of the walls for scrap (I've seen what a few such people have left behind). Some people may even take a sledgehammer and break things in one last act of spite.

In highly appreciated areas, the auction is usually the worst time to buy. Get them from the owners before the lenders pile on all the default and foreclosure fees, while there is still something to save for the owner, equity-wise. Get them from the lenders as REOs after they fail to sell at auction. Depending upon who forecloses, that can wipe out entire trust deeds. For instance, if there's a first and a second on the property, and the first forecloses, that second is gone. Dust. History. Worthless paper with unimportant markings, basically good for fire starter. If it originally sold for $500,000, and there's a $400,000 first and a $75,000 second, but the property is only worth $420,000 now, that second holder is crazy if they show up to the auction to defend it, especially since the holder of the first has added thousands of dollars in fees, every penny of which gets paid before the second gets a penny. The second is unlikely to get a penny, and bidding on it is throwing good money after bad. It's a waste of an employee's time, if nothing else. For buyers at auction, there's a key phrase to remember: cash or the equivalent. You don't win the auction and then arrange financing; you have to have that first. This doesn't apply to sales before and after the auction. Nor does California's ninety percent rule.

You are not (if you're smart) buying at auction sight unseen. You can usually make an appointment to see the property in the days before the auction. You should also look at other properties in the area. Know the market before you bid. Know what you intend to do with the property, know how much it's going to cost. Depending upon the law where you are, there may be a building inspection required, or perhaps you can take an inspector with you. This costs money, so you may want to preview once before you haul the inspector out there. Do your homework before you toss your money into the ring. That's what the people who make money at foreclosure auctions do. It's a full time job if you want to do well, and if you're not doing it all the time, a good agent is a lifesaver. Every situation is different, and it takes a certain amount of experience to know the best way to approach buying a given distressed property. You're competing with people who do this full time for a living. Ask yourself questions like "Why should I be willing to pay more for this property than Joe, who's been doing this for twenty years?" Auctions get crazy and emotional. If you have someone there to help take the emotion out of it, you are less likely to waste large sums of money. If you have someone there to help point out the pitfalls, you've probably just saved yourself every penny of their commission and thousands of dollars more besides. So long as they do what they say they will, of course.

No matter what else is true, there is always an element of risk in buying a foreclosure, more so than most other homes. The owner (the lender) has never lived in the property and is exempted from most disclosure requirements. Often, they honestly don't know about problems that exist. This doesn't mean they don't have to tell you about problems they know about, but having never lived in the property or dealt with its maintenance issues, they just have no reason to know about many problems that really do crop up. Furthermore, the lender addendums that lenders will require to be signed make buyer due diligence difficult, and lenders will not fix anything they don't have to. It can be a real struggle forcing them to make repairs to safety and habitability issues, as they are required to do in California. It is also my experience that the agents that work for lenders aren't at all hesitant to defraud buyer's lenders in concealing property defects that are loan killers - a buyer's lender who may be another branch of the lender that owns the property.

Buying foreclosures is not generally for people who want to just move their furniture into a property. Buying foreclosures can be rewarding, but you need to have a certain amount of financial resources to be able to withstand the consequences of the risk if it goes bad.

Caveat Emptor

Original article here

On a fairly regular basis I get email asking what I think of this or that loan calculator on the web, this or that predictive model for real estate prices or loan rates, etcetera.

Loan calculators are pretty simple when you get right down to it. Numbers go in, other numbers come out. It's just math - except that you've got to be careful about the numbers going in. Just because your balance is $400,000 now does not mean it'll be $400,000 after the refinance. It's very possible to do a zero cost refinance that adds nothing to your loan, but most people don't do it. Furthermore, I know I've said this before, but the only calculator out there that I trust is one that I know the provenance of. I've caught more than one company that had programmed its calculator to low-ball the payment. There's no way to tell for certain except using your own calculator, and if you have your own financial calculator, why are you using the web? You can cross check, however, because it's rare that two calculators will be mis-programmed to yield the same wrong answer. Also remember to add in closing costs and prepaid interest and escrow accounts, if you're going to have one, and always figure the cost of any points after everything else is added in there, because that's what the bank is going to do. Finally, don't take it for more than it's worth. Just because they tell you, "nothing out of your pocket," does not mean there are no closing costs. They exist. Somebody is paying them, somehow. Unless you know for a fact otherwise because you've discussed it and know where the money is coming from, I'm certain that "somebody" is you, and they're getting rolled into the balance of the new loan. I've had people bring me paperwork from other companies showing new loan balances thirty thousand dollars higher than they were expecting, with correspondingly higher payments. (I've also told people to never shop for a loan based upon payment more than a few times, also)

For spreadsheets, what you can get is usually an analysis of one variable per spreadsheet. I've programmed a loan comparison spreadsheet, but it only compares two alternatives at a time and it's not really suitable for use with the public, because you have to understand the limitations and GIGO factor. Just like I've got spreadsheets that answer the "rent or buy" question, among others, but you have to understand the limitations on the results imposed by your model.

As a computer programmer, I make a pretty decent loan officer. In order to compare financial information via spreadsheets, you have to understand what points of comparison the calculations are meant to compare. If your data is out of whack, if your assumptions are away from reality, or if you're trying to apply the comparison outside its design limits, what you get is useless.

I have several spreadsheets I have programmed and use. All of them have limits that need to be understood in order to get useful information out of them.

The first is a rent versus buy spreadsheet, that I first talked about in Should I Buy A Home? Part 3: Consequences. In that article, I spent a good paragraph telling you what my assumptions were in cranking the numbers. I think they are good and reasonable assumptions for the markets I have seen in my area in my lifetime, but many people might not. I just had someone make a comment to the effect that "rent doesn't increase with inflation." Well, it hadn't been keeping pace with the cost of buying the last few years when he said it, but that's not the case now. Even then, that wasn't the same thing as not increasing roughly with inflation. Furthermore, we've gone through a period when landlords were keeping rental rates low in the attempt to have someone else pay most of the mortgage of their investment property. Judging by the "loaf of bread" or hourly wage comparisons, or anything else except the price to buy, local rents have increased by a factor very close to general inflation over my adult lifetime. Whatever you think of my numbers, though, the fact remains that they are assumptions, and if they do not correspond to future numbers, the conclusions they reach have no bearing on the real world.

The second limitation upon this sheet is that it's assuming smooth increases. This is not what happens, as anyone over the age of ten ought to know. Over longer periods of time, the data may tend towards an aggregate average, but that says nothing about any given year. In reality, some years are plus thirty percent while other years are minus twenty. Even if my assumptions for averages are good, the spreadsheet that predicts the next thirty years is useful mainly to predict overall level of the market many years out. The numbers for any particular year are so much garbage, as far as the real world goes, where a 5% differential between estimate and actual is often enough to render something worse than useless. Even if my assumptions for average return are right on the money (and if I didn't think they were pretty close, I'd use others), any particular year could be at the top of a peak or the bottom of a market trough. If you know what state the market will be in in a particular year three decades out, why the heck aren't you richer than the ten richest billionaires in the world combined? Knowing what the market was going to do these past few years is a lot easier than knowing what it'll be like thirty years from now! I have what I think are good predictions based upon good models, but I don't have any god-level knowledge of where any part of the economy will be thirty years from now, and neither does anyone else. We see the future dimly, reflected through the present and the past.

Speaking of which, let's drag one of the standard disclaimers out and air the dirty laundry. "Past performance is not indicative of future results." Averages of past results may be the only way we have of predicting the future, but those results depend upon unknowable factors. Somebody could invent something tomorrow that utterly changes the face of housing thirty years out. You think the urban planners of the 1920s foresaw urban sprawl? I know for a fact that they didn't. What no model of the future can predict is unforeseen factors. I can't tell you what they will be or what effects they will have, but I can promise you there will be some. In 1894, Michaelson (who first measured the speed of light) said, "Our future discoveries must be looked for in the sixth decimal place." This just a few years after the formulation of Maxwell's equations, and within a year Rutherford had changed the atomic model forever, while the basis of quantum mechanics was being laid, and less than ten years later were Einstein and relativity. Michaelson was right in a technical sense that precise measurements were the key to unlocking future discoveries, but wrong in the sense he meant it, that all the major discoveries had already been made. My predictive model is more detailed than most, and I do my best to include all of the factors I see, but I have no way of including factors that I can't see, and one thing I can promise you is that there are some. It may work out that I guess right anyway, but that doesn't mean there weren't any unforeseen factors, just that I got lucky despite them. The further out the model goes, the more it is dependent upon subsequent events no one can predict. Someone could announce man-portable fusion power tomorrow, or "Star Trek" transporters, or any of dozens of new potential technologies that could alter the world, and that's just the technological possibilities. Politics and demographics will utterly change in the next thirty years (When I graduated high school, more people were predicting the world conquest of communism than the collapse of the communist system. Mr. Carter's presidency was not the United States' shining hour).

Just because we know that the precise numbers are wrong, however, doesn't mean that those numbers have no value in predicting the future. The way the numbers will move relative to each other is much more important information. Population is increasing and will continue to increase. Demand in major urban areas and desirable areas will continue to rise faster than supply, and since such areas are where most of us live or want to live, the price of real estate will quite likely continue to increase faster than inflation. Particularly types of housing which are universally desired, such as detached single family residences sitting on a certain amount of land owned basically fee simple. PUDs and townhomes are less desirable for most folks, true condominiums less desirable yet, and below that are apartments. Offer most people the chance to move up on the ladder of desirability, and they'll take it. Since the only thing preventing most people from doing so is price, price is what's going to make it ever harder to make that transition to more desirable housing. Living space in a desirable location is a scarce good. Living space, desirable location or not, is a limited good. The only way to change this is to somehow manufacture more space or arrange to have fewer people to share it. I'm not aware of any plans to manufacture enough space to make a difference to the billions of people on earth, so I'm guessing that barring worldwide nuclear or biological warfare, population density is going to increase, demand for housing is going to increase, and supply is going to stay pretty much right where it is. Nonetheless, this is only a guess. My guess is that housing will be about four to five times as expensive as it is today thirty years out. If it's only twice as expensive as today, we'll all still live in million dollar houses. If it's eight times, we'll be in four million dollar houses. The wider the net, the more probability I have of being right - and the less useful the information is. Unless the price right now is something like two cents, nobody sane is going to invest money for that long without a better idea of what the payoff will be.

Whether I'm right or not is something nobody knows right now, or even how close. Actually, not being quite that much of an egotist, the question in my mind is more akin to "how far off will I be?" But the data is still useful, because it tells me that as long as my assumptions are anything like real, we're all looking at living in million dollar real estate - the only question is exactly when. It tells me what people will be need to be able to pay every month, at least in a general sense, and it tells me that more and more people are going to get priced out of real estate, or down into less desirable housing, and that real estate is therefore going to be a quite satisfactory vehicle for creating personal wealth.

Each of the changes has consequences, assuming it does indeed happen. If it's difficult saving the money for the down payment when homes are $300,000, how difficult is it going to be when they're $1,000,000? At a guess, three times as hard. Fewer people will be able to do it, proportional to the numbers today.

On the other hand, no system of projecting the future is better than the limitations imposed upon it by limited foresight. If the population of the United States drops to 1789 levels all of a sudden - or 1607 levels - all bets are off. Of course if that happens, most of us won't be here to worry about it, and the ones that are will have bigger problems than the price of real estate. It's pointless to waste time worrying about the price of real estate in such possible circumstances, where the price of real estate would be the least of our worries.

Caveat Emptor

Original article here

You might get what you pay for. You don't get what you don't pay for, despite the fact that the local dog target loves giving discounters free puffery.

I'm not against discounters. I'm very happy to do a discounters work for a discounter's price. Fifty percent of the pay for less than ten percent of the work and almost none of the liability is a real win as far as I'm concerned. The difference is that I'm not willing to pretend that you're getting the same value from me. In fact, the amount of value the buyer receives from their alleged "agent" is pretty much negligible, and it would be a lie to pretend otherwise.

Let's illustrate with a recent example. Some full service clients of mine had gotten interested in a property. They wanted a fixer property with potential and a view, and they asked me to check this one out. Yes, it had a view, but the view was of a high school stadium, making peaceful enjoyment of the property rather hit and miss, subject to the local sports schedule. It had some potential, true, but every surface in every room needed to be redone. It is going to take $100,000 to get that potential, and the property would only be worth maybe $40,000 more than the owners are asking. Leave out those pesky numbers and a less capable agent can make it seem like a great bargain. If all you're thinking of is a potential $5000 rebate check from the buyer's agent, which can be fraud for reasons similar to these, you may think you got a deal from a discounter. Lots of people never do figure out how much that rebate check actually cost.

If they had been clients of a discounter, they would have been in escrow on the first property. Too bad about that $100,000 they'd have to spend to get $40,000 benefit. On the other hand, I found the same people a property not far away that needed about $40,000 worth of work to be worth $120,000 more than the asking price. What does a discounter do? Write the offer on the first property. Now you've got a property you need to put $100,000 into to make it usable, that's worth only $40,000 more than you paid. Money the discounter would have rebated: roughly $5000. If they didn't have a full service agent to compare with, it even looks like a great deal, because none of the value I provided these folks shows up on the HUD 1 form, or anywhere else as numbers on paper. The value is still there, as my clients know.

If you know enough about the state of the market, what problems look like and what opportunities look like, you may spend less with a discounter, or get a rebate that doesn't cost you several times that difference. If you know everything a good agent does, there is no reason not to put that money in your pocket. But if you know everything a good agent does, why is the discounter making anything? Why aren't you doing your own transaction? Why aren't you in the business yourself and getting paid for your expertise?

A full service agent goes a long way past filling in the blanks on Winforms and faxing the offer. When I go out looking at 20 to 30 (or more) properties per week, I'm not just finding individual bargains. I'm also learning about the general state of the market, what things to look for in a given neighborhood, what common problems are with a given model of house. I know what's sold in the neighborhood recently, and I know what it looks like because I've been inside it, and I know how it compares to other stuff that's out there now. I have a pretty fair idea of what it's going to take to beautify properties, and I know what they'll be worth when the work is done, because I know what other stuff that already looks like that has sold for recently.

Real estate is a career. It may not absolutely require a college education, but many agents have one, and know many things you can't learn in college - because the professors don't know, either, unless they're active real estate agents. A good agent spends a lot of time and effort not only learning their local market, but keeping their knowledge base updated. This thing changes constantly, and it doesn't even change uniformly. How did La Jolla get to be La Jolla? I assure you it wasn't some random seagull anointing the neighborhood from above with the Bird Dropping of Higher Property Values. Rancho Santa Fe doesn't even come close to the ocean, and it's the highest mean property value zip code in the nation. How did your neighborhood get to where it is? Is it likely to change, and how? What are the known and probable upcoming changes in the neighborhood? How is it likely to effect your prospective property? Wouldn't you like to know about that redevelopment zone - or the railroad tracks they intend to drive through the area?

Full service can be a very hard sale when all that you consider is the numbers on the HUD 1. There just isn't any space for "Agent kept you from making a $60,000 mistake," let alone, "Agent showed you an $80,000 opportunity." But people who know property know that there is a lot more to every transaction than the numbers on the HUD 1. If you're dubious, may I suggest this experiment when you're ready to buy: Find a couple full service agents willing to work with a non-exclusive buyer's agency agreements, and sign them. Then compare what happens as compared to the service of the discounter you use for properties you find yourself. There is no need to sign even a non-exclusive agreement with a discounter, by the way, as any sales contract will note the agency relationship for that transaction. Like I said in How to Effectively Shop for a Buyer's Agent, let the ineffective alternative select itself out.

I'm perfectly willing - happy, even - to do discount work for "discounter" pay. I only make half the money, but I can service a lot more than twice the clients for a much smaller level of risk and still be home in time for dinner. I'm even a better negotiator than dedicated discounters, because unlike them, I know what's really going on in the areas I serve. However, saying "full service at a discount price," does not make it so, and I refuse to pretend that it is. Same as saying a fifth-hand Yugo is the same as a new Ferrari, saying something like discount service is the same as full service does not make it true. Furthermore, the people who approach me for discount work usually end up understanding that a real professional is worth a lot more than the extra money I make, and are happy to pay it. Most people have no problems understanding that the reason a good car commands a higher price than a bad car, let alone a skateboard, is because a good car provides more value. People will pay $100 per seat for decent - not great - musicians in concert when you couldn't pay them enough to attend a garage band practice session. Why should this principle hold any less true for expert help in what is likely to be the biggest transaction of your life?

Caveat Emptor

Original article here

Every purchase contract I write includes an addendum for Wood Destroying Pests. In California, this is accomplished via form WPA, a one page addendum that requires an inspection and details responsibility for who makes repairs. The work needed is separated into two sections. To quote from the actual standard report, Section I work "CONTAINS ITEMS WHERE THERE IS EVIDENCE OF ACTIVE INFESTATION, INFECTION OR CONDITIONS THAT HAVE RESULTED IN OR FROM INFESTATION OR INFECTION," while Section II is "CONDITIONS DEEMED LIKELY TO LEAD TO INFESTATION OR INFECTION BUT WHERE NO VISIBLE EVIDENCE OF SUCH WAS FOUND."

The standard around here is that the seller pays for Section 1 items, the buyer for Section 2. The reasoning for this is quite solid: The lender isn't going to fund loans for properties where they know about termites in the process of eating the property that they're taking as security for the loan. They could very well end up foreclosing upon a property that cannot be sold, or cannot be sold for the amount of their loan. Federal Reserve Regulations frown on that, to say the least.

So when I got this from an agent on an REO, I was skeptical

Hi Dan,
The bank will not pay the termite - Section 1. They said we must get bids and the buyer will need to pay for it. This is not allowable with VA. I already know how much it is - $1550 - I ordered the report. The property needs tenting.

I forwarded that to my clients, who responded:

Thanks for the update. As usual I have some questions.

1. (irrelevant to this article)

2. We are definitely eager to see the termite report. Are they likely to give it to us, and if it does show serious structural damage, can we back out?

3. Is the VA loan going to hinder this or is it a simple matter of writing another check?

4. Would they have told us about this if we were going the conventional loan route?

My answers?

2) They have to give us the information if they have it. Not only is it in the contract and the law, disclosure laws require it. The only legal way not to disclose it is if they honestly do not know. That isn't the case - they're telling us there is known Section 1 work needed.

3) Section 1 work eliminates the VA loan as well as any others unless it's done. It's a condition of the contract. The lender is going to want to see the report. When they see the report, they're going to say no. Section 1 work is a loan killer, no matter the loan type. The only ways to get around it are an all cash offer, or agreeing to eliminate the termite clearance from the contract.

4) They would have had to. See answers to 2 and 3

However, this work is the owner's responsibility - in this case, of the lender who owns the property. Section 1 termite work impacts safety and habitability; not to mention that no agent who doesn't hose his clients is going to agree to clients paying section 1 work before escrow is completed (in other words, before you even take title). Since transactions fail to close for other reasons at the last minute, this means you could end up paying for the work and not taking title. The property and our offer were predicated upon the property being in a certain condition, but now we know it is not in that condition. Work is needed to bring it up to that condition. Therefore, the property is worth less without that work being done. The owners can do this work, or they can give an allowance in the price, and since this work is necessary to get a loan, not doing it makes a major difference in the price.

You can decide what you want to do. This may be just a testing tactic. If we respond strongly, they may give on the issue. If they don't, I would very strongly advise you to reconsider the property - it's very possible that you would end up spending the money to tent the property and still not getting the property. But that isn't my decision to make.

I am certainly going to advise against deleting the wood destroying pest addendum from the contract offer, which would enable us to pretend to our lender that no such damage exists. Not only is it fraud (and they would come after all of us), but what happens if it were to turn out that damage was greater than represented by the sellers?

If they are going to stand upon what the agent is representing here, the property is worth considerably less than the asking price, and they are trolling for an agent who will allow their clients to be hosed in the interests of getting a commission check, or willing to commit loan fraud.

We went back and forth a bit, and this was what I ended up sending back to the listing agent:

My clients are indicating that their offer was predicated upon the Wood Destroying Pests Addendum.

Section 1 Work is required to be done by every lender and every loan type I am aware of. Failure to disclose it (when known to exist) to the lender is fraud. Therefore, it needs to be done prior to loan funding, and therefore prior to transfer of title. Since the only non-fraudulent way to get a lender to fund such a loan is to do the work, it is the responsibility of the current owner to obtain a termite clearance.

Furthermore, since required Section 1 work impacts both safety and habitability of a property, an "as is" transaction does not shield the current owner from the need to repair this fault.

So the current owner is advised that they are required by the terms of our offer and the need for most potential purchasers for financing to do the work.

Otherwise, may I suggest you solicit "all cash" offers?

Here is the situation: The current owner and listing agent know that there is Section 1 work that needs to be done. Knowing this, if we were to conspire with them to eliminate that particular phrase from the contract, we would be guilty of fraud, in that we would be asking the new lender to fund a loan where we know there is a disqualifying condition of the property, but failing to advise them of it. This would be particularly pointed in the case of an agent who also does the loan (and therefore has a fiduciary duty to the new lender), but it doesn't let everyone or even anyone else off the hook: That listing agent is conspiring with malice aforethought to keep relevant information secret from the new lender, as are the current owners, who happen to be a bank, and therefore should be fully apprised of what usual lending standards are. Fraud, fraud, and fraud.

They ended up rejecting our counteroffer. Chances are they'll find someone who doesn't mind committing fraud. Lots of agents do this, as evidenced by the fact that she barefacedly proposed this fraud in written communication (email). That doesn't change the fact that she is proposing an intentional concealment of known information that a party to the transaction (the new lender) has a legitimate interest in knowing, and that is just as much fraud as appraisal fraud, concealing cash back from the seller to the buyer, or any of a large number of other ways to commit fraud in consummating real estate sales. Remember that agents owe a duty of fair and honest dealing to everyone, not only contracted clients. That includes the buyer's lender, whomever it may be. Just because you may not deal with them directly doesn't make them any less of a party to the transaction. Lots of escrow officers and agents are discovering this now in regards to concealing sellers giving buyers cash back, because the property is therefore worth less than presented. The exact same principal applies to the termite report.

Caveat Emptor

Original article here

I read a lot of the info. you have on your web page ... thank you.

I don't live in San Diego so I'm not looking for a home.
What I am trying to decide is whether to sell or refinance.

I live in DELETED. My mortgage payments are now approx. $2,400. I cannot afford to refinance into a fixed rate mortgage or interest only. I wanted to reduce my payments and I was recently offered a neg-amortized loan.

While I do have plenty of equity in the home, I balk at the thought of using my home as a piggy-bank. It's just not my style. I feel like I made a terrible mistake. I had a very modest home ... fairly low payments & property taxes ... but I wanted more, so I sold it.

I bought a good-sized lot with the proverbial "fixer-upper." Mistake #1 I should have thought of it as the "MONEY PIT."

Anyway, five years later and I've just survived a remodel but I'm still struggling.

Do you have any sound advice/suggestions?

First off, despite your market being somewhere I am licensed, each area's market is significantly different. Unlike the loan market, each commuting area has enough of its own concerns that nobody can keep track of more than one - not really. If someone called me out of the blue and asked me to list a property even a few miles outside my normal area of San Diego County, I would not have a good idea what it should list for. I can do a comparative market analysis, but that's just cranking numbers, and there's a lot more to market knowledge than cranking numbers. In the last week, I've looked at between 50 and 60 properties, and in the case of 20 to 25 of them, I can explain to an idiot why it is priced wrong by at least 10%. Sometimes they're under, sometimes they're over. Whichever it is, it's not good for the owner. Some agents will tell you there's no harm in being high, which is a premeditated lie. Properties that sit on the market because they are priced too high will sell for less money than the owners could have gotten, and that's if they sell.

Some properties are obvious money pits, while others are vampires, charming on the surface, while they embed their fangs permanently in your wallet. The best opportunities, however, are all fixers. The reasons a good buyer's agent is worth more than they will ever make are legion, no matter how much our local dog-target keeps pushing discounters. I just got a call from one pushing a property I previewed last week. Yes, it had a view, but the view was of a high school stadium, and every surface in every room needed to be redone. It's got potential, but it's going to take $100,000 to get that potential, and the property would only be worth maybe $40,000 more than they're asking. Leave out those pesky numbers and a less capable agent can make it seem like a great bargain. On the other hand, I found the same people a property not far away that needed about $40,000 worth of work to be worth $120,000 more than the asking price. Money the discounter would have rebated: roughly $5000. Difference in outcome: $80,000 in prospective equity and $60,000 of wasted work. Prospective differences in listing agents are every bit as large.

Now, let's consider the kinds of issues that might give you a better idea about what to do about your situation.

You say you've been through a remodel and have significant equity. That's good news in that you are not "upside down", but should be able to sell the home for more than you owe on it. That's better than a lot of folks right now.

However, the unavoidable fact is that it costs money to sell. A good listing agent is going to cost money - and a bad listing agent will cost you more, and this cost is no less real for the fact that most of it won't show up on the HUD-1. A good listing agent is going to tell you to offer a good buyer's agent percentage, also. Furthermore, you're going to buy a home warranty, and a policy of title insurance. I warn my fixer clients that it's going to cost about eight percent of value to get the fixed up property sold at a good price - so they might as well include that estimate in the calculations of whether the property is worth buying in the first place. I'd rather work a little harder, and have a client that keeps coming back to me because they keep making a profit worth making. When I originally wrote this, if you had a property that appraised for $500,000, you might have only gotten $480,000 or less on the purchase contract - and you may have had to give allowances on top of that. $480,000 less eight percent is $441,600, and if you have to give a $15,000 allowance for closing costs, that's $426,600. So you can have a good amount of equity on the face of things, and be upside-down in fact when it comes to the actual sale. Even if you have $100,000 in equity, it just turned into $25,000 to get you out from under a loan you can't afford. It depends upon your local market, the condition of the property, and the neighborhood it sits in. Things are better than that now, but there are many new issues, most of them brought about by regulators that I'll grant meant well but didn't understand what they were doing.

On the other hand, given the fact that you cannot afford your payment, your alternatives do not include doing nothing. If you try to do nothing, you will have your credit ruined and lose the property as well as quite likely get a 1099 love note from the lender that says you owe taxes and possibly (depending upon whether or not your loan has recourse) a deficiency judgment. So doing nothing is not an option.

When I originally wrote this, another alternative was a negative amortization loan. Those are pretty much history now with long overdue regulatory changes, but I'll leave the example just in case they come back: Something fairly middle of the road in a negative amortization loan would have a payment based upon a nominal (in name only) rate of 1%, for which the payment on $400,000 would be $1287, saving you $1100 per month in cash flow. On the other hand, if your real rate is 7.75 (reasonably median), at the end of two years you owe $433,500, and that's not including the prepayment penalty. After three years, when most negative amortization penalties expire, you owe $452,000, assuming rates stay exactly where they are, which I do not expect them to. Even if you got the loan for zero cost, you spent $1450 per month of your equity. In order for you to come out even, you'd have to net almost $479,000. That means you need to get a little over $520,000 sales price in three years if you don't have to fork over that $15,000 allowance, or $537,000 if you do.

It's true that you don't have to make only the minimum payment every month. Nor do you want to. However, let's be honest with ourselves. For most people, most of the time, they will. Even if they had it to spend on the mortgage, the kids need shoes, they "need" a new car, or they "need" a vacation. My understanding is that less than 5 percent of the people who have negative amortization loans make bigger payments than minimum more than five percent of the time. So whereas you won't necessarily owe this much in three years, it seems a pretty good bet to me.

Now here's where people helping people in situations like yours get grey hairs. We're guessing at where the market is going to be in three years. Not only about what we think the general market will be like, but what we think this property will be worth. Some things are consistent. For instance, unless you do another remodel, it's unlikely your property will spontaneously acquire brand new cabinets and stainless steel appliances, and since you are stating that you can't afford your current payment, it's unlikely that you'll be able to purchase such. Your property will probably compare to the rest of the market about like it does today, or maybe a little worse. The carpet will get older, the paint on the walls will be a little older, the shingles on the roof will have used three more years of their useful life. You get the idea.

On the other hand, the market really doesn't have to gain much to offset this. Mostly it just has to firm up, and if it does so, then even a two and a half percent annualized rise in prices would cause you to break even. On the average, that's trivial. Less than half the overall average annualized rise. On the other hand, it's not something I or anyone else can guarantee. It's investment risk. The market could start sliding again, or it could be completely flat. Once you buy an investment, any investment, there is no way to remove risk from the equation completely. One of the things that caused the problems a lot of the country has in the current market was agents who promised the people that their property would appreciate - and sometimes it doesn't. It's one thing for people to make the choice knowing the risks; it's quite another to sell them property by telling them that "real estate always appreciates," or even that "Real estate never loses value." Both are patently false.

People have a tendency to assume that the market will keep doing what it has been doing in the most recent past. At the last update, lots of people were writing how my local market is going to lose another 20% in the next year - completely ignoring that we're no longer priced at economically unsupportable levels, and indeed, we were about thirty percent below where a macroeconomic analysis of real estate prices suggests that we should be. We didn't lose 20% - in fact things went up. The excess inventory ("high supply") that was half the reason the prices fell has been steadily falling for the last year, people are now finding that they can qualify for more house than they thought (removing the bar that has been choking the demand side). Decreasing supply and increasing demand: What do you think is going to happen? Furthermore, buyers were coming out of the metaphorical woodwork at that point in time. I had been running every second of the last previous three months, and I hadn't been soliciting - every last bit of business I can handle was been coming my way all on its own. Furthermore, in the high demand areas of town we were starting to see regular bidding wars like we did in 2003 and 2004, only this time the people involved have hefty down payments, and are qualifying for "A paper" thirty year fixed rate loans full documentation. Five years ago, military personnel had to settle for crummy housing unless they were an O-5. Now I'm finding even E-6s and E-7s beautiful detached homes, bigger than my own, of recent construction that they can actually afford to buy at current prices with full documentation loans.

There is one more level of complexity to add, though. What are you going to do for a place to live if you sell? What do the alternatives look like? How are rents, and what are likely to do in your area? Are landlords going to have to increase those rents? Are people moving out of your area, causing them to drop? A good agent in your area will know. Rents here are seeing significant upwards pressure, and although this isn't your area, the Era of Make Believe Loans is over. Sane landlords can't pretend that as long as rent makes up for the majority of what they spend, they'll eventually get it back with profit when they sell because the prices are rising as fast as they were. Apartments and condos make economic sense to rent out - single family detached housing, not so much.

These, then, are some of the things to consider. There's less risk in the "sell now" option, but you're accepting a significant hit by exercising it. If you hang on those three years, you might be just fine, or you might be hosed even more completely than you are now. When I originally wrote this, given that you know you can't afford the property, if you had come to me in San Diego, I'd probably have advised you to sell now (That advice would likely be quite different now). Selling is the safe option, however unsatisfying it is. Once you have sold, the hemorrhaging is over - you're not bleeding green every month. Sell to someone who can afford the property, and who can afford the risk that it will further decrease in value over the short term. The assumption would be that they would be getting a deal - but what if you hold on to the property and the dice come up snake eyes? You are looking at a maximum length of time before you will have to cut your losses or have them cut for you. This is a recipe for a disaster even bigger than selling now.

Caveat Emptor

Original article here

That was a question I got.

One point, either discount or origination, is one percent of the final loan amount. After all of the loan amounts and fees and what have you are added, for a loan with one point, multiply the amount by 100 and divide by 99, and that will be your final loan amount. For a loan with two points, multiply by 100 and divide by 98. The general formula is multiply by 100 and divide by (100-n) where n is the total number of points. If you're just looking for a quick and dirty purely verbal estimate, it's ok to simply add 1 percent per point, but any actual paperwork should use the correct procedure.

Points come in two basic sorts, discount and origination. Origination is a fee your loan provider charges for getting the loan done. Some brokers quote in dollars, most quote in points because it sounds cheaper than an explicit dollar cost. Most brokers out there charge at least one point of origination. To contrast this, direct lenders do not have to disclose how much they are going to make on the secondary loan market. And many direct lenders still charge origination. Judging the loan by how much the provider makes (or has to tell you they make) is a good way to end up with a bad loan. My point is that it's the rate, type of loan, and total net cost to you that are important, not how much the guy is getting paid for doing your loan, or whether they have to disclose it all. Remember two things here, and they will save you. First, loans are always done by a tradeoff between rate and cost. For the same type of loan, the more points you pay the lower your rate will be, and vice versa. Second, remember to ask about "What would it be without a prepayment penalty?" It's a good way to catch people who are trying to slide one over on you, and the lenders pay a lot more for loans with a penalty, and the lenders make a lot more on them when they sell them to Wall Street, so they often do them on what looks like a much thinner margin until you ask the question "What would it be without the prepayment penalty?" Remember it.

Discount points are an explicit charge in order to offer you a lower rate than you would otherwise have gotten. To use an example I ran across the day I originally wrote this, six point five percent with one point, seven percent without. As I type this update, the rates are much lower, but the curve between the two is much steeper at the low rate end. On a four hundred thousand dollar loan, one point is essentially four thousand dollars, either out of your pocket where you're not earning money on it, or added to your mortgage balance where you are making payments and paying interest.

Is it a good idea to pay discount points, or is it a better idea to pay the higher rate? That depends upon the loan type and how long you keep it. Let's say the loan is $396,000 without the point, $400,000 with, just to keep the math easy. Your monthly interest charge on the first loan when I originally wrote this was $2310, on the second it was $2166. On the other hand, you would have paid $361 principal on loan 2, only $324 on loan 1. Here's the bottom line, though: You've got to get that $4000 back before you sell or refinance. Just a straight line computation, that second loan saves you $181 the first month. $4000/$181 per month is about 22 months to theoretically break even (and it's a little faster than that, because loan 2 pays off more principal per month). On the other hand, even after you've theoretically "broken even" there is a period where if you sell or refinance, you will inexorably lose money because you're paying interest on a balance that's higher than it would have been.

Let's run the actual numbers. If the above loan is a thirty year fixed and you keep it four years, you're well ahead. You've saved yourself $6944 in interest and your balance is only $2159 higher. $6944 - $2159 = $4785. Even if your next loan is at ten percent, you're only losing $215.90 per year. Especially when you consider that at a cost of money now versus later, you'll never make it up, because you can invest that $4785 you saved and it'll pay more interest than that. Similar numbers apply to today's loan tradeoffs.

On the other hand, let's say the rate was only fixed for two years rather than a fixed rate loan. After that, it is a universal feature of hybrid ARMs that they all adjust to the same rate. You are theoretically ahead by $363, but because of your higher balance, even if the loan adjusts to five percent, you're losing $154 per year due to your higher balance, and there is nothing you can do about it. Play now, pay later - and you still owe more.

There is no cut and dried answer about whether it's to your benefit to pay points. I tend not to do it, myself, because rates do vary a lot with time, and money you add to your balance sticks around in your balance. If I've got a zero or low cost loan and the rates drop half a percent, it's worthwhile to refinance for free. If I have a loan I paid a point for, I'm going to have to pay that same point again to see a benefit on refinancing, and as we've already discussed, if you don't keep the loan long enough, you've wasted your money. The national median time between refinances was about two years when I wrote this; now it's up to three. I see no reason to pretend I'm any different from everyone else, but some folks do have a history of keeping loans a long time. You need to make your own choice to fit your own situation.

Caveat Emptor

Original here

I got a question about "what does it mean if my loan is not funded after right of rescission?"

It likely means your loan provider lied to you, probably from day one. Once you have signed documents, there shouldn't be anything but procedural matters left. Things that cannot be taken care of earlier. Things like final payoff coordination, the escrow officer using funds to pay homeowners insurance. Every once in a while, a good loan officer will get a subordination moved to prior to funding because it's on the way, but it is necessary to start the three day right of rescission now in order to fund on time under the rate lock you have.

Every once in a while, it'll be because of something happening to you in the meantime. Lenders who are risking hundreds of thousands of dollars don't just sit there and presume nothing has changed since the first time they checked it out. They are going to check again, right before they put the money to the loan, to make certain that nothing the loan was based upon has changed. So sometimes while they are doing a final Verification of Employment (making certain you still work there), the answer comes back that the borrower doesn't. The final credit check comes back with a score that no longer qualifies under that program. These are not the loan officer's fault, except inasmuch as they didn't warn you not to do whatever it was. Whether you quit your job or were fired, the result is no loan. So I always tell folks not to change anything about their life or credit without checking with me first. Neither I nor they can really do anything about layoffs, of course, but the point is not to voluntarily do anything that messes up your loan.

The vast majority of the time, however, what's going on is that the loan officer never had the loan. There's some condition holding it back that you, the borrower, can't meet. They have a choice between hoping to get around it or going out and actually finding a loan that you can qualify for and telling you about that instead. I shouldn't have to draw you a picture as to which choice they will likely make. Many times, they were teasing you with a loan that you had no hope of qualifying for as an incentive to get you to sign up. This is a standard "trick". They get you wanting that loan, which sure sounds good, and you apply. Unfortunately, that loan was never real, or never something you had a chance of qualifying for, but now they've got you signed up. Now you've done their paperwork, and you're mentally committed to their loan.

If it's an honest mistake, they are not going to have you sign documents. They're going to come back and tell you as soon as there is a condition they can't meet on loan qualification. But the question was about when you have signed documents and the loan doesn't fund. They can keep stringing you along, hoping it will happen, or they can come clean and tell you they can't do the loan. In the first instance, they might still get paid. In the second, they likely won't, because if you're smart you'll go elsewhere. Needless to say, this can waste a lot of time getting "one more document" from you or jumping through one more hoop. If the loan doesn't fund at the end of the rescission period and you are not certain as to why, you've probably been had. This is why I always tell people to ask for a copy of all outstanding conditions on the loan commitment before you sign final loan documents. Ask them to explain them, too. You see, once you sign loan documents and the rescission period expires, you're stuck with that loan provider. You can't go elsewhere unless and until they give up. Even if you have a back-up loan waiting to go, they can't do anything until the other loan funds or gives up, which could be weeks. Not a bad situation for an unethical loan provider to be in. In the meantime, the seller cancels your purchase and you're out the deposit. Or the rates go up and you're not getting a refinance on anything like the terms you might have really qualified for at the start of the process.

Caveat Emptor

Original here

Not very long ago, the purchase market in many areas of San Diego went through a phase that could only be described as "piranha feeding frenzy". This sort of market reinforces several pieces of advice I have given here. First, What Happens When You Over-Price Real Estate?: properties priced correctly got multiple offers, properties priced a little under optimal were seeing bidding wars, while properties overpriced just a tad sat until the price got reduced low enough to counter the very high "days on market" counter. Second, all of the subsidiary ideas in How to Sell Your Home Quickly and For The Best Possible Price also got illustrated to anyone paying attention. Properties that were clean, uncluttered, and easy for buyers to get in to see (as well as priced correctly) are seeing multiple offers within a week, while corresponding properties without those virtues are sitting with no offers. Buyers and their agents even learned to avoid short sales, other things being equal.

But the most important thing is something that you kind of have to be a buyer or a buyer's agent to appreciate, and that is to be very careful you don't list your property with someone who doesn't have the time to dedicate to selling your property quickly and for the best possible price.

Here's the situation: You've got this one agent or brokerage. Their signs are all over on listings. "Must be pretty good," people think, and they call that agent, who comes out, schmoozes them, may even talk them into pricing the property correctly, and gets a signed listing agreement.

This agent then promptly disappears to schmooze more prospective listings. When previewing or showing properties where the owner is home, I've made a habit of asking a question of them that really asks about talking to their agent. It's damningly consistent how often these people tell me they can't so much as talk to their actual agent. Even talking to the agent's office staff is dubious. The agent themselves? No way. The only calls these people are getting from the listing office is new agents without listings hoping to use their property for an open house to make contact with buyers and bring more business to their brokerage that way. But working to actually sell the property they've agreed to undertake fiduciary responsibility for selling? Not so much.

Despite the barriers, I managed to talk to one of these listing agents last week. She told me "I have no idea how many offers I've got on the property. My office staff is handling that. I'm too busy because my transaction coordinator isn't doing their job."

Say WHAT? Whose job do you think all of that is? That transaction coordinator doesn't have their name and signature on the listing agreement. They didn't sign it, representing that they would diligently work to sell the property on the best possible terms. The office staff, including the transaction coordinator, is there to dot the is and cross the ts to enable the agent to handle more "big stuff". They are not there so that the agent can disengage themselves from the listing, or go heap more work onto the pile that the poor office staff has to deal with. Yet when I managed to indirectly suggest she should perhaps not accept any more listings until she had a handle on the ones she already had, she acted like I was some kind of alien monster, here on planet Earth to consume the poor hardworking agents such as herself, and usurp their Rolls-Royces. She's making money hand over fist - but her clients are getting hosed.

When I make offers - offers with reasonable deadlines to respond - they are sitting there, without response, for the week I give them, and usually several weeks beyond. It took one company six weeks to respond to a one week deadline offer, and I've got others where if they do eventually respond, the clock is sitting at nine weeks or more. Some of them are plying the time-honored (and horribly weak) technique of the "best and highest" offer - but even they're not picking one for weeks. This is pathetic. And then they have the gall to complain when they eventually do call back that my client has moved on and is no longer interested in their property. Just because it's like I'm talking to a black hole is no excuse to terminate the conversation, eh?

Not that the response to the "normal" listings and lender owned listings is great, but the response to short sales are far and away the worst. It seems that many agents are just having their back offices send all of the offers directly to the lender. No response to the offer, no negotiation and consultation with the actual owner of the property, no fully negotiated purchase contract, and definitely no fighting to get any particular offer accepted. Then they get upset when, after two months of this nonsense, most of the offers have moved on, including the highest, and none of the remaining offers are willing to match that highest offer that the lender just approved. In case you haven't figured it out yet, this means they're back to square one as far as actually getting the property sold, only the "days on market" counter stands so high they're going to have to cut the asking price even further to get any new buyers interested. Never mind that the lender might well have approved any of the offers if the agent had dug in and negotiated it correctly and fought for that offer. Never mind that the agent could certainly have gotten more money out of most - if not all - of the offers simply by coming up with reasons why it was in the prospective buyer's best interest to do so.

These poor people in the back office have no clue which offers are strong and backed up by a buyer's actual ability to perform, either. For that matter, neither do most listing agents. Letter from some lender asserting without evidence that the buyer is supposedly able to qualify for a loan in the amount of whatever loan amount is required? Worthless. What was the qualifying rate used to justify that conclusion and is it still available? What's their debt to income ratio and is there any wiggle room if the rates are a little bit higher, if there is some unreported debt, or if there's some kind of special tax assessment? Is the allowable loan to value ratio going to work for this property? Do these buyers have the cash to close? Nor is pre-qualifying with their favorite lender any better - not to mention that requiring a buyer to do anything with any particular third party - even simply requring prequalification with a given lender is illegal under RESPA.

To make up for the back office and agent's incompetence at deciding whether a given offer is backed by an ability to perform, listing agents are attempting to impose onerous and abusive requirements for buyers in order to make that agent's life easy - not to get the most money from the quickest sale and the fewest problems. I just read a listing that said no offers will be submitted without seven different illegal requirements, and a host of others that certainly act to discourage buyers with even halfway competent agents. Starting the "due diligence" period as soon as the offer goes in, before there is a fully negotiated contract, so the buyer has to spend money when they might not even get a contract, and when they technically do not have the right to have inspectors at the property? Requiring buyers to qualify with or even to use particular lenders? Requiring the contact information for the buyers themselves, allowing them to bypass the buyer's agent and contact the buyer directly? All of those are violations of major legal principles involved in real estate - and I've seen them on many listings within the past few weeks. Nor are they in the nature of "fiduciary duty" because they enable both the agent and their client to be hauled into court for violations of the law, costing far more than the principal could possibly make even if they buyers didn't understand their legal rights. Quite frankly, what these requests most often do is scare away qualified buyers who are competently advised, as well as causing the property to be worth less to the ones that do stick around.

The way to get good responses is first, to not put onerous conditions upon the property in the first place, and second, to respond in a timely fashion to every offer. Whether you counter-offer or explain that there are better offers on the table is determined by circumstances. But by responding to prospective buyers, engaging them in the process, and letting them know you take them seriously, the listing agent and their client are building psychological buy in for the buyers. They are giving the buyers a reason to believe that there is a real possibility of getting this property, and given such, they will focus upon this property. Until there's a fully negotiated purchase contract, those buyers are free to wander off in search of other properties, and if not responded to in a timely fashion, pretty much all of them will. Why not, when there is no response? Even "Talk to the hand!" is more response than I'm getting out of most listing agents these days.

Any time you have multiple offers, that is a golden opportunity to play them off against each other, netting more for the clients. These "top producers" are completely blowing these opportunities, which incidentally would net them more money in commissions, as well, but they're too busy signing new listing contracts to properly service the ones they've got. I'd be too ashamed of myself to associate myself with these listings. I'd certainly never brag about it in the vein of "I sold all these properties!" Have they no professional pride whatsoever? Kind of like someone who's supposed to be a maker of fine cabinetry bragging about creating steaming piles of excrement.

Let's examine the economics of the situation. Say that an agent can have thirty listings, of which three or four will close in any given month and a couple more agreements will expire. Suppose they are getting 90% of the sales price a dedicated agent with two active listings who sells them all quickly will get. Let's say the "top producer" averages 3.5 sales per month, while the not so top producer who actually serves their client interests averages 1.8. Let's do the math.

First off, that "top producer" has thirty signs on thirty properties out there advertising them and their services. The agent who serves client interest has two at any given time - and not the same two for very long. It's repetition and consistency that sell services to more members of the public who don't understand how these things work. Most yard signs (not my occasional listings - thanks to an idea I got from Greg Swann) advertise the agent, not the listing. But people driving by the same sign every day for six months are a lot more likely to call the agent to sell their property than the ones who drive by the same sign for only four to six weeks. Benefit: "top producing" bozo, not consumer. This turkey is selling about 12% of their listings per month, as opposed to the agent we're considering, who sells 90% of their listings per month.

Let's examine who makes how much, as far as the agents go: "top producer" gets 3.5 commission checks per month for 90% of the commission, because they found a buyer that produced 90% of the sales price. Let's say the median price in the area is $400,000, and commissions are 3%. 90% of $400k is $360,000 times 3 percent times 3.5 checks per month means they average $37,800 per month in revenue to their brokerage, of which some goes to the brokerage and some to them. The agent who really gets the property sold gets $400,000 times 3% times 1.8 checks per month, which means they average revenue to their brokerage is $21,600 per month. Which agent do you think the brokerage values more?

Now let's look at individual consumers and how they come out. Let's assume 8% overall cost of selling the property, and a loan for 70% of the value of the property, in this case, $280,000. The person who chooses the "top producer" walks away with $51,200. The person who chooses the agent who actually makes the effort to sell their property walks away with $88,000 - more than sixty percent more money in their pocket. If the loan is for 90% of value, or $360,000, the "top producer" client is going to be short $28,800, while the real agent's client is still going to walk away with $8000 in their pocket. Not to mention that the property sells quickly, so you don't have all the monthly expenses of maintaining it even though it may be vacant. If you bought for $300,000 and have a $280,000 loan at 6% here in San Diego, that's about $1800 per month that the consumer saves, considering insurance, for every month the property didn't sit on the market unsold. All of this is real money! Not to mention the clients of the agent who limits how many clients they work with have a 90% per month probability of ending up happy, while the "top producer's" clients only have a 12% chance of ending up with a sold property, and they are not going to end up nearly so happy.

So if you still want a "top producer" after reading all of this, be my guest. They're easy to find. Just look for all the yard signs sitting in the yard for months - if the listing didn't fail completely. Look for corporate advertising blanketing a particular market channel. But if you look a little bit harder, you can find a competent agent who has the time and will actually work hard to sell your property, properly manage the offers they do get, and sell the property for a better price much more quickly, ending up in much more money in your pocket.

Caveat Emptor

Original article here

"challenging underwriters mistakes in housing loan paperwork" was a search that I got.

You can't challenge them. Butting heads with an underwriter is stupid and counterproductive. There's only one person who gets a vote, and it's not you, whether you are an applicant, processor, or loan officer. The underwriter may not be the original application of the saying "a majority of one," but it certainly fits the situation.

Keep in mind that as a loan applicant, you will never communicate directly with your underwriter. It is an anti-fraud measure constant throughout the industry. If someone tells you that you are talking to your loan's underwriter, either they are lying or the loan has just been rejected on procedural grounds.

If a loan officer believes that the underwriter has made a mistake in the underwriting of the loan, it is far more constructive to find out what it was - on what grounds the client was rejected. Actually, loans are usually not flatly rejected, they simply come back with conditions the client cannot meet. A loan that actually gets rejected usually has further adverse consequences for the borrower's credit, and is usually pretty good evidence that the loan officer was promising something they couldn't deliver.

It does happen that underwriters, like loan officers, mis-compute things, miss things, and misconstrue things. This is one of the hardest lessons for a loan officer to learn: NEVER tell the underwriter anything that they do not absolutely have to know in order to approve the loan. The client has a rich uncle that gives them $10,000 every year? The client makes millions in the stock market as well as their salary? The client simply has millions in assets and they could buy the property for cash if they wanted? I wouldn't breathe a word of any of this to the underwriter. Not a peep, if I had my druthers. The underwriter will start asking all kinds of questions, asking for all kinds of documentation, both on the existing assets or income and on the likelihood of it continuing. If you're familiar with how the stock market works, you might have an appreciation for how hard it can be to prove that you're going to have income from it in the future. That underwriter isn't interested in trends or suppositions or even the fact that it's happened the last twenty years in a row. They want proof it's going to happen in the coming years. When accountants won't write a testimonial (trust me, they won't), you're out of luck.

Sometimes the underwriter comes back with conditions that are beyond the bounds of reason. Dealing with this is part of my job, but it's more akin to a negotiation than a confrontation. I've got to get them to tell me what has them concerned, and see if there isn't some other way to reassure them on whatever grounds they may have for concern. Remember, if the loan goes sour, both the underwriter and I are going to hear about it. It may cost them their job, and I may have to come up with thousands of dollars to pay the lender. Not to mention that the client isn't exactly happy. The underwriting process, properly used, is as much for the protection of the client as the lender.

So what I've got to do is find out what concern caused the underwriter to place this condition on the loan, and then a more reasonable alternative may suggest itself. If you ask in the right way, conditions can be changed if the request is reasonable. But you've got to know what you're doing. If the alternative you suggest does not adequately address the underwriter's concerns, they are within not only their rights, but also in full compliance with regulations where you are probably not, to refuse to make the change. Sometimes the underwriter and the loan officer disagree as to the computation of income, for example. By definition, the underwriter is right - unless I can persuade them that my way is better. Just human nature, you can't do that by challenging them, you have to persuade.

It is possible to run into an intransigent underwriter. That's one reason why brokers have the advantage over direct lenders, who are stuck with the same group of underwriters all the time. I can pull the loan and resubmit it elsewhere. Given that particular lender isn't going to approve the loan anyway, they won't fight too hard. On more than one occasion I have had the lender come back and issue an exception on their own when I pull it for re-submission elsewhere, but the ability and willingness to actually take it elsewhere is essential to this. And it is sometimes possible to go over a given underwriter's head and get an exception from the supervisor, but it tends to poison the well when you attempt this, whether it is successful or not. When you're asking for special consideration for your clients, they tend to look much harder at all of your clients. I've seen a couple loan officers talk themselves into one approval through an exception with the supervisor, only to have their other loans that were going through smoothly kicked back out for further underwriting. So you have one happy client, and three or four that otherwise would have been happy and who now are not. Sounds great if you're that one client, but how would you like to be one of those three or four others? Not a good situation for anyone to be in. Taking the approach of collaboration works better.

Caveat Emptor

Original here

My aunt is going to move to a new condo and wants to sell her old one. I would like to buy her old condo as an investment and rent it out (as I am already a home-owner). This whole investment/rental buying is all new to me.

She has lived there about 5 years and the value has increased more than double. Obviously I would love to be able to keep her tax base. I am thinking about getting an interest only loan to help me get into this. Can I get a loan for 100% of value? My aunt will need the entire amount to purchase her new place. What suggestions do you have to make the loan process easier and pay the least amount in fees?

It is worth between 360,000 to 390,000 (we haven't yet got an appraisal, this is from comps in area). My wife and I currently have a house in (City) with a value of 650,000 and a mortgage of 400,000. We both work and have some extra income, maybe 400 a month that we could supplement against a renter. I think we could qualify for the loan, but then we would have to refinance our house to cover a down payment and closing costs. We don't have any savings to pull from. My wife hopes to retire in 2 years and I will in about 8 years.

Investment property is a different item from a personal residence, in several particulars. First off, even if it's residential, the loan is a riskier one to the lender. A loan on investment property is going to carry a surcharge of 1.5 to 2 discount points (one discount point is one percent of the final loan amount), over and above any other charges for the rate you choose. Furthermore, despite a lot of research, I don't know a single lender that will currently do a loan on investment property for more than 80 percent of the value of the property (When I originally wrote this, it was 90-95 percent, but there has never been such a thing as a zero down investment property loan). So you need a down payment of at least twenty percent.

The good news is that whereas you do not have savings to pay it, you do have a considerable amount of home equity. Depending upon your exact situation, either a "cash out" refinance or just taking out a HELOC (Home Equity Line Of Credit) might be in your best interest. It depends upon your current mortgage and your credit, and I cannot make a recommendation one way or another without looking at the market you're in for current comparables, running your credit, and seeing what can be done. If you've got good credit and income, and have had the good credit and income for some time, it's more likely to be in your best interest to simply take out the HELOC. I have some without prepayment penalties and are zero cost. If your credit or income has improved of late, it may be in your best interest to refinance, or if you've got an ARM that's about to adjust anyway. Assuming you're "A" paper, you may now be a conforming loan where you would not have been when you took it out, although taking the cash out could cause you to exceed, once again, the conforming limit. Therefore, the acknowledgment that a HELOC is likely to be the way to go.

Cash flow is also an issue with investment properties. If you don't have a tenant, you get zero credit for the rent at initial purchase from A paper. If you do have a potential tenant, with a signed lease for at least one year, the lender will give you a credit of seventy-five percent of the proposed rent towards your cost of owning the home (principal, interest, taxes and insurance). Some subprime lenders will credit you with ninety percent, but their rates are typically higher in compensation. With the vacancy rate in urban California being about four percent, even ninety percent is a bit low, but the standards are what they are. I know many people who are making money hand over fist on rentals where the bank thinks they are paupers.

There is no such thing as an easy documentation investment property. Indeed, for any loan, for all real property you have to show the full breakdown for each property you own. When I first wrote this, you could state your overall income in most cases, and most folks with investment property had to do stated income due to the cash flow computations being so restrictive, but with the disappearance of stated income loans this option no longer exists. Most folks are probably going to have to incorporate and apply for cross-collateralized commercial loans - requiring higher interest rates and still more equity - in order get loans for investment property.

In urban California, however, prices had gotten so high that I did not remember (when I originally wrote this) the last time I saw a single family residence being purchased for rental purposes that "penciled out" with a positive cash flow. As I said in my article Cold Hard Numbers, this is one of the things that convinced me California real estate was overvalued. The penciling out part has now changed. Rents are up and prices are down, and due to all of the pressures placed on landlords by the changing loan rules for investment property, expect rents to continue to climb. I'm in escrow with some folks buying a better house than they're renting right now, and their monthly cash flow requirement is still going to go down, even before the effects of income taxes and all those lovely deductions for mortgage interest and property taxes.

(Got some spare cash lying around? Condominiums are wonderful investments at current price levels in my neck of the woods)

Now, as long as you have the cash flow to last until rents catch up, this is fine. But you need to be very certain that you do have that cash flow. When I originally wrote this, if you were buying for $360,000, that was a first loan at about 6.75 percent right now of $288,000, which gives a payment of $1868 (rates are lower now). Additionally, there's going to be Homeowner's Association dues of probably about $200, and taxes (assuming no Mello Roos) are about $375 per month, or about $200 if you can keep your aunt's tax basis. That sums to $2443 or $2268 if you can keep her tax basis. Now ask yourself how much similar units are renting for? If it's less than $2050 (or $1875 if you can keep the tax basis), your $400 per month isn't going to make up the difference. You might consider a negative amortization loan in this circumstance, but be advised that you're eating up your investment every month, the real interest rate is actually higher than the 6.75 percent, and prices may go down and not recover for several years, leaving you holding the bag for a big loss. It's a risk some folks are willing to take, others are not. I'm willing to do them for people in this situation, but only after I explain all the pitfalls (Option ARM and Pick a Pay - Negative Amortization Loansand Negative Amortization Loans - More Unfortunate Details cover most of them). Usually people who have been informed of the pitfalls decide that these loans are not for them, which is one of the reasons why I question whether the risks have been adequately explained to the forty percent of all local purchases being financed by these. (At this update: Anyone still have any doubts on that?)

Indeed, given the fact that you're going to have to make payments on the Home Equity Line of Credit as well, it's difficult to see how your $400 per month of extra cash flow is going to stretch to cover. If your credit is decent, I could have gotten you into the property, but that's not exactly doing you a favor if you find it impossible to make the payments.

Caveat Emptor

Original here

A Home Equity Loan, or HEL (pronounced "heel") is a one time loan, much like a car loan. You get the money all at once, pay it back so many dollars per month, and when it's paid, it's over. The most common Home Equity Loan is probably the 30/15, which is like a fully amortized thirty year fixed rate loan except that it's got a balloon payment at the end of fifteen years, when the remaining balance is due. Since very few people do not sell or refinance much sooner than that anyway, the fact that it has a balloon just isn't important to most folks. I do not know why, but the rates for true thirty year fixed rate home equity loans are much higher than for 30/15s. Fifteen and twenty year fixed rate Home Equity Loans are also pretty common, these being truly fixed rate loans without balloon payments, but the payments for those are significantly higher, so many people are not willing to consider them.

A Home Equity Line of Credit, or HELOC (pronounced hee-lock) works more like a credit card than anything else. At one point in time, I actually had a VISA card linked to a HELOC. There is an initial draw, which can be $0, and your monthly payments are based upon your actual balance. If there is no balance, no payments. The main difference is where credit cards are usually indefinite period and you can keep charging on the card as long as you pay your bills and stay within your limit, HELOCs usually only have a five year initial "draw period" when you can actually take more money, followed by what is most commonly a twenty year repayment period where you are making payments, but cannot draw any additional money. Unlike Home Equity Loans, HELOCs are variable interest rate loans based upon the prime rate on a certain day of the month. Also unlike Home Equity Loans, HELOCs are lines of credit, where you can take more money as long as you are within the draw period and under your limit. Also, so long as you are within the "draw" period, the minimum payment is usually based solely upon the interest accruing in any given month. It's only after the draw period ends that most of these loans begin to amortize as far as the minimum payment is concerned, but you can always pay extra.

With both Home Equity Loans and HELOCS, they are assumed to be Second Trust Deeds, with a different kind of mortgage in first position. But because the closing costs can be much lower than for a regular first trust deed, it need not necessarily be so - you don't have to have another mortgage in front of them. Indeed, sometimes with comparatively small mortgages (usually under $100,000) it can save you money by selecting a Home Equity Loan or HELOC instead. Even if the rate for the Home Equity Loan is a quarter of a percent higher than for a fixed rate first mortgage, it can save you money by not costing you $2500-$3500 in closing costs. Often, you can find competitively priced second mortgages where the closing costs are zero. So if you can save $2500 on a $100,000 balance, it'll take you ten years to recover the difference in closing cost at a quarter of a percent per year, if you buy with a traditional first mortgage, and most people refinance within three years anyway. In such cases, it can make sense to choose a Home Equity Loan or Line of Credit instead.

Home Equity Loans and HELOCs are priced upon the degree of risk that lender is assuming. If you're taking out a $100,000 loan on a half million dollar "free and clear" property, you can expect better rates than someone taking out the same loan when there's a $300,000 loan already in place. One thing to be aware of is that because Private Mortgage Insurance is typically not available, lenders for Home Equity Loans and HELOCs have significantly greater equity requirements, and they are not typically willing to insure any amount over 90% CLTV, or comprehensive loan to value ratio, at least not as of this writing. Given how badly they were burned by piggyback loans, I would not expect this to change any time soon.

Caveat Emptor

Original article here

Not interested? Most people aren't when it's talking about how they got taken advantage of in the past. First off, it's in the past so it is over and done with, and there's no use dwelling on it, right? Second, there's the ego thing. Nobody who's been bragging about what a great deal they got likes to find out they've been had. Taken for a ride. Conned. Big time.

Anyone reading this who isn't interested in improving what happens next time can tune out now, because that's what the rest of this article is about: educating you in how to shop for a loan and what the tricks are, and if you've never had a real estate loan but want one someday, chances are you'll benefit from reading it too. If you're the sort of person who isn't interested in improving your future loan, chances are you're not a regular reader because helping folks understand their financial options for next time is the most consistent thing I do here.

On a very regular basis people tell me how they got taken advantage of by a loan provider. Actually, a lot of them think they're bragging about what a great deal they think they got, when in their situation, I wouldn't take that loan if the bank paid me. High points charges that stick around in the balance essentially forever. Points on hybrid ARM loans (3/1, 5/1 and 2/28 are the most common). Prepayment penalties, especially needless prepayment penalties, or prepayment penalties that last longer than the period of fixed interest rate. Fixed rate loans where hybrid ARMS are more appropriate. Long terms where a shorter term would be more in your best interest. Most loan officers are looking for an easy sale, and no loan officer ever complains that a sale was too easy to make. Failing an easy sale, they'll look for any sale. If they don't get you signed up for any loan, they don't make any money. They are not responsible for your best interest, they are responsible for making money and not stepping over legal limits which are very different (in the sense of being less restrictive to loan officers) than most members of the public believe. If ever a loan officer tells you that in your circumstances, they wouldn't refinance, make sure you get their contact information and put it someplace you will be able to find it when you go looking for your next loan because such a loan officer is a treasure worth keeping.

First off, if your credit score is above about 660 and you have a prepayment penalty, chances are excellent that you were taken for a ride. People with credit scores above 660 should usually be A paper, not subprime. A paper does not need a prepayment penalty except when the loan officer wants to get paid more. A 2 year prepayment penalty is worth a good chunk of change on the secondary bond market - usually about 4% of the loan amount. This means that if you have the $270,000 loan I use as the default here, they made almost $10,000 over and above the normal price spread when they sold your loan. And even when they retain servicing rights, lenders sell loans over 95 percent of the time. At the very least, you should get some kind of benefit for accepting a prepayment penalty A paper. A current "maximum conforming" loan of $417,000 would be worth almost $17,000 more to the lender with a prepayment penalty than without. This, all by itself, is often a reason they stick folks in subprime situations. If you think you're A paper, make them show you the turn-down from the automated loan underwriting program (Desktop Underwriter or Loan Prospector) before you even consider a subprime loan.

Since I first wrote this, it has become more difficult to get A paper loans in the 660 to 720 range, especially if you're in a situation above eighty percent loan to value ratio. Keep in mind, however, that 720 is the median credit score nationally (half above, half below). It isn't difficult to get a 720 credit score if you will try, and that FHA loans are now much more useful than they were for avoiding the need for subprime loans. No to mention that it's very difficult to find a real sub-prime loan these days - the few sub-prime lenders left that I'm aware of have basically the same qualification standards as A paper. The way I'm putting it is they're looking for borrowers who don't think they're "A paper" but are.

If your credit score is below 620, you're almost certainly stuck with a loan where you have a prepayment penalty by default. Buying it off is usually a good idea, but buying them off isn't free. Between 620 and 659, there's some wiggle room as to whether you will get an A paper loan. If you have twenty percent equity in the property or are making a 20 percent down payment, chances are good you'll make it full documentation. Since Stated Income loans are not available anywhere I'm aware of at this update, full documentation is the only way to get a loan.

But most people never undertake the most important step they can to get a better loan. They don't shop multiple lenders, and by shop multiple lenders I mean have conversations about the best loan for your situation. When I first wrote this, I advised people to ask for a quote guarantee and sign up for a back up loan, but changes to the way lenders handle mortgage loan rate locks mean that nobody can give those at loan sign up. But shopping a very few lenders and having real conversations will likely save you $10,000 over the period you keep an average loan. There are lenders out there doing oodles and scads of business charging borrowers thousands of dollars more than the average lender.

I have changed where I hang my license several times since I entered the business, and the one thing (other than looking for loan officers who don't understand the way the business works) that most of the firms out there have in common is that they don't want to compete on price. They know they may have to the first time, but they want the client that just automatically comes back to them that they can soak for two or three points on every loan, in addition to whatever they earn for the prepayment penalty. I understand this yearning very well; it's a normal human desire to want to make more for the same amount of work, and also to lock up the customer for the future. If all you think about is how easy the loan is to get, you are these firms' favorite type of client. Guess what? You may not see their extra $10,000 or $15,000 as a separate charge on any of your paperwork, but it is there and you are paying it, and someone who knows what they are looking for can find it. Most folks would never dream of paying $50 for the same toaster that everyone else is buying for $13.99 at Target, but the way loans are priced is confusing at first sight, and people don't want to sort it out. It's pretty easy, actually. Figure out what kind of loan you want and qualify for, then price the rate/cost trade-offs of that loan type amongst the various loan providers. Figure break-evens on the extra cost of the lower rate. One rule I have never encountered an exception to is that if a loan provider pushes a low payment to sell a loan, they are a crook. If they sell by interest rate, they may be worth talking to, providing the loan type is what you're looking for. If they sell by the Tradeoff between rate and cost, they're definitely worth talking to. And if someone suggests a different type (i.e. not 30 year fixed), hear them out but make certain they tell you all of the details. There is always a reason why one loan is significantly cheaper than another loan. Never sign up for a loan until you are certain you understand what that reason is

Another very common tactic used to induce your business is advertising. Remember the loan ads that went "Lost another one to (mega corporation which shall remain nameless)"? That particular mega corporation is not competitive rate-wise or underwriting wise with others. Joe ShadyBroker who earns six points on every loan can often deliver better rates than they will. What they were trying to via their advertising is create the illusion of low prices by telling you they have low prices. Then, when you call and they quote the superficially low payment due to a rate where you have to pay three points to get it, they've got the average potential client suckered. Because their payment on a 2/28 loan with a 3 year prepayment penalty where you have to pay three points to get the rate is lower than mine on a thirty year fixed with zero points, people will sign up. Why? Because it looks more attractive to them at first glance. Get the calculator and the checklist of questions and ask the questions and do the math. Nobody can take advantage of you without your consent, but those who allow themselves to be intimidated by numbers are giving their consent. Actually, with most places, it's like begging, "Oh, please, I want to pay thousands of dollars more to get a higher interest rate!"

If someone doesn't ask questions like "how long are you planning to keep it?" or "how long do you usually keep real estate loans?", especially if they just launch right in to a spiel based upon a low payment, they are a cash-sucking Vampire. They may be an intelligent vampire doing what they are doing in full cognizance of what it does to you, or they may be an innocent vampire who doesn't really understand the business and who is being controlled by a green-blooded master cash-sucking vampire, but in either case you don't want to do business with them. Yes, these are sales questions. Yes, they get you talking to a salesperson, who then has a possible opening to talk you into something that may not be in your best interest. If they don't ask the questions, I guarantee that they're trying to push you into something that isn't in your best interest. Which is better: Not talking to a salesperson and being certain of being messed with, or talking to a salesperson and possibly being messed with? Note that there is no option that says "Don't talk to a salesperson and not get messed with." If their people don't know enough to help you from their own knowledge, those sales folk were probably intentionally hired because they didn't know any better. It is not a crime to make money. They are looking to make money, I am looking to make money, everybody in every line of business is looking to make money, including your employer - that's how they pay you. If I were independently wealthy and never needed or wanted to make money again, I certainly wouldn't be doing real estate loans, and neither would anyone else. You can take the attitude that you're going to pay a reasonable amount, and while you can take steps to hold that amount down and make certain it doesn't get outrageous, you know you're going to pay what it costs, or you can take the attitude that a cheaper quote means you'll actually get that rate at that cost when the overwhelming probability is that they're lying to get you to sign up. You need to look gift horses in the mouth. If someone's quoted fees are lower or higher than everyone else's, there is a reason. If they're too low, it's probably because they're pretending that a large percentage of what you are going to pay doesn't exist, because that gets people to sign up. Ask them if they will guarantee their total fees in writing. If the answer is anything less than a (qualified) "yes", they are lying. Actually, most of the liars won't tell you "no" in response to that question. They'll try to distract you with some line about how they're a major corporation or how they honor their commitments or any of several other lines that mean absolutely nothing. The MLDS and Good Faith Estimate are not commitments. Major corporations pull the same games as everyone else. In fact, they usually get away with playing even worse ones than Joe ShadyBroker because of their "name recognition". Even though the government has stepped in and made it harder to justify changes to the amounts, the companies who do this have figured out all the loopholes - and there are some big ones.

So shop around. Ask every single prospective loan provider every single question in this article. Pull out the calculator to see if it's believable, to see if the numbers work.

The typical savings of being a savvy consumer is literally thousands and likely tens of thousands of dollars every time you get a real estate loan. You may not see the savings directly on the HUD-1 at closing, but they will be present nonetheless. If you don't accept a prepayment penalty, that's thousands of dollars you've saved yourself down the line when you've been transferred and need to sell. If you get a rate that's a quarter of a percent lower (for the same price!) on a $270,000 loan, that's $675 interest you are saving per year. That's a couple of car payments; perhaps enough to let you buy for cash next time you need a car. If you invest the difference over the potential lifetime of your mortgage, a difference of over $127,000! If you save yourself the two extra points of origination that they were going to charge you, that's over $5500 that either is in your pocket, and that you can invest or spend on other things, or $5500 that isn't in your mortgage balance, where you're going to pay hundreds of dollars in interest on it per year ($357.50 per year at 6.5% interest), in addition to owing the base sum.

My point is this, folks. If I were a financial advisor trying to score an extra quarter percent commission off of you, most of you would be upset. Many people are so upset by 0.25% 12b1 fees in mutual funds that they won't pay the advisor who would save them a lot more money than the 0.25% per year simply by simply reminding them of sound investment principles. If I were a car salesperson trying to pad the cost of the car you were interested in by $5500, a large percentage of the population would most likely slug me. But because real estate transactions are complex and people don't want to take the time to understand them, they unwittingly walk into situations like this, and many people do so repeatedly throughout their lives, making the same mistakes about every two years. The dollar amounts are large enough that even small differences are thousands of dollars. If you're not going to guard your pocketbook, most loan providers will pick it.

The workman is worthy of his or her hire. The person who gets you the loan is entitled to be paid. Judge the loans on the bottom line to you; how much it costs and what you will get. The proof that they got you a better deal was that they delivered a better loan, not that they made less money. And if the person who does your loan can make an extra half-point while actually delivering you a loan that is the same rate on the same loan at less cost than the other provider, haven't they earned that money? You came out ahead because of their work - had you gone with any other loan, you would have paid more or had a higher rate. They made more. Definition of win-win. There is a loser here, by the way, but you'll never know who it was. It is the lender or the broker you didn't sign up with. But by finding you a program you fit better, the loan officer you did sign up with got you a better deal and made more money. It happens every day, if you make the effort to look for it, and go about it in the right fashion.

Caveat Emptor

Original here

I have never had someone tell me they wanted more information than this letter provides. I also require the prospective loan officer to fill if out for prospective purchasers of my occasional listings.

DELETED (Mortgage Corporation)
Address DELETED
City and ZIP DELETED
Phone DELETED

My name is Dan Melson and my License number with the Department of Real Estate is DELETED. I have funded in excess of one thousand real estate loans

This is to certify that I have performed initial investigation as to whether Mr. Client and Ms. Client are eligible for the contemplated loan and purchase under the purchase contract being submitted on (property address)

I have run their credit score with all three major credit reporting agencies. Credit scores as of DATE are

Person Equifax Experian TransUnion

Primary Borrower XXX XXX XXX

Co-Borrower XXX XXX XXX

The credit report lists their current monthly debt service as being a total of $X/month, and according to Mr. Client and Ms. Client, they have no other debts.

I have in my possession copies of paystubs for current year and w-2s or tax forms for the prior year, acceptable to lenders for documentation of income. These indicate pay for the last thirty days as well as year to date pay and prior year.

Total Income for the period to be averaged $X (DELETED months)

This indicates an average monthly income of $X

This monthly income, per (details of specific loan) guidelines, allows a total debt service plus housing of up to $X per month.

Projected Property Taxes: $X/month
Homeowner's Insurance: $X/month
HOA Dues: $X/month
Mello-Roos: $X/month

Fully Amortized Loan Payment: $X/month ($X at Y%, type of loan, pricing date)

Total of housing and other debts : $X/month

Since this is less than the total allowance based upon income, I have reason to believe Mr. Client and Ms. Client will qualify for the loan based upon Debt to Income Ratio. Projected back end Debt to Income Ratio: X%

The Allowed Loan to Value Ratio for contemplated loan per lender guidelines is X%.

I have in my possession current bank and other asset statements indicating the presence of liquid assets in the amount of over $X

Projected down payment: $X
Projected loan closing costs: $X (includes loan closing costs including all third party costs as well as points, if any)
Projected impound account and prepaid: $X
Other projected expenses: $X (Inspection and anything else I know we'll need)

Total: $X

Accordingly, Mr. Client and Ms. Client appear to be in possession of sufficient cash to fund the projected down payment and other closing costs.

Therefore, according to known underwriting guidelines applicable to the specific loan indicated above, having verified and tested Debt to Income Ratio, Loan to Value Ratio, Credit Score, and cash to close, I have a reasonable basis to believe that Mr. Client and Ms. Client will qualify for the above contemplated loan in a timely fashion to complete the contemplated purchase in a timely fashion.

Sincerely

Dan Melson, Loan Officer
DELETED (Mortgage Corporation)
Address DELETED
City and ZIP DELETED
Phone DELETED
Fax DELETED

This website does not speak for my brokerage, therefore I do not use their name here, but those are filled in on the real thing. Actually, I use computer generated letterhead. This is the precise equivalent of an accountant's testimonial letter. Whomever it is given to needs to be able to contact me with questions, and I am responsible for specific details I mention. Without those details, I might add, whatever paper this is printed upon is completely worthless.

I write every one of these specific to a given property and a given purchase contract and loan pricing as of a given date, and usually with quite a bit of wiggle room on the actual rate and cost. It doesn't do any good to write that the loan depends upon getting financing that may not be available tomorrow if the rates rise even slightly. It certainly doesn't do anyone any good to write that "Mr. Client and Ms. Client are pre-approved for a loan up to $X" without specifying the parameters I used to justify that statement. Debt to Income Ratio, Loan to Value Ratio, Size of loan, size of payment, estimated closing costs, estimated cash to close, specific tradeoffs between rate and cost that vary daily (at least) - all of these have an effect upon whether the prospective buyer will qualify for this loan under this proposed contract today. Without all of this information, the seller's determination as to whether to grant credit by signing that purchase contract is missing some vital information. It's not that any prequalification or pre-approval is actually worth anything, in the sense of being able to hold that loan officer responsible for any and all failed loans, but they can be held responsible for material misrepresentation. Without a representation or relevant facts used to reach the conclusion, what assurance have you that the person who wrote it didn't just flip a two-headed coin? "Sure, they qualify!" (I'll figure out what they really qualify for later, but they sure are happy with me for saying they qualify...)

The whole idea of such a letter is that the person to whom it is presented can go to any competent loan officer and ascertain whether or not this loan can be done. I have never had anyone call me for more information or for verification - which means one of three things must apply: 1) The people on the other end can tell that the loan can be done, 2) They're just putting the letter in the file for CYA, 3) They're just asking for this letter so they can illegally refer people to a specific loan provider who refers the clients back to them or gives even better kickbacks.

I'd like to see this or something like it standardized across the industry. If you're going to write a letter, you might as well write one that means something, that contains enough information for the person on the other end to be able to make a reasonable determination of whether this is, in fact, a reasonable transaction that has every likelihood of becoming a fully consummated transaction. That is the only possible excuse for requiring such a letter in the first place - your client's best interest. You can satisfy your client interest without violating RESPA - all you need is the information to know whether the loan officer writing the letter based that letter on solid facts or not.

Caveat Emptor

Original article here

Agents rationalize this in all sorts of interesting ways, so let's just start by quoting the cold hard federal law. It's pretty damned clear:

RESPA

no person shall give and no person shall accept any fee, kickback, or thing of value pursuant to any agreement or understanding, oral or otherwise, that business incident to or a part of a real estate settlement service involving a federally related mortgage loan shall be referred to any person.

Let me repeat the important part: no person shall give and no person shall accept any fee, kickback, or thing of value

Is a "business relationship" a thing of value? It seems straightforward enough - I can't find anybody who says "no" - until we're talking about prequalifying my clients with their favorite lender. Then I get all kinds of hemming and hawing about there being "no money involved," as if the relationship itself were not valuable. That lender would now have client information, the ability to contact them per that "business relationship" codified in law, and likely the ability to sell that client's information (amazing how often the ability to opt out isn't offered until after the information has already been sold). Look up the legal definitions of consideration and value: I assure you that those definitions are not restricted to transactions where money is involved.

This pretends, of course, that there might exist such a referral relationship where there's absolutely no element of "You scratch my back - I'll scratch yours" involved. I have yet to find such a relationship. I suspect that even if I were to emulate Diogenes looking for such, I would die unsuccessful. Even when I am referring folks to real estate agents elsewhere, despite the fact that I accept no referral fees, there is some possibility they will eventually refer me some business back. Even if they don't, I still get the knowledge that these folks I dealt with in some way were satisfactorily served by a competent, conscientious provider. All of these things are of value to me, and if you're a professional agent or loan officer, they should be to you, also. And the business relationship is certainly valuable to the receiver. Therefore, all of these things involve both the giving of and the receipt of value.

REALTOR Magazine

Generally, to operate an affiliated business arrangement legally, you need to:

* Disclose to consumers your interest in the affiliated company
* Tell consumers the cost of the service
* Explain there's no required use, i.e., consumers are free to go elsewhere for the service without penalty

And there's the rub. When you require that consumers use a particular service, they are not free to go elsewhere. It doesn't matter if you don't have a financial interest. The only difference if you have no financial interest is that you don't have to disclose that interest.

It is one thing if the consumer asks for a referral. Then you can tell them about any companies, any providers of services you like, so long as you disclose any financial interests you and your company may have. It is a completely different matter to require them to use your favorite loan provider - and illegal. Even "just for prequalification"

Now if you want to argue about "How do I fulfill fiduciary duty to my client by filtering out unqualified buyers rather than wasting months on transactions that will never fly," you simply need a very few pieces of information: Debt to Income Ratio, Loan to Value Ratio (which you should know yourself from the contract) Credit Score, and Cash to Close. I guarantee you this is more information than 99.9 percent of all loan officers investigate when writing a qualification testimonial. Your client is entitled to this information - they are involved in a decision as to whether to grant credit by agreeing to the purchase contract, which will cost them thousands of dollars if unsuccessful. Then take this information to anyone you choose and ask them if they could get a loan done for this borrower. You have absolutely no reason to require any potential buyer patronize any particular loan provider in order to get this information.

(Here's a letter with an example of the information required)

And here's my public service for the day, to inconvenience those ethically challenged individuals that persist in this illegal practice of requiring buyers to pre-qualify with a given lender:

report RESPA violations

You should send a written complaint describing the practice that you believe violates RESPA. The complaint should include the names, addresses and phone numbers of the alleged violators. It is preferred that you include your name and phone number in case an investigator wishes to ask further questions. You may request confidentiality. Send the complaint to:

U.S. Department of HUD
Office of RESPA and Interstate Land Sales
451 7th Street, SW, Room 9154
Washington, DC 20410

Caveat Emptor

Original article here

As of July 1, 2005, mortgage providers have to have explicit written authorization to run credit.

I am not certain of the political forces that made this bill, and it is still not clear to me whether this extends to non-mortgage credit providers. If it does, this is probably one of the niftiest consumer protection things to come down the pike in a long time. On the other hand, if it's limited to mortgage providers, then it's a stab at making life difficult for Internet brokerages, which may do business at a remove of thousands of miles.

An Internet broker employee is talking on the phone with a client, not physically in the client's presence. They can be some of the cheapest and best loan providers out there, if they are so minded (as I keep saying, a far more important concern is how low a provider is willing to go, not how low they can go. Internet brokerages can also be consummate ripoff artists). It becomes a real hardship on their business if they can't run credit without explicit written permission, whereas it's not a major issue with a more traditional brokerage or direct lender.

Recent changes in the business mean that this is becoming less important. Nobody is locking loans any longer before they have a loan commitment (i.e. basic underwriting approval with enumerated conditions for actually funding the loan). I still can't run your credit until I get a signed form that says you give me permission. No big deal if I'm sitting right there. A real pain if I'm in California and the client is in Florida. I'm not even certain facsimile permission (no original signature) is acceptable, as it's not something that enters into my current business. This means a delay potentially of days while the form gets back to the lender. So life for an ethical Internet broker suddenly gets a lot more difficult, while life for the crooks becomes no harder.

On the other hand, if the requirement for written permission extends to all providers of credit, then it becomes worth the game. Mind you, an adult should be aware of what's going to happen if they give a social security number to a car dealer, furniture store, or anyone else. I've never heard of anyone using it just for liar's poker ("Oooh, this is a good one - four 8s!"). If you give a merchant your social, then they are going to run your credit. Treat it as a mathematical certainty, because it might as well be.

Each time somebody runs credit, it's an inquiry - a ding on your credit. Inquiry dings are progressively damaging. They cause your score to go down, each and every time you have an inquiry, and the more inquiries you have, the more each new inquiry drives it down. There used to be a game among mortgage providers until the new rules a few years ago - see if they could be the last ones to run your credit before it went under a threshold score, and some would run it multiple times if they could. Anybody running after that would be at a disadvantage, because you no longer qualified for a given credit score's pricing level.

The exception to "a ding for every inquiry" is mortgage credit. With the new rules that every consumer should get down on their knees and give thanks to the National Association of Mortgage Brokers for getting through Congress, consumers are now actually permitted to shop around for mortgage rates without getting dinged every time their credit is run - provided they run credit under a business code that say's "inquiry for mortgage." (So if you are mortgage shopping at a bank or credit union, be sure they run your credit under their mortgage inquiry code, and not a general inquiry code). All of the times it is run within fourteen days by mortgage providers count as exactly one inquiry. This gives consumers the ability to shop as much or more for a mortgage as they would for, say, a toaster oven, without being penalized.

But if the new rules apply to non-mortgage credit grantors also, this is a good thing. Here's why: Every time I start a loan, I have a set spiel that I go through. "Don't change anything, credit-wise, even if you think it will help. Don't buy anything. Don't charge anything on your credit cards. Make your normal payments - no more, no less, unless you ask me first. And don't allow anybody except mortgage providers to run your credit for any reason. Don't even let them have your social. Because they will run your credit, I guarantee it."

On every home loan, one of the last things that will happen before your loan is recorded in official records at the county will be that the lender will run your credit again to make certain nothing has changed. And if anything has changed, you will very likely lose the loan (and the house if it's a purchase). Even if the escrow company has the money or it's actually been disbursed, the lender will pull it back, as they can do that until the deed is recorded. So there is a real need for prospective borrowers to understand that until the final documents are recorded with the county, they shouldn't so much as breathe differently.

For a certain personality type, being told she can't shop for curtains and furniture and paint for her new house is nothing short of torture, and so I've learned to be very explicit. "It's okay to look, to talk to the nice salesfolk, and to get an idea of what you want. But don't actually buy anything. Tell the nice salesman who says he just 'wants to get a head start on your order' that your mortgage loan officer said that you're right on the line, and anybody else runs your credit and drives you under the line the first consequence to the furniture or paint or drapery salesperson will be no order, because they're likely to cost you the loan.

So while you have a home loan pending, tell the nice salespersons that you're really protecting them by not giving him your social, because if they run your credit and cost you the loan you'll have to tell your uncle Bruno the mobster about it. And we all know what happens then.

Back in the real world, things are not usually quite that bleak. But it's surprising how often people end up with higher rates and higher payments and worse loans because they didn't understand this one point. Suppose your monthly payment is $50 higher than you thought it would be, in addition to what you spent on the new stuff that caused money to go into that salesman's pocket. Doesn't that make you feel all Warm And Tingly towards that salesman? Didn't think so. And a certain percentage of the time, this new monthly payment you now have because you Bought Something means you Do Not Qualify for the loan. So: No loan. No house (if it's a purchase). No lower payment (if it's a refinance). No cash out of your equity (if that's what you were trying to do). And so now you've got this stuff, and no house to put it in. Now you've got to tap the vacation or retirement account to pay for it because you're not getting a refinance on reasonable terms. Not to mention all the times these people run credit and hurt people's credit scores without real permission when there's no mortgage loan in the offing. So I can put up with one segment of my industry have a slightly higher bar to jump over if that's the carrot.

Caveat Emptor

Original here

When you have more than one loan on your property, there are some issues you should be aware of. Keep in mind the fact that some states still use the mortgage system, requiring court action to foreclose, as opposed to Deed of Trust, which does not. For practical purposes they are similar, yet I have never done significant work in a mortgage state so there may be small but significant differences.

Each loan is secured by a different Deed of Trust. Two loans, two Deeds of Trust. A Deed of Trust is a three way contract between the borrower (called the trustor), the lender (called the beneficiary), and a third party known as the Trustee, to whom title is nominally conveyed for purposes of selling the property if you default on the loan. The Trustee and the Beneficiary are often the same, and while there is no legal impediment I'm aware of to the Trustor and Trustee being the same, I also cannot imagine a lender agreeing to it.

Trustees can be changed, and this is accomplished via a document known as "Substitution of Trustee," which is required to be recorded with the appropriate county in every state I've done business in.

Each Trust Deed operates independently of all others there may be against a given property. They take priority in order of date. When a Trust Deed is recorded against an property on which there already is an active Trust Deed, it automatically becomes a Second Trust Deed, if another happens it is a Third Trust Deed, and so on.

The reason they have the ordinal is because they are paid off in the order they happened. Suppose the property is sold, and the sale price is not sufficient to pay all of the debts. The trust deeds are not paid proportionally; The First Trust Deed is paid off in full before the holder of the Second Trust Deed gets a penny. Then the Second is paid before the Third, and so on. This is why Second Trust Deeds carry higher rates than First, because they are riskier loans for the lender. As I've said elsewhere, just because the property is sold doesn't mean you're clear. If there is not sufficient money from the sale to pay all debts, you can expect the lender to hit you with a form 1099, reporting that you have income from debt forgiveness, and you will be expected to pay taxes on it. Not to mention that there may be recourse in many cases.

Now, if for whatever reason you pay off your First Trust Deed, the Second automatically goes into the first position, and any subsequent loan goes into second position. This is most common when people go to refinance the loan secured by their First Trust Deed. Even if you do not particularly want to pay off your Second Trust Deed, it may be the best thing to do. Because what happens if you just pay off the First Trust Deed (only) and get a new Trust Deed, is that the new Trust Deed will go into the second position. Unfortunately, in order to get the quoted rates for a primary loan, it is a requirement that the loan be in first position. If it's not in first position, they will not actually fund it. In short, no loan.

This is not necessarily an impasse. Many times, the holder of the second trust deed, because their loan was priced to be second in line anyway, may agree to subordinate their loan to the new loan, which is a fancy way of saying "stand in line behind the new trust deed holder".

They don't have to do this, and there is no way, other than paying off their loan in full, to force them to do so. Some companies never subordinate, while some others are never willing to stand second in line at all, and others are in both categories.

For those that will consider it, they are going to stipulate some conditions. First of all, the new loan is likely going to have to put the borrower into a position where it is easier, or at least no more difficult, to make payments and pay off the loan. So monthly payment usually cannot rise.

Second, they are going to want their trust deed to be in no worse of a position than it was when the loan was originally approved, as regards the value of the home being able to pay their loan off too if for some reason either loan is defaulted. They may even require than you agree to a higher rate, higher payments, or a different loan altogether - as I said, there is nothing you can do to force them to cooperate.

Assuming that they are willing to cooperate, they will require that the entire process on the prospective new loan be essentially complete - that is, ready to draw documents and fund when the Right of Recission expires after three days, before they will even look at it. Some lenders take 48 hours to look at a subordination request, others take up to six weeks, and it can be even longer. For any given lender, it takes as long as it takes.

There is also going to be a fee involved. They have to pay their people to look at the loan situation and make certain it still falls within guidelines. They're the ones doing you the favor, they certainly are not going to do the favor for free. Whether the subordination request is eventually approved or not, the subordination fee is likely to be non-refundable, a sunk cost that you are not going to get back even if it's not approved.

Even more important than that, however, subordination takes time. When I first wrote this, I locked every loan as soon as I could. It's more complicated now, but I still prefer to lock early rather than later. No loan quote is real unless locked, all locks are for a specified period of time, no lock is good past the original period of time unless you pay an extension fee, and if you need to lock for a longer period of time in order to subordinate, either the rate, the cost, or possibly both will be higher. Since this can add anywhere from two days under idea conditions to six weeks or more for a refinance that takes three weeks to get approved and get funded in the best of times, this means a longer lock period becomes advisable. Most often, the extra costs mean that it's more cost effective to just pay off both loans rather than subordinating the second to the new loan.

Since Home Equity Lines of Credit are always secured by a trust deed, they count as any other second mortgage would. You'd be amazed how often people do not disclose Home Equity Lines of Credit even when directly asked about them. They are only hurting themselves, but they often get angry to no good purpose when, if they had been upfront about them, the loan officer could have designed around any difficulties. Furthermore, people are often resistant to the idea of paying off and closing Home Equity Lines, despite the fact that they are easy to get. I've had people stonewall, utterly in denial that this is a Deed of Trust upon their residence until I have the title company fax me a copy of the Trust Deed, and reference it with the Preliminary Report, and ask to see the Reconveyance (which is a fancy way of saying the piece of paper proving that the trust deed has been paid off). If it's a legitimate lien, we have to deal with it. Actually, we have to deal with it if it's not a legitimate lien as well, just in a different manner. On the other hand, some time ago I had some seasonal resident clients whose ex-caretaker had managed to take out a loan against the property. It does happen, and it's a mess, but most times it's just the people themselves who weren't told - and didn't figure out - that this financing agreement they signed for the pool or air conditioner or roof was a second trust deed on their house.

To summarize then, second loan means second trust deed, if you refinance they must be paid off or subordinated, and subordination takes time such that it may be better to pay it off than go through the rigamarole of subordination.

Caveat Emptor

Original here

Every so often I run across a reference to a "rate buydown" I don't like to use them because they don't benefit the client, but I should explain them, what they are, and how they work.

A rate buydown is where for an upfront price, the lender agrees to give you a temporarily lowered interest rate on what is usually a fixed rate loan. 2/1/0 buydowns, where the rate is two percent lower the first year, one percent lower the second year, and then at the loan rate the third year, are the most common, but I've seen one year buydowns of two percent, two year buydowns of one percent for those first two years period, and any number of other tricks.

This isn't free. A 2/1/0 buydown usually costs three points. In fact, what usually happens is the three points go into an escrow account somewhere where they pay out the money to make up the difference in interest to the lenders as the loan goes along. When the buydown period is over, the lender who originally funded your loan then gets to keep what's left over.

Here's what this means to you. Let's make this easy. Say you would have had a $291,000 loan, fixed at 7 percent, without a buydown. But with the buydown, you have a $300,000 loan at 5 percent the first year, six percent the second, and 7 percent from there on out. In order to really understand this, let's first take a look at your loan without a buydown:

Month 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Balance $291,000.00 $290,761.47 $290,521.55 $290,280.23 $290,037.50 $289,793.35 $289,547.78 $289,300.78 $289,052.34 $288,802.45 $288,551.10 $288,298.28 $288,043.99 $287,788.22 $287,530.95 $287,272.19 $287,011.91 $286,750.12 $286,486.80 $286,221.94 $285,955.54 $285,687.58 $285,418.06 $285,146.97

Payment $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03 $1,936.03

Interest $1,697.50 $1,696.11 $1,694.71 $1,693.30 $1,691.89 $1,690.46 $1,689.03 $1,687.59 $1,686.14 $1,684.68 $1,683.21 $1,681.74 $1,680.26 $1,678.76 $1,677.26 $1,675.75 $1,674.24 $1,672.71 $1,671.17 $1,669.63 $1,668.07 $1,666.51 $1,664.94 $1,663.36

Principal $238.53 $239.92 $241.32 $242.73 $244.14 $245.57 $247.00 $248.44 $249.89 $251.35 $252.82 $254.29 $255.77 $257.27 $258.77 $260.28 $261.79 $263.32 $264.86 $266.40 $267.96 $269.52 $271.09 $272.67

Tot Int. $1,697.50 $3,393.61 $5,088.32 $6,781.62 $8,473.50 $10,163.97 $11,852.99 $13,540.58 $15,226.72 $16,911.40 $18,594.62 $20,276.36 $21,956.61 $23,635.38 $25,312.64 $26,988.40 $28,662.63 $30,335.34 $32,006.51 $33,676.14 $35,344.22 $37,010.73 $38,675.67 $40,339.02

Tot Prin $238.53 $478.45 $719.77 $962.50 $1,206.65 $1,452.22 $1,699.22 $1,947.66 $2,197.55 $2,448.90 $2,701.72 $2,956.01 $3,211.78 $3,469.05 $3,727.81 $3,988.09 $4,249.88 $4,513.20 $4,778.06 $5,044.46 $5,312.42 $5,581.94 $5,853.03 $6,125.70

Now let's look at it with the buydown:

Month 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Balance $300,000.00 $299,639.54 $299,277.57 $298,914.09 $298,549.10 $298,182.59 $297,814.56 $297,444.99 $297,073.87 $296,701.22 $296,327.01 $295,951.24 $295,573.90 $295,257.63 $294,939.77 $294,620.32 $294,299.27 $293,976.62 $293,652.36 $293,326.47 $292,998.96 $292,669.81 $292,339.01 $292,006.55

Payment $1,610.46 $1,610.46 $1,610.46 $1,610.46 $1,610.46 $1,610.46 $1,610.46 $1,610.46 $1,610.46 $1,610.46 $1,610.46 $1,610.46 $1,794.15 $1,794.15 $1,794.15 $1,794.15 $1,794.15 $1,794.15 $1,794.15 $1,794.15 $1,794.15 $1,794.15 $1,794.15 $1,794.15

Interest $1,250.00 $1,248.50 $1,246.99 $1,245.48 $1,243.95 $1,242.43 $1,240.89 $1,239.35 $1,237.81 $1,236.26 $1,234.70 $1,233.13 $1,477.87 $1,476.29 $1,474.70 $1,473.10 $1,471.50 $1,469.88 $1,468.26 $1,466.63 $1,464.99 $1,463.35 $1,461.70 $1,460.03

Principal $360.46 $361.97 $363.48 $364.99 $366.51 $368.04 $369.57 $371.11 $372.66 $374.21 $375.77 $377.33 $316.28 $317.86 $319.45 $321.05 $322.65 $324.26 $325.89 $327.51 $329.15 $330.80 $332.45 $334.11

Tot Int. $1,250.00 $2,498.50 $3,745.49 $4,990.96 $6,234.92 $7,477.35 $8,718.24 $9,957.59 $11,195.40 $12,431.66 $13,666.35 $14,899.48 $16,377.35 $17,853.64 $19,328.34 $20,801.44 $22,272.94 $23,742.82 $25,211.08 $26,677.71 $28,142.71 $29,606.06 $31,067.75 $32,527.79

Tot Prin $360.46 $722.43 $1,085.91 $1,450.90 $1,817.41 $2,185.44 $2,555.01 $2,926.13 $3,298.78 $3,672.99 $4,048.76 $4,426.10 $4,742.37 $5,060.23 $5,379.68 $5,700.73 $6,023.38 $6,347.64 $6,673.53 $7,001.04 $7,330.19 $7,660.99 $7,993.45 $8,327.56

It is also to be noted that in the very next month, your payments go to $1982.23, as opposed to the $1936.03 they would have been in the first place, and that they will stay there the rest of the loan, all 336 months should you keep it the rest of that time. Why? Because your balance is larger than it otherwise would have been, so the payment is higher, in this case by $46.20, due to the higher loan amount.

Finally, let's look at the differences:

Month 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Escrow Acct. $8,552.50 $8,176.27 $7,796.79 $7,414.04 $7,028.00 $6,638.63 $6,245.92 $5,849.83 $5,450.34 $5,047.43 $4,641.06 $4,231.22 $3,817.87 $3,647.29 $3,475.21 $3,301.60 $3,126.46 $2,949.78 $2,771.53 $2,591.72 $2,410.32 $2,227.32 $2,042.72 $1,856.50

Net cost $8,552.50 $7,982.95 $7,413.19 $6,843.21 $6,273.02 $5,702.62 $5,132.02 $4,561.21 $3,990.21 $3,419.02 $2,847.64 $2,276.08 $1,950.65 $1,687.67 $1,424.51 $1,161.18 $897.67 $633.98 $370.13 $106.11 -$158.09 -$422.44 -$686.97 -$951.65

What this means is that your lender's escrow account ends up with $1850 that they get to keep, on top of everything else they made from the loan. You paid that money! The final column is the net cost to you, what you paid to get it less the interest it saved you. Hey, look at this! In month 21 it goes negative! You must be saving money if you keep it that long, right?

Nope. This is a temporary and illusory savings phenomenon, and I don't know of any way to make it permanent. You see, the benefits stop in month 24. They are over. Kaput. Gone. That's all, folks. But you owe $6798.14 more (at the start of month 25, not illustrated above) than you would have without the buydown. There are exactly three possibilities as to what happens. First, that you keep the loan. Due to the extra interest you're paying every month, you are in the red again in month 56, and it keeps getting worse the longer you keep the loan. After 120 months of the loan, you are $1755 down. This particular example actually peaks in month 242 at $3351 negative, then starts decreasing, but you don't get it back before the loan is paid off.

The second possibility is if you refinance the loan. Let's say you get a really fantastic deal and refinance at 5 percent on a 30 year fixed rate loan, and I'll even give you that your higher balance doesn't cost you any more in fees. Your payment is $85.35 per month higher than it would otherwise have been, your interest charges $28.32 higher (and the difference represents you paying the principal off faster if you don't pay for a buydown). Your savings is gone in less than three years, and there's nothing you can do about it.

The third and final possibility is that you sell the house. You get $6798.14 less in your pocket. This means that you don't have $6798.14 earning money for you in the stock market. At ten percent your benefit is gone in less than a year and a half. If you take the money and buy another property, that's $6798.14 higher your loan balance will have to be. Let's say you get that same fantastic 5% loan we talked about two paragraphs ago on the new property. Guess what? The same math applies here also. There is no way to win in the end with a buydown, unless someone else pays for it (for example, seller paid closing costs).

So they are a piece of garbage. Why are buydowns attractive, and why do otherwise rational people sign up for them?

The answer is "Because they lower the payment for a while". People choose loans based upon the payment. In particular, they choose loans based upon the payment in the first check they are going to have to write. Most people figure that the check they are going to have to write two or five years out isn't important. Unscrupulous lenders and loan officers know this. That's why the horrible negative amortization loans were so popular, despite them being time-delayed financial poison. So don't shop for loans based upon the payment, and if someone starts talking about ways to cut the payment as opposed to the interest rate, put your hand on your wallet and leave. If they persist, drag them out into the sunlight and put a wooden stake through their heart. It's the only way to be sure.

Before I go, I want to mention one specific group that gets targeted for these things, and that is veterans. The Veterans Administration loan, aka VA loan, has the ability to roll (not coincidentally) three points closing cost over and above the cost of the home into the loan. Most military folks are busy learning their trade, which is usually not something having to do with finance. Indeed, I've never heard of any MOS that included this type of financial training. So when the loan officer whispers sweet nothings into their ear about cutting the payments for the first couple of years, they don't know any better and they sign right up. They could have used those three points for something potentially useful, like discount points that buy you a lower rate for the entire term of a VA loan. If you keep it long enough, they will eventually net you money. The veterans could just not pay those three points, and not start out with what is basically negative equity. But rate buydowns make a loan appear attractive on the surface to someone with insufficient financial training, while costing them money in the long term and allowing the initial lender to make more money than they otherwise would.

Caveat Emptor

Original here

I got a question about what the number one obstacle is to most people qualifying for the loan on the property they want.

The answer is "existing debt." Credit cards, student loans, car payments, etcetera. It seems like more people than not have a reasonable idea of the property people making what they are making might be able to afford. Whereas I do understand people who want a four bedroom house despite only making enough to be able to afford a two bedroom condo, it seems that more folks than you'd think really do have an idea what people making what they do should be able to afford. They can be lured down the primrose path of negative amortization (or the latest scam that has taken its place), but even most folks who fall for it, know on some level that it's not real. They may not realize exactly how nasty it is, but they know it's not the whole truth.

The real hurdle faced by most buyers is that they owe too much money to too many other people for too many other reasons. Every dollar you have in existing monthly obligations is another dollar you can't afford on your house payment. People don't think about this until they want to buy a house, at which point they probably already have tens of thousands of dollars of debt, costing them hundreds or even thousands of dollars per month.

Let's say that Mr. and Ms. Homebuyer make $120,000 per year between them - $60,000 each. They are making $10,000 per month. By the calculations for A paper fixed rate loans, they can afford total monthly payments of $4500 per month. This is a forty five percent debt to income ratio. If housing is their only debt, they easily qualified for a $500,000 property with zero down payment. As of the time I originally wrote this, $2367 first at 5.875% with one point, thirty year fixed rate first mortgage, $752 second at 8.25% 30 year due in 15, $521 per month prorated property taxes, and $120 per month for a good policy for home owner's insurance. Total: $3760. They're $740 under their limit. They would actually qualify for a significantly larger loan if they had no other debt.

(When I originally wrote this, that was true. At the update, rates are lower while 100% conventional financing is not available, but this is still a valid illustration of the principle of debt to income ratio, which is what we're looking at).

However, Mr. and Ms. Homebuyer still have student loans, because everyone knows you don't pay your student loans off. Right? But because Mr. and Ms. Homebuyer owe $50,000 between them, and they're paying $180 each, for a total of $360 per month, that's $360 in monthly housing costs they can't afford.

Also, Mr. and Ms. Homebuyer both have $30,000 automobiles they're making payments on. On five year loans, Mr. and Ms. Homebuyer are paying $600 each. He has four years to go, she has two. That's another $1200 in housing costs they can't afford.

Ms. Homebuyer charged their vacation trip to the Bahamas that cost $10,000 to their credit card, and Mr. Homebuyer put the furniture he bought Ms. Homebuyer on an installment plan. The credit card is $500 per month, the furniture is $400. Net result: $900 more that they can't afford for housing payments, because they have to pay it out for existing consumer debt.

By the time Mr. and Ms. Homebuyer have paid all of the monthly payments they already owe, the lender calculates that they can only afford $2040 per month in housing payments. Now, instead of easily affording a $500,000 house, they don't even qualify for a $300,000 condo. $240,000 first at 5.875 is $1420, $466 for the second at 8.625% (below a price break), $313 property taxes and $240 in association dues. Total: $2439! They're $400 per month short!

For people who have a down payment, often the only way they are going to qualify is by spending it on their pre-existing debt. If they don't have a down payment to pay existing debts off, they are not going to qualify "full documentation," which is a fancy way of saying that the income they can prove isn't enough to qualify them for that loan. Furthermore, the manner in which you pay that debt off can be restricted. Sub-prime lenders don't really care as long you can show where you got the money and the debt gets verifiably paid off. "A paper," however, has to deal with Fannie Mae and Freddie Mac guidelines, which are less forgiving. In case you're unclear, 'A paper' loans are much better. But 'A paper' guidelines are that you cannot pay off revolving debt to qualify, and even installment debt is at the discretion of the underwriter. In short, once your credit has been run, what you can pay off to qualify "A paper" is limited. A lot of folks end up stuck with sub-prime loans because of this. Higher rates, shorter term fixed period, pre-payment penalty. This was one of the big reasons "stated income," was abused so much, at least when stated income loans were available. This always was one of the markets that was tempting for homebuyers to go "stated income" for precisely that reason, but there are real reasons why it is, and always has been, a better idea to buy a less expensive home than go stated income on the loan if you don't really make the money. Lots of folks been getting a concrete real world education in that in the last few years.

However, this is probably the most common reason why people did stated income loans. However, stated income loans mean that your rate is higher, and you might not be able to use all of the money you were intending to as a down payment, because you've got to have reserves for a stated income loan. Finally, and most importantly, stated income loans are dangerous. The debt to income ratio is not just there for the lender's protection - it is also there for your protection. Stating more income so that you can get around the limits on the debt to income ratio is intentionally disabling an important safety measure, meant to keep borrowers from getting in over their heads with loans and payments they cannot really afford. You make $X, which equates to being able to afford total monthly payments of forty five percent of $X. You state that you make an additional $Y per month so that you qualify for higher payments, and you are intentionally defeating that safety precaution. You are going to have to make those payments. The people who loaned you the money want their payments every month! Where is the money going to come from? I would be very certain I could really afford the payments before I agreed to a stated income loan!

So you should be able to see some of the issues that existing debt can cause. Existing debt quite often means that you do not qualify for a property you would easily be able to afford - if only you didn't have those pesky consumer loan payments every month. It can force you to undertake a less desirable loan type, it can force you to accept a pre-payment penalty, and it can prevent you from being able to qualify for the property you want. Alternatively, it can force you to choose between not buying at all, and intentionally defeating one of the most important safeguards consumers have, the debt to income ratio. The smartest thing to do is probably to buy the less expensive property that you can afford now, but all too many people refused to do that, and are finding out right now the reasons why it would have been smarter.

Caveat Emptor

Original article here

The first thing you need to understand in reading any property advertisements is that agents write them to get people to call. They are trolling for clients, not sales. Except in the case of someone who doesn't accept dual agency advertising a listing they actually have, they are written purely with the idea of dangling something out there that clients want. Since most agents like dual agency just fine because it means they get paid twice for the same transaction, understand that only a tiny percentage of the ads that are written out there are written for any purpose other that to get potential clients to call.

Keeping this fact firmly in mind, there are two sorts of places where people go to search for property: Some that are based on MLS, and others that are not.

If it's in MLS or coming from MLS, it better be good information. I can (and do) file violations on liars in MLS. So do others - every time somebody wastes our time by saying the property has something that it doesn't. Filing violations in MLS is simple, it's effective, and after a certain low number of violations, the offender's input access gets restricted. They can't put properties in MLS and they might as well be out of business. Note that they can still "puff" a property significantly; but number of bedrooms, square footage, anything with a number or a yes/no associated with it had better be right. The big violation I'm finding most of recently is advertising it in MLS as "fee simple" when it should be either "PUD" or "Condominium". If it's got homeowner's association dues, it's not fee simple - end of discussion. It may be single family detached, but it's not fee simple ownership, as that homeowner's association has rights with respect to the property.

Everywhere else, everything that is not based on MLS, take all advertisements with a respectful amount of caution - Like at least equal in weight to the building. Once you get outside the domain of MLS, there are few sanctions possible for even the most outrageous puffery - or even advertising a property that does not exist at all. Or anything remotely similar. Some agents won't put anything out there that isn't as close to gospel truth as they can make it, but others are not nearly so fussy, and you really want to avoid the latter sort.

Non-MLS based property advertisements may now be pending, it may be sold, or it may in fact never have existed. The agent put that ad in trolling for buyers. What they want is your signature on an exclusive buyer broker agreement, so they can lock your business up. Readers here know you shouldn't sign exclusive buyer's agency agreements, because that's a poor way to get a good buyer's agent, but most people don't know that and most agents are laying in wait for the ignorant.

A good buyer's agent can help you debunk the nonsense. Quite often, I have clients who should know better, as I've explained this to them - often more than once - ask me about this fantastic possibility they see from site not sourced in MLS. About as surprising as gravity, they turn out to be in some way non-factual. Claiming 2 bedrooms when it's really one, or four bedrooms when it's really two. 1 bedroom when it's really a studio or loft. And sometimes, they actually had it, at that price, six or ten years ago. And then I call the agent listed on the ad, look it up on MLS, and voila! the deception becomes apparent.

There's nothing wrong with responding to such ads, and there's nothing wrong with working with the agents who advertise them, so long as you limit yourself to a nonexclusive agreement, so you can get rid of them when it become apparent they're not guarding your interests. But even with a non-exclusive agency agreement, I'd be asking myself "If they lied to get get me to call, what else are they going to lie to me about?"

I just had a client send me three prospects from one of the non-MLS based search services. All three of them were non-existent, posted by a lead generating service as bait so they could sell everyone who responded as a lead to agents. They didn't have such a property, they never did have it, it wasn't even for sale, and hadn't been for over 10 years. But that's how they get leads, which they then sell to several agents.

Here's another sneaky trick: Services advertising themselves as "foreclosure specialists" go around to all the properties that have a trustee's sale happen. They illegally put a sign in the yard, relying upon the fact that the property is vacant, directing passersby to a phone number. On the phone number, they put the puff description from whatever the last time was that it was in MLS, whatever they can see, or something they can pull from assessor records. They say they have an exclusive listing. What they really have is nothing. I've tried contacting lenders before their new lender owned property gets listed. Even if I have a buyer willing to make an offer, they usually don't want to hear about it. What the places who claim they've got "foreclosures before they're listed" are doing is trying to get suckers to call - in other words, trolling for clients. They simply know that the lenders are eventually going to put 99.999999 percent of these on the market within a few weeks, and they can fend you off until then. They aren't offering anything real. They don't have anything real. They are doing nothing beyond trolling for clients who will generate easy commission checks. They don't have to even sell you that one. If they had anything real, when I call for a client they should be falling all over me, like the agents that really do have foreclosures. Those agents who really do have lender owned listings are falling all over themselves to get back with me. The troll services take my information and say, "We'll have to call you back," and they just don't. I call again, they do the same thing. I ask who's the listing agent responsible for a property and what number to call to contact them, they don't have an answer. Then it comes up on the MLS, and the agency that's been advertising it is nowhere in sight. This is different from people who are buyer's agents who have legitimately gone out and found bargains - because they'll tell you they want to act as buyer's agents. In the first case, they are claiming to have a listing that they do not, in fact, have. In the second case, they are claiming to have found a bargain, and are telling you quite straightforwardly that they are looking to represent buyers. That's what I do. But when you're acting as the agent for the seller, you're not supposed to say anything that violates a fiduciary relationship - in other words, a listing agent is supposed to pretend this property is the greatest bargain since the Dutch bought Manhattan, or at least as close as you can realistically get. It's in the job description, not to mention the contract.

So be aware before you respond to property advertisements that quite often, the property advertised doesn't exist. To avoid leads services, look for specific names of the agent in the advertisement. To avoid problem agents who require an exclusive agency agreement before showing, simply refuse to sign exclusive agreements. Dual Agency is a very bad idea for buyers (and it's not good for sellers, either). If they have the listing, they're going to get paid when the property sells regardless of whether you signed that agreement. If they don't have the listing, they still risk nothing with a non-exclusive buyer's agency agreement.

Caveat Emptor

Original article here

Listing Agents say they hate it when prospective buyers (of their listings) make offers on multiple properties, but they keep doing things to encourage it.

It is both legal and simple for buyers to make multiple offers. All I have to do is include some phraseology about this offer will be withdrawn in the event of the acceptance of another offer. Listing agents do the equivalent thing every time they negotiate multiple offers. At least they do it if they are hardworking and smart, rather than asking everyone for their "best and highest offer," a lame, weak technique that has precisely one advantage - minimal labor for the listing agent - and a laundry list of disadvantages. But it should not surprise anyone that if listing agents can do one thing, buyer's agents can respond by executing multiple offers, especially where sellers and listing agents miss deadlines to counter, take weeks to make up their mind, don't respond to requests for information, and have to be goaded into responding at all.

A single offer is stronger for both buyers and sellers. For buyers, it says that you have singled out this one property to make an offer on. You want this one, at least if the seller can be dealt with on a reasonable basis. It says you aren't going to flake out or abandon them mid-negotiation because you have found something you like better, and if you come to an agreement, you're not going to abandon that agreement without reason. Someone making multiple offers cannot claim any of this. For sellers, all of these are valuable features of an offer - perhaps more valuable than an extra $10,000 on the offer. If your agent doesn't understand this, that's a problem.

Furthermore, encouraging multiple offers encourages both lowballing and uncommitted buyers who don't care whether they buy your property or not. There's not much emotional buy-in, but many buyers will throw out a low-ball for marginal properties just to see if they get a response. But even if you do respond to such offers, they're not going to turn into the kind of offer that makes sellers happy.

For all the complaints about multiple offers I hear, though, listing agents seem to keep doing things to encourage them. Sitting on offers for weeks is a bad idea because buyers will move on. Sitting on purchase offers without response for six weeks or more. When the sellers finally respond, the buyers are already in escrow on something else. About a month ago, I got a response three weeks after the offer, two weeks after deadline to respond, during which time the clients decided they wouldn't be happy in the property after all. Agents who delegate assistants (licensed or not) to check boxes on offers are a definite turn off, as well - those assistants have no idea what is a good offer and what is not. They have never seen the property, they have no idea of the market it sits in, no real clue as to general market activity - and if the agent doesn't have their hands on the situation pretty constantly themselves, neither does the assistant. When I call an agent phone number in the listing, and there is literally no way of talking to the agent, or for that matter, any actual living person, that's a situation for a throwaway multiple offer, if anything at all. They're not taking prospective buyers seriously. Put in a lowball multiple offer, if they respond in a timely fashion, great. Otherwise, let's move on with our lives.

If you want buyers to make single offers, you need to respond to them promptly and individually. You need to take the time to understand the offer and the strong and weak points, and you have to understand how it matches up with your clients needs. This takes time, and it takes an agent who knows what they are doing - not a clueless unlicensed part time receptionist who is filling in boxes. This means that in order to get the most mileage out of the offers you get, you have to have a listing agent who has the time to spare for this particular listing. The corporate transaction mills are not the way to get that. There are many reasons I advise people against so-called "top producers," and that is only one of them. If you want the best possible price, you need an agent with the ability to invest enough time in your property to make a difference. Yes, I use loan processors and transaction coordinators. They're not allowed to interact with my clients, and they don't even enter into the picture until and unless we've got a full loan package ready for submission or a fully negotiated purchase contract. They're there to dot the i's and cross the t's - taking care of the routine fine detail work that most clients never know about - not so I can disengage myself from the transaction.

If the agency real estate office is doing everything they can to take as many listings as they can, to the point where the agents cannot properly service those listings, that's a situation where you're begging for multiple, weak offers. I put deadlines to respond on every offer I type. Reasonable deadlines, minimum of three business days, perhaps five, to give the other side plenty of time to respond. Most of my buyer clients have time pressures. They don't have three weeks to wait and see if one offer responds, after which they wait three more weeks to see if another offer responds, when they're operating under any kind of a deadline. I'm working with a client who's being posted here from elsewhere a couple months from now. When we started looking , even a short sale was a legitimate possibility, which should surprise you given my general opinion that buyers should avoid short sales. Inconsiderate listing agents trying to service too many listings have eaten most of the time we had to play with, causing us to now be in the situation of needing to make multiple offers on multiple properties. Buyer degree of attachment to any given property: small. Buyer willingness to negotiate on any given offer: small. Buyer willingness to offer an attractive price in such circumstances: small. And these "top producer" megaoffices listing these properties are wondering why, despite the incredible numbers of offers being made, they're not getting the kind of increases in value we saw a few years ago? Why the offers are all petering out at a low level? Why prospective buyers who do get accepted offers are so likely to bail out on the deal? Why actual sales prices aren't increasing?

Many listings want to accumulate offers for weeks. I've read several listings that say things like "no offers will be evaluated until (two weeks from now)." Okay, if we like the property, and nothing else catches our eye, we'll consider making an offer just before then. Keep in mind, it'll be ten days between when my client saw the property and when they make their offer, it won't be a hot "right now" offer or even a lukewarm "next day" offer. It'll be a multiple offer - only fair, since that's what the seller is asking for. And if my buyers find something else in the meantime, well, there won't be any offer made at all.

Let me ask: what happens when your best offer - most often the first, almost always one of your early ones - has moved on with their life? For that matter, what happens when all the good offers have moved on with their life? You're stuck with the low-ball offer from a flipper, that's what. I'd hate to be in a situation where I told my listing client there were 8 offers - but only the two lowballs were still interested because I had my head you-know-where. But that's what these agents are setting themselves up for.

If there are competing offers and one of them isn't nearly as attractive as another, there is no harm in saying so, and saying so quickly. Either they will drop out of contention or they will increase the attractiveness of their offer. If they increase their offer, my client is happy. If they drop out, my work with them is done, and they're now out there looking at other properties. The quicker I answer, the more likely it is that this prospective buyer will respond with a better offer. I'm perfectly willing to fax over (slightly redacted) critical pages of competing offers in such situations where their offer isn't even close.

Every offer needs to get a timely response, whether it's a rejection, a counter, or an acceptance. This is not only common courtesy, but good business, and the best way to end up with a good price on the final contract, one that the buyer is both willing to and capable of meeting promptly.

Negotiate with each offer individually. Asking everyone for a "Best and Highest" offer is very weak. Any buyer's agents that are worth a damn know how to respond to that one. Individual negotiations (if you happen to actually have multiple offers) works wonders. Put the multiple offer disclaimer on it if it's appropriate, and slap it back to them same day if you can. Keep the negotiations hot. Keep the buyer's memory fresh. Increase the buyer's mental buy-in if you can. This is labor intensive, but it leads to happy clients, bigger paychecks, and more clients. I don't see how anything else can be more important than those three things for an agent. I don't see how anything can be more important than just creating happy clients.

Encouraging multiple offers by acting like you don't care about prospective buyers is a good way to be forced to settle for less money than you could have gotten. I don't encourage it, I don't recommend it, and I very definitely do not practice it. I don't understand those agents and sellers who do. You get the buyers you deserve - the desirable buyers you earn by treating them correctly. Give them respect, give them attention, negotiate with them as individuals, and one good, seriously interested buyer is all that you need to get a good price for the property.

Caveat Emptor

Original article here

This is one of the hardest things to get across to many people - agents included. A property with a fully negotiated purchase contract is not one that someone else can buy. They have a legal agreement binding them to sell it to someone else. If they sold it to you, they could be sued for what is called "specific performance" - in other words, do what you agreed that you would do - and I am given to understand that you don't want to be on the losing end of such a suit.

You are wasting your time making an offer that the owner is not free to accept. I would actually argue it's worse than that: You're effectively trying to bribe someone into not meeting their contractual obligations. If your terms are worse than what they have now it's not a very effective bribe, but you're still making the attempt. If you were in the position of the accepted offer, how much would you like it?

Nor is a so-called "back-up offer" likely to get you the property on any kind of advantageous terms. Watch the property in MLS and see if it drops back to "available" rather than pending, but making a back-up offer will do nothing but weaken your negotiating position if that property should become available again.

There are ways to get out of accepted contracts. The classic one is non-performance of the other party. The other side doesn't do what they said they would do - they go past the agreed upon escrow period, they can't qualify for the loan, whatever. There are as many ways to fail in contractual obligations as there are contractual obligations. Neither side is required to cut the other side one iota of additional slack beyond what is spelled out in the contract.

With that said, if the contract isn't one you want to honor, why in the heck did you agree to it? If it doesn't put you into a better position, why did you agree to it? The only reasonable response to this that I'm aware of is "It is better than no deal, but then someone came along and offered a better one" To which the person on the other end of the negotiated contract will reply, "too late." They have now spent significant resources towards honoring their end of the deal you agreed to. If you hadn't made the agreement, they wouldn't have spent the money for appraisal, inspection, etcetera. None of these transfer to another property.

Another reason this happens is because when the property gets moved to 'Pending' in MLS, that listing agent no longer has prospects calling them wanting to view the property. Many listing agents see the listing primarily as a way to attract buyer clients, and when it's no longer available, see themselves as 'deprived' of that benefit. These are almost always really awful agents, both for buyers and for sellers.

As a final word on the subject, it is possible that some agents will tell you a property is under contract when it is not in fact under contract. Perhaps they're finalizing the last few details and it's really at least in the neighborhood of true. Sometimes, there isn't an offer at all and the agent is simply filtering out offers they see as undesirable - usually from the point of view of a bad agent rather than that of their client, the seller. Unfortunately, what all of these possibilities have in common is it's rarely worth paying a lawyer to fight about. Let it go - there are other properties just as good out there, where nobody is playing these counter-productive games.

Caveat Emptor

This is a right given to buyers agents by my local MLS, and it's a good one, that I like to take advantage of whenever it is practical. The actual property owner - not the listing agent - does have the right to refuse in writing, a copy of which must be provided to that buyer's agent.

This presentation is not intended to be an argument, and the buyer's agent is not permitted to stay for discussion of the offer between the owner and their agent. Think of it as a prepared speech. What I make is very akin to a corporate Power-Point presentation - in fact, it is a Power Point presentation on my laptop when I have the opportunity to put one together. Chances are good that you have seen dozens or hundreds of presentations basically like mine, except that I can guarantee to get done in fifteen minutes or less, providing nobody interrupts and starts arguing. The presentation is not intended to be an argument. It's a sales pitch. It's intended to make a calm, rational case why this offer that my client is making is one that should be accepted. I make my case, thank them for listening, and leave. I am not allowed to be present for the discussion of the offer, so it wouldn't be very smart of me to design my presentation as an argument. Also, it would be pretty silly of me to expect an immediate response. It would be stupid to demand one.

Many people seem to feel threatened by such presentations. My best understanding is that most of these are afraid of conflict. As I said before, however, it's not an occasion for an argument. I am not allowed to hang around for the discussion, and my presentation is geared towards being perceived as the rational thing to do when the discussion starts without me there to defend it. I don't like it when presentations turn into an argument. A presentation is an opportunity for me to speak my piece directly to the seller, unfiltered by any outside influences, so that both parties have an opportunity to gauge the mental state of each other. If the listing agent has done their job correctly, we're going to be saying the same things, albeit from a different perspective. On the other hand, if the listing agent is a problem personality who "bought" the listing, wants both halves of the commission, has their hand out behind their client's back, or any number of other unsavory problems, then a seller should be grateful to that buyer's agent for providing them with evidence to suspect such. Not to mention that presenting an offer in person is the only way I know of to guarantee that said offer doesn't go straight from the fax machine to the trash can without intersecting the seller in-between. Yes, I do know agents that I suspect of this. I could name agents I more than suspect of this - and the only way I can ensure it doesn't happen is request to present offers in person. I'm calm, I'm professional, and if I get a signed note saying the client doesn't want me to present in person, they at least know about the offer. And even if you've known your agent your entire life, "trust but verify" is never bad advice.

This isn't to say bad conduct on the part of a buyer's agent during presentations should be tolerated. If the presentation is made at the listing office or at the owner's home, they have a right to insist that I leave. If we're out in public somewhere, they have the ability to pick up and leave at any moment. It is incumbent upon me to give them reasons to keep listening.

Many listing agents feel threatened by this request. If they have done their job correctly, there is no reason for them to be, because what I'm going to say is going to reinforce the critical parts of what they should have said, thereby bringing them additional credibility in the eyes of their client. If it doesn't, well then the client has to judge the situation on its merits. That listing agent has unlimited access to the client. I have this short prepared presentation limited to one subject - my client's offer and why they should accept it. If the listing agent can't make a better case that their interpretation is better than mine, something is wrong. I'm not trying to steal their client - I want to make certain we're all on the same page. And if the listing agent has done their job correctly and I'm a bozo, well, the comparison isn't going to flatter me. So I'm motivated to get it right.

I do not agree to disclose the presentation or the offer beforehand, however. I am responsible to my client to make the presentation as strong as possible, and tipping my hand short-circuits the entire purpose of the presentation. It isn't like the seller has to come up with an immediate verbal response, as if we were in court. When I'm done, I thank them for listening and walk out. They have until offer expiration to respond - so it's in their best interest to schedule me as soon as possible. I just had a request where the listing agent refused unless I faxed over the offer first - which defeats the entire purpose of making the presentation. No. There is no reason you need to see it beforehand - unless you're trying to cover for your own lack of competence. You've got the same data I do. You can figure out precisely which comparable properties I'm going to use, and propose your own. I similarly, have to anticipate this and tell why the comparables I pick are the correct ones, and make the comparisons make sense in the real world. I have a short presentation time to make my case. You have unlimited time to disagree with me, in free format. I'm not allowed to be present for discussions unless you intentionally start those discussions with me present. If I do say something you disagree with and you can't out-argue me before your own client with all of those advantages, something is rotten in your State of Denmark. Not that the presentation is intended to be an argument - but if the listing agent insists on making it one, all of the advantages are in their corner. I can't fight either a listing agent or an owner who doesn't want to be reasonable. I can't force anyone to agree with me, to sign a contract they don't want to sign, or anything else. Actually, if someone on the other side is not going to be reasonable, both me and my client are better off finding out right away. What I can do is build a coherent rational case why it is in the seller's interest to accept our offer.

Nor will I agree to limit the subject of my presentation, at least not any further than presenting the case I need to make. I'm not going to talk politics, I'm not going to display any of the internet's famous prurient material, and I'm not going to do anything else that's irrelevant. I will cover the state of the market, I will cover which properties are and are not comparables, and I will cover why this is a good offer that should rationally be accepted. I recently had a listing agent tell me that they would only agree to let me make a presentation if I limited myself to one section of the presentation I usually give - the "my clients are good people" spiel. I could have lied and told them I'd do it. Instead I told them that their condition was not acceptable. This right was intentionally granted to buyer's agents precisely because there should be checks upon the agent on both sides, and in many cases, clients trust agents in defiance of all reason because they don't understand that the agent is telling them garbage because nobody else gets to talk to them. Whether a buyer's agent makes an in person presentation isn't the listing agent's call. They can certainly counsel the client on the subject, but the decision as to whether to accept the presentation is the client's - precisely because the agents we're all trying to get rid of are going to be the ones trying to prevent anyone else from talking to their client.

I haven't really done all that many of these yet. But the format of the presentation is pretty simple: Show them I'm a good guy, show them my clients are good people, talk about their situation. Then I segue into what the market conditions are, and the property and its position in the market. I show why the property is a good match for the client and why the client is a good match for the property by market position. I show why this offer makes sense in light of market and market position. I talk about the benefits of accepting the offer. Then I close by talking about how my client really wants this property, how well my clients qualify and evidence that they will be able to consummate the transaction - why it's a good fit all around. Finally, I thank them for listening and, assuming there are no questions, leave.

If nobody starts interrupting and arguing, it all takes ten to fifteen minutes. As I said, I'm not looking to attack anybody. Attacking doesn't get me a fully negotiated purchase contract, so it doesn't make my clients happy. What I am looking for is the opportunity to make my case in person, and present all of the evidence I want presented. The reasons it's advantageous to do so are obvious, but let me add one more: You would not believe all how often listing agents (or their clueless assistants!) do not read material that is in the offer, do not understand it, or don't understand even the most obvious implications of what is there. Some fraction of this is intentional filtering - not wanting their client to see information that client is entitled to see because it is part of the offer (this is called "intentional breach of fiduciary duty" in court filings) - while some is unintentional negligence, in that they're going through motions and making checks in boxes, and they don't pull their noses off the grindstone long enough to realize what's there in the offer and why it is important. But it is in the interest of both principals that this evidence be presented, and if the listing agent is too busy to take the time to understand the offer, they've got too many listings to properly discharge their fiduciary responsibilities to them. This is what is called prima facie evidence - "on the face of it", it is obvious that they're not properly discharging those duties. By allowing a buyer's agent to make a presentation, they are relieving themselves of a lot of potential for legal difficulty down the line, because the buyer's agent should talk about all of this stuff. That's the whole point of the presentation.

It's also an opportunity that everyone should welcome: to put human faces on the transaction, instead of just these mysteriously appearing pieces of paper and voices on the phone. It gets the buyer and seller thinking of each other in terms of being real people. It very much tends to lessen the tendency of people to draw lines in the sand and issue ultimatums, it increases the probability that this will become a fully negotiated purchase contract, and it becomes very helpful later on if we need subsequent negotiations because something new happens or is discovered about the property.

Here's one final benefit of the presentation: the listing agent has this same right to present counter-offers. I have to admit to encouraging tit-for-tat in my clients for this - if the listing agent allowed me to present, I think it's a good idea to reciprocate. If they didn't, that's not a good sign for the counter presentation or the transaction for that matter, and maybe we need to find another property not represented by such an problem personality. Whatever my attitude, it's my client's call. In the final analysis, you can't win a fight with a listing agent who is determined to be a problem personality. All you can do is avoid the fight by going elsewhere. To be fair, the same applies from the other side as well.

Caveat Emptor

Original article here