Dan Melson: May 2022 Archives

I recently got an email from a reader that was coming into a property as I left. I dropped my card and we did the lockbox shuffle thing, then there was an email when I got back to the office that said, "That was ME with the other agent! What did you think about the property?"

No.

What I think is that if you're not going to give me the opportunity to earn the business, I'm not going to put my license, my insurance, and most importantly, my reputation on the line. I am in business to make money. I am not a charity. I earn my money by advancing your interests, by saving you more money than I cost, by preventing you from getting into bad situations, by warning you about them and knowing what protective or ameliorating actions to take before it all blows up. If you want to brag that you did it without an agent, you are not a potential client - but you're not someone I'm going to give free advice to, either. I don't begrudge "do it yourselfers" coming in to read my websites, but as I've made clear on many occasions, there's a world of difference between general knowledge and knowing how to diagnose whether there is a problem, if so, knowing what that problem really is and what is causing it, and knowing all the tradeoffs between the various methods of solving it. All of this stuff is "free" to clients, or at least, part of the package. But if I do it where you're not my client, not only am I possibly creating an agency relationship despite the fact that I'm not getting paid, but I'm removing some of the most important reasons why you should do business through me.

I'm going to decline to do that.

There seems to be a fundamental confusion on the part of many people. They want free information as to where the bargains are, free information on how to handle all the issues and problems that pop up, free opinions on the state of the property, free information on how to fix it up for maximum profitability, free this, free that, free everything. Then they turn around and say "Agents don't do anything!" Kind of like, "Other than that, Mrs. Lincoln, how did you enjoy the play?"

Agents aren't just about putting the property into MLS, putting up a lockbox, and on the buyer's side, opening the door so you can take a look, no matter how many people tell you otherwise. Maybe that's what the shake and half-bake agent at the do nothing discounter says, or the "do it yourself" real estate author trying to sell fairy tale books. There are people out there who are fully capable of working without an agent - but they don't make requests for basic information like these examples. They realize that by being unwilling to have an agent get paid, they're assuming these tasks and decisions themselves. Folks who are qualified and able to do it themselves are sharp cookies - sharper than many agents who benefit from large advertising budgets. I admire that sort of do-it-yourselfer for being sharp and dedicated enough to take on the difficulty of real estate as well as whatever else they do for a living. But if you're asking about basic questions, you're not one of them.

Agents are paid on a unique basis. It takes anywhere from weeks to months of work to earn a pay check, and the whole thing can fall apart at any time, and if it does we make nothing. Yes, it may seem like a large number of dollars, but we don't get to keep all of those dollars. Outside of the real estate field, I can think of exactly one example of this, and that's lawyers taking the case on a contingency basis, who make thirty to forty percent of every dollar they recover, not a mere 2.5 to 3% of the amount in question. By that standard, agents are ridiculously cheap. We're assuming all of the transaction risk, and we're at many times the liability risk of the legal profession, where even if your lawyer was a grossly incompetent tool who took bribes from the opposition, you have to get through members of a profession with more history of protecting fellow members than any other. Lawyers have written the law so that lawyers are less responsible to their clients than anyone else. But real estate agents get scrutinized by lawyers, so that is not the case with us.

What you're doing by asking for free advice is no different than asking for a free steak from your supermarket, a free cake from your bakery, or free legal advice from your lawyer. Actually, it's worse because there's no prospect of a business relationship or income from it, and there is potential liability. Your supermarket might occasionally give you a free steak because of your continuing custom and other purchases - mine's done it twice, actually. A bakery you go to anytime there's a birthday or other reason for a party might give you some freebies because you spend a lot of money there. Your lawyer might decide not to bill you for an unrelated discussion of another issue you ask about after the main business is done - but in all of these cases, it's due to an ongoing business relationship. If you asked for such favors without the relationship, the answer would definitely be "no". For an agent who gives free advice to non-clients, you're putting yourself on the line liability-wise, without the paycheck at the end. I'll give free consultations to prospective clients, I'll go over your situation and all of the other stuff. All contingent upon a successful transaction. If there isn't one, it's because you were working with another agent and they got the job done better and first, which is a risk I willingly assume. But the general doctrine in real estate is "If there is no transaction, there is no foul and therefore no liability" This is why slimy loan providers get away with so much, and if there's another agent who did the transaction, they're on the line, not me.

But if there is a transaction with no other agent, and I gave advice on it, I'm put my license and my pocketbook on the line. If I do that when I'm not getting paid, why should people use me as an agent? How the heck am I going to feed my family as an agent? Which means no more expertise for those who would use me as an agent, do a transaction, and get me paid.

This applies just as strongly to people who want to use other agents, but use my expertise. It's not for nothing that one of the recurring themes here is firing bad agents and learning enough not to hire them in the first place. There are way too many bad agents out there. Many of them are involved in a lot of transactions, because they do know how to market themselves even if that's the only thing they do know. Chances are that if you need to ask another agent's opinion, you should fire the one you've been with. My expertise is for my clients - you want it, you've got to be one of them.

I am willing to work hourly instead of contingent. But that requires you being willing to write a check to the brokerage right away rather than being able to lump it in with the costs of a successful transaction. It's not what people think of as being cheap, either. Most people aren't willing to part with that sort of cash, deluding themselves that they'd rather have what they think of as a "free" transaction. To be fair, it's usually much cheaper to sign the agency agreement where I get paid contingent upon a successful transaction. Doing real estate agency right is a very time intensive thing. I've usually got 200, 300, or more hours invested in a client before the transaction closes. Multiply that by my consulting rate (that some people really do pay), and you've got a very tidy sum; far in excess of what I make on transactions under a million dollars or so for even a 200 hour investment, and I don't do many million dollar transactions. And on hourly rate, there is no possibility of me not getting paid when the transaction fails to close because something made it fall apart. I did the work, I put in the time, you owe me the money. So when you really think about it, the normal small percentage, contingent upon closing, is an incredibly good deal for the client. Many people get freaked out when they see what agents make for a transaction, but considered in context of what a good agent provides it is both incredibly cheap and damned cost effective.

So unless you're one of those folks who really does know enough to do it themselves, make sure you've got a good agent who will do the work themselves instead of delegating it to a ten dollar an hour new hire fresh off the street. If they're not a good agent, fire them and find another - because the money we make is too much to spend for a bad agent. Finally, understand that what agents agents make is very much worth the cost of the money they make, and having them make that money is the price of having the end result of the transaction not only be more profitable to you, but reliably result in fewer and smaller problems down the line. If you're one of those who really doesn't need an agent, I'm not threatened and more power to you. But people who really don't need an agent don't ask me what I think of a property, how to price or market it, or how to handle the seemingly endless complicating details that can and really do crop up in most transactions. Nor do people with a good agent need to ask other agents those questions.

For everyone else, get yourself a good agent. If you're not in the areas I work, there are other agents that work on the same basis. Look around, read their websites - you can find them if you try. But if all the posts on the website are about sales and marketing, that's kind of a red flag that they're not really a good agent, and you should keep looking. Yes, sales and marketing are important for listing - they're what gets a property sold, or at least offers on it. But offers, even an accepted offer, does not necessarily translate into a sale, and it's a sale that sellers want. On the buyer's side, marketing means very little. Indeed, the ability to pierce and deflate marketing claims is one of the hallmarks of a good buyer's agent. Both buyer's and seller's agents need a lot of specific problem solving ability. And buyer's agent or seller's, if marketing is all they can do you need to keep looking for another agent.

Caveat Emptor

Want to think about gun control instead of emoting?

Tell me what law we can pass that someone determined to commit mass murder will follow. Tell me how you're going to keep guns - any gun - out of the hands of someone who doesn't care about the law?

You can't. A f*cking medieval blacksmith can make a perfectly functional semi-automatic (one trigger pull, one bullet fired). A modern machine shop (including hobbyist level) can do it in minutes. A fully automatic weapon is not that much more difficult.

All a law that says you can't make or can't have weapons does is keep the law-abiding from being able to shoot back. Cesare Becaria wrote this in 1767, and Thomas Jefferson made certain whatever founders did not know about this wisdom learned.

So unless you can find me such a law, wipe the f*cking lazy ass LIE that you can solve the problem of mass murders by 'just the right gun laws' out of your lazy ass mind, and start actually thinking about the real problem, which is not the guns. Guns are nowhere near the most destructive weapons (or the easiest to make or obtain). You should thank your lucky stars that you haven't made guns impossible to acquire for the criminals determined to commit murder, because there are far worse and more effective alternatives.

(Disagree with this? Prove me wrong by counter-example. All it takes is just one. Should be easy if I'm wrong).

The reason the Second Amendment exists is more valid and more important today than at any previous time in our history. The fact that certain people are working so hard to undermine it is evidence of this.

So stop your emoting about the problem and actually start thinking. Because all of the 'maybe the Second Amendment needs to change' crap is nothing more than a psyop being conducted on the mentally lazy. If you're susceptible to it, have the good sense to shut up until you figure out what's wrong with yourself.

This is going to be one of those occasional posts that gets expanded and reposted from time to time. This list is not exhaustive, although over time it is intended to become closer. If you have one, send it to me (dm at)

Any of these is sufficient reason, all by itself, not to do business with that company or person, to cancel your loan if in progress, or to go get another backup loan.

Any actual lie

Up front application fees, or sign up fees.

Up front lock fees.

Up front appraisal fees, as opposed to at the point of appraisal. (NOTE: With HVCC now in effect, this has changed. Consumers are no longer allowed to pay the appraiser directly, so the lender now needs to collect it until and unless HVCC is removed)

Any up front fee beyond credit report (or for now, appraisal).

Requiring the originals of your documents.

Trying to sell you a Negative amortization loan, under any of its names, without explaining in detail all of the gotchas

I used to say "not locking your rate, or letting it float." This is another thing that has changed now with changes in the business. Every loan we lock that doesn't close for any reason is now costing all of our clients that do close extra fees, so we have to wait until there is a reasonable assurance of closing before locking. I'm not happy about it, but I have to do business the lender's way or leave the business

On stated income or NINA loans, not giving a real idea of what the payment is going to be, and making sure you can afford it. (Stated income is almost non-existent now).

On full documentation or EZ documentation loans, needing to document more money than you make.

Requiring you to pay an "in house" appraiser (Who is receiving a salary)

Not allowing you to choose an appraiser if you want to. (Another change with HVCC - this is not allowed now)

Consistently using the same phrase in response to a question. "Nothing out of your pocket" ($30,000 added to your mortgage) and "Thirty Year Loan" (note the absence of the words "fixed rate") are two that are sufficiently pervasive as to merit special mention.

An answer to a question that is somehow similar, instead of to the question you asked. Especially if said obviously intended to distract and mollify you, or is a pat phrase you've heard them use before.

You check their calculations on a couple of calculators and the numbers are both consistent and different from what you were quoted as a payment. (Some web calculators lie, but they usually lie in slightly different ways, although note that an auto payment calculator uses different first payment assumptions).

(Yes, regulations have been put in place that make it extremely difficult for the more ethical providers)

Buying:

Use of non-standard forms when standard forms are available

Asking you to sign an Exclusive Buyer's Agent Agreement before they've shown any property.

Asking you to sign an Exclusive Buyer's Agent Agreement at all without furnishing you something special (i.e. daily foreclosures lists, or some service you would otherwise have to pay for).

Not finding out what your budget range is and sticking with it. For example, if you've got $30,000 for a down payment and closing costs, can qualify for a $270,000 loan, they shouldn't show you anything that you cannot get for $300,000 total, including all costs you need to pay.

Not finding out what you actually make, and what your current monthly obligations add up to. This lets me, as the real estate agent, know what I'm really dealing with here, even though I have no real need to know if I'm not doing the loan. In case you haven't gotten the idea, there are a lot of mortgage folks out there who may not have your best interest at heart, and "stated income" loans allow for a lot of sins. You can get offended at invasion of privacy if you want, but I'd be grateful - This is one part of the system checking another, looking out for you, when they could just grab their commission and bow out of the picture.

Promising to find houses below market value. I do my best, but so does every other agent out there. This is something nobody can guarantee, and most require taking risks or putting all cash into the transaction, and they're usually gone before the public even has a chance.

Telling you about "money in your pocket" when you ask about closing costs

Selling:

Use of non-standard forms where standard forms are available.

Excessive pressure to sign listing agreement immediately (Some pressure is normal and to be expected)

Not being upfront about their business model. I've got an article about business models in the real estate industry (there are 2 basic, and many variations). Each has situations they are best for, and situations they are not so great for. You want to know if it fits your situation.

Not explaining what properties in your area are selling for before they ask for the listing.

Promising to get more for the property than the market will support. If there is a competing property on the market cheaper, or a better property on the market for the same price, buyers will choose that one instead of yours.

Putting the property on the market before it's ready and available to show.

Not holding at least one open house on a weekend date within two weeks of listing. Sometimes this is tough during the holiday season, but there's no excuse for the rest of the year. Especially during the summer, if they want to take a three week vacation, there should be someone else there to take up the slack. Perhaps it might be unproductive if you live in a thinly inhabited area, but anywhere within the commuting area of a major city, this is a minimum.

Caveat Emptor

Original here

We have several rental properties that we own (more than 10). When we were younger, before we got married, we both moved around a lot and bought houses, moved, stayed a year or so and did it again. I of course don't have to mention why we did this (no money down, low fixed rates, etc.) However, now I am running into a dilema. I am finding that no one wants to refi or do purchase money loans now that we have 10+ mortgages. I need good rates to make my cash flow work. I have recently herniated one of my discs and have been out of work for almost 3 months, so I need to take money out of our house that is paid for, but no one wants to do it. Any suggestions on how to get around that? My credit scores range from 763-805, so that is defintaely not the problem. Any advice would be greatly appreciated as I am down to crunch time in needing to get some money.

The reason for this problem is that whereas nationally, vacancy rates are much higher, and here in high cost California they are only running about 4 percent, the bank will only allow 75 percent of rent to be used in the calculation of whether you qualify or do not (debt to income ratio). Furthermore, on the liabilities side they charge the full payment, taxes, and homeowner's insurance, as well as maintenance. To "pile on", Fannie Mae and Freddie Mac won't buy loans where the applicant has more than ten loans, period. But note that this is ten loans, not ten properties.

Here in the high cost areas of California there was a while where it was unheard of for a recent purchase rental to be turning a positive cash flow, at least according to "lender math". But for properties purchased a decade ago here as well as right now, and nationally in many markets, there are people making money hand over fist on rental properties whom the bank believes must be cash destitute. There is no way they will qualify for a mortgage loan without tweaking something.

There are two main ways to solve the problem.

10 mortgages (assuming you still own the properties) gives one serious status as a real estate investor. The loan should then be able to be done. Not necessarily A paper, but subprime with that kind of a credit score and a prepayment penalty will give them comparable - perhaps even better rates. Furthermore, on investment properties, there's a minimum of about a 1.5 point to 2 point hit on the loan costs just due to the fact that it is investment property. So refinancing an investment property is not something you want to do often. If you can't go 10 years between refinances, something is probably wrong. Especially given the extremely narrow spread between long term loans like the 30 year fixed rate loan and shorter term fixed rate hybrids, for investment property a 30 year fixed rate loan is likely the way to go.

The alternative is to go with a commercial loan. Commercial loans are much easier than residential, and they will allow a real estate investor to qualify where they wouldn't under residential rules. However, the rates are both much higher and variable ("Prime plus margin") rather than fixed.

But the key part is "real estate investor."

This is a business. You're going to need an accountant to attest to the fact that you've been operating this business at least two years. But that gives you standing as at least partially self-employed as the operator of a real estate investment business.

Which once upon a time gave you an out to do stated income, possibly even A paper. Unfortunately, that is no longer the case - one more instance in which people who abused stated income really ruined the market. You're going to have to state that you earn more income than you do. There are no longer stated income loans available from any source that I am aware of. Given the environment today, a good loan officer looking to cover themselves is going to want you to acknowledge that you can make whatever the payment is really going to be. I don't care if you need $6000 per month to qualify and you tell me that you make $12,000 per month, or $120,000. Any time you are looking at stated income, you're looking at a situation that is vulnerable to abuse, both from the point of view of a consumer being put into a loan they really cannot afford, and from the point of view of a bank lending money based upon a credit score and source of income that really may not be there. This one is especially vulnerable to the latter concern in the current market, and I would likely take a real careful look at any bank statements that pass through my hands to make certain it's not patently disprovable. If it makes a borrower uneasy, well half of the reason is to protect them. Stated Income may have been colloquially called "liar's loans", but that is not what they are intended for, and in this case you are intentionally overstating income in order to qualify under unrealistic underwriting rules.

The second approach was NINA - a No Income, No Asset loan, also known as "no ratio" - meaning no debt to income ratio. These were much easier to do for the loan officer, as they're completely driven off credit score, but carried still higher rates, and unfortunately, despite these being less fraudulent, I no longer have any idea of where to find one outside of "hard money" loans carrying interest rates above 12%.

The only general solution available today is a portfolio loan. If you really do make a million dollars a year from something else, you can get a loan on any number of properties from a lender who holds the loan in their own name rather than trying to sell it to Fannie and Freddie. This begs the question of how you make the money or where it comes from, but it is possible. Nor can your lender de-fund existing loans unless it's for a reason allowed in the Note (loan contract)

There always was serious potential for abuse in this situation, a potential that lenders were willfully refusing to see back in the Era of Make Believe Loans, but now the pendulum has swung too far in the other direction. The lenders are now so paranoid about these loans for which there is good reason and a valid market for existence, that these markets are going completely unserved. Self-employed people and commissioned salesfolk have to file taxes, also, and tax forms are the preferred method for documenting income. Nonetheless, because there are significant deductions that would not otherwise be allowed due to the fact that these professions are largely paying bills with "before tax" money whereas most folks are paying with "after tax" money, people in such professions needed the alternative documentation methods in order to qualify for loans. With those alternate methods all but non-existent now, people in many professions (including real estate agents and mortgage loan officers) are finding it difficult to get loans at all. There always was the danger of talking yourself into a loan that you could not really afford, but while lenders were being willfully blind to it until recently, now they've got an obsession with avoiding that market completely. I am sure that business models will spring up allowing that loan market to be served within a another year or two, but in the meantime it's going to be really hard for people who are confined to that market to get a loan.

Caveat Emptor

Originally here

Thanks again for the terrific posts. I've learned more about mortgages in the past two months than I ever dreamed I might.

I am looking to buy my first home soon, and have myself in a good credit position to do so. My credit score is over 800 and I have no back-end debt - no car payments, alimony, student loans, etc. My annual salary is well over $100K, and while my down payment will not be as much as I would like, I should be able to put up 20% of the purchase price.

Before I shop for a loan, I have some questions and would appreciate your insight.

1. Do monthly "subscriptions" such as landline phone bill, cable, internet, cell phone, etc. come into consideration? As I have no cell phone and no cable (and don't intend to get them), I see my monthly expenses in this regard as significantly lower than most other borrowers.

2. Do my retirement savings come into play? I have saved conscientiously for several years and between IRA's and pension funds (fully vested) I have a significant amount put away.

Thanks again for the teachings

Gosh, I didn't think a dream client like this existed any more!

In general, there are only three instances when reserves really come into play. They are:

1) Stated Income. Since people in this category were not documenting their income, for a true stated income loan they are looking for evidence that these folks are living within your means. The measurement that has evolved is six months PITI (Principal Interest Taxes and Insurance) in a form where you can get to it - savings accounts, investments, something. If you have a retirement account, such as a 401, IRA or similar, most lenders will allow you to use a discounted amount, most often 70 percent, as the money would require the payment of taxes and penalties. Roth IRAs may be treated differently, as the rules are different. There were Stated Income Stated Assets loan programs, but when you get right down to it, those loans look more like heavily propagandized NINA (No Income, No Assets, aka No Ratio loans) than they did a true Stated Income. (at this update, I am unaware of any lender who is actually funding stated income loans of any sort)



2) Payment shock. If your payments are going to be much higher than rent was (or previous payments were), many lenders will require two to three months reserves of PITI payments in reserves.



3) Cash to close. No matter what the loan, the underwriter is going to be looking at the loan to make certain that you have the cash to close, and any reserve requirements are in addition to this. If your loan is going to require a certain amount of cash, either in the form of down payment or loan costs or most often, for prepaid interest or an escrow account, then the underwriter wants to see evidence you've got it. It's no good for the bank for the loan to be approved, the documents printed and signed, the notary paid, and then the loan doesn't close because you didn't really have the cash. Seller paid closing costs are getting to be a really touchy point with many lenders, by the way, as they indicate the property may not really be worth the ostensible sales price.



In any of these cases, the underwriter is going to want to see evidence as to where the money came from. They want to know that you've either built it up over time or have had it for quite some time or that you can document where you got it from. What they are looking at with these requirements is the possibility that you got a loan from somewhere that you're going to have to pay back, and the payments on which may mean you no longer qualify under Debt to Income ratio guidelines.



Mind you, it never hurts to have money socked away. But it's not worth any huge amount of contortions to prove. For A paper lenders, the guidelines are razor sharp, and excessive reserves are not a part of them. You've either got the required amount or you don't, and the fact that you have $100 million in investment accounts isn't relevant - and it may cause some underwriters to start wondering why you're not paying for the property in cash or putting more of a down payment (Anytime you give an underwriter more information than required, you run the risk that they will ask you difficult questions about it). Some subprime lenders may approve a loan they would not otherwise have approved, or maybe offer better terms than they might otherwise, but there have been enough adverse experiences with this that it is becoming more rare.



Monthly subscriptions (utilities, etcetera) are why the permissible debt-to-income ratio (DTI) isn't higher. You can cancel cable TV, you can cancel dish network, you can cancel pay per view, you can cancel magazines, although most folks want phone, gas, and electricity. Utilities etcetera do not count against debt to income. Only the payments on actual debt count.

Caveat Emptor

Original article here

if our house is being foreclosed, can they take our retirement or make us sell our cars?

we both have (1-2 year old) cars that are paid off. Can they take our cars or make us sell them to pay them some money?
Can they place a judgment to take our retirement 401k?

Depends upon the law in your state, and whether the loans you have are subject to recourse.

Here in California, purchase money loans are not subject to recourse. Providing you don't commit fraud or any of the other things that void this protection, once they take the property, that's it. If your loan was purchase money, used to buy the property, they shouldn't be able to win a deficiency judgment after foreclosure.

However, this isn't likely to be as innocent a situation as all that. Can't make the mortgage payment, but have two vehicles less than two years old which are all paid off? That says this was likely to be a "cash out loan" to me!

I am unaware of any circumstance under which a "cash out" loan is not full recourse. It's not like you did it by accident. Now, if as I suspect may also have been the case, false promises were made to you as to your payment, interest rate, etcetera, that's a matter to take up with the people who did your loan. Actually, probably better to have your lawyer take it up with their lawyer. But that doesn't mean the current holder of that loan isn't entitled to their money.

If, as I suspect, you "cashed out" to pay for those cars, then you've got a full recourse loan, and they can pursue a deficiency judgment. Whether they will or not is subject to several variables, most significantly whether they think it's worth their while.

Once they get a deficiency judgment, talk to a lawyer about whether they can get court approval to take your vehicles. But they're going to get the deficiency judgment if they try. Cash out loans are pretty cut and dried. Unless there's something reasonably unusual going on, for which consult a lawyer, you're likely to be better off agreeing to it in the first place, rather than forcing them to pay attorney's fees and having the judgment say you've got to pay their attorney fees as well as your own, in addition to the base deficiency. My understanding is that safe harbors for assets in this case are intentionally as few as the legislature can make them.

One of those few safe harbors, though, though, is likely to be retirement accounts. Retirement accounts are a protected asset class, and while I suppose it's possible for a creditor to get at them, I've never heard of a case of them being successful, at least not until you start withdrawing from those accounts. Once it gets withdrawn, of course, the money you withdraw is ordinary income, and therefore, fair game. This can lead to the sort of situation computer programmers call a "deadly embrace". They can't get at the retirement account as long as the money is in there, you can keep the money in the retirement account, but if you try and withdraw it for use, they can then get at it. They can't get it until you try to use it, but they can get it if you do. Usually, people in this situation negotiate a settlement.

Caveat Emptor

Original article here