Dan Melson: May 2012 Archives

what happens if partner refuses to pay his half of the mortgage?

The lender will hold you each responsible for payment in full. That's the long and the short of it. You both agreed to the loan contract, and if it's not paid in full there will be all of the consequences for each of you: Hits to your credit, notice of default, foreclosure.

This is basically blackmail on the part of your partner, and a disturbing number of partnerships have this phenomenon. The only way I know of to recover the money is through the courts, which takes forever and costs more money. Even when you have a judgment, it can be difficult to actually get the money if they have taken certain steps to place it beyond your reach. Talk to an attorney right now, keep good records, and send everything Certified Mail.

Unfortunately, there are no method except time that I am aware of to repair the damage to your credit once it has been done. You just have to wait it out. For that reason, it is usually cost effective to loan your partner the money, even at zero percent interest.

What if you don't have the money for both halves of the payment? Well, that's a real question, and the answer is found in the article What Happens When You Can't Make Your Real Estate Loan Payment. This is not a good situation to be in. Talk to that attorney about liquidating your investment. It takes time and a lot of money if your partner doesn't want to.

What can you do to prevent this from happening? Pick a good partner that won't pull this nonsense. Spend the money to protect yourself up front with a partnership agreement. But that won't protect you if you didn't do it in advance, and the fact is that if your partner wants to be a problem personality, you really can't stop them in the short term. Not that it makes any difference to your pocketbook, but sometimes it's not intentional. People do fall on bad times for reasons not under their control.

Corporations are another step people take to protect themselves from this sort of thing, but that brings in all sorts of further problems. How the corporation qualifies for a loan is often a significant problem, and many times practically speaking, is insurmountable.

Borrowing money in partnership with someone else is something to be done with a lot of forethought and preparation, otherwise there's not much you can do when bad things happen.

Caveat Emptor

Original here

The first thing to consider is that maybe you shouldn't. You never want to get involved in a bidding war. There's a classic riddle I ask every single one of my buyer clients at least once.

"How often does the Deal of the Century happen in real estate?"

The preferred answer is "About once a week." I'll give full credit for anything under two months. Yeah, you might not get this one. But another bargain just as good will be along soon. My point is this: There just aren't any properties worth getting into a bidding war over, and part of a good buyer's agent's job is keeping you from going overboard because you've got tunnel vision for this one property.

The second thing to consider is that just because the listing agent tells you it's a multiple offer situation doesn't mean that it actually is one. Quite often, agents don't understand that lying about this is a good way to scare desirable potential buyers off, and they say they've got four (or fourteen, or four hundred) offers hoping to shake a better offer out of prospective buyers. Ladies and gentlemen, if these offers were any better than the one you just sent over, they'd be in hot and heavy negotiation with the other offer, if not in escrow. I've been told this on December 24th when the property had been on the market for six months. Neither Santa Claus nor the Real Estate Fairy are real. Yes, sometimes it may be the truth. See the answer to "How often does the Deal of the Century happen?" above. The rest of the time, it hurts the seller more than the buyer, scaring off good offers and puncturing credibility. Credibility is like a balloon - if there's one hole for the air to escape, what you've got is nothing. I don't understand agents who do this to themselves, especially as it hurts their clients also.

The third thing to consider is that you're always subject to how the the seller and their agent want to handle the transaction. You can't force them to do anything, even act in their own best interests. I'm coming up against an awful lot of horrible listing agents who respond as effectively to offers made as any other black hole. Put in a good offer and you get all the response of someone dropping it into a black hole. If you're not familiar with black holes, there's only three pieces of information it's possible to get on a black hole: Mass, charge, and spin. The real estate impact is similar; We can see it's still listed "active" on MLS, but no matter how many phone calls, emails, and faxes we send over to the listing office, we never get a response to our offer. And some of these listing agents have the gall to complain when they do respond six or eight weeks later that all of the prospective buyers have moved on. So be aware that you can't force the listing agent to respond at all. Fiduciary duty is supposed to accomplish that, but real world experience tells us that it often fails. I can point to many agents and brokerages that are completely incompetent at anything other than getting signatures on listing agreements.

In neither case am I saying that you always want to walk away from all multiple offer situations. What I am saying is that the situation is rife with potential for disappointment and other morale busters. But if you can keep a healthy attitude and not let the idiocy and failings of those you cannot control bring you down, it's still an attractive property that you obviously want. If you put in an offer, you might get it. If you don't, I can guarantee you won't.

The next thing to consider is trying to find something other than money that the sellers want, and offering that in lieu of a certain amount of cash. There are as many possibilities as there are scenarios. Short sales often want certain specific things, lender owned properties usually want different things, and regular sales still others. There is always the possibility that something other than money will win the day, and the smarter the seller and the better their agent is, the more likely this will be the case. Something over fifty percent of all escrows have been falling apart locally, thanks to the new appraisal standards, other legislation passed by Congress, and a generally over-paranoid lending environment.

Some sellers and their agents just stupidly choose the apparent highest offering price, and nothing I nor anyone else can say is going to dissuade them. The most probable explanation is that listing agent's commission check - since commission is paid upon official sales price, they will advise their client, the seller, to take whatever the highest offer is. Some of these agents may have ten or twenty years in the business and just consider it "bad luck" that all of their listings have the same exact problems after they have a contract. Problems are always with us, as well as the potential for problems. If it were easy, anyone could do it and there would be no need for real estate agents. But an agent where the vast majority of their accepted offers have these problems isn't luck - and the one common factor all of their problems have looks them in the mirror every time they walk by one.

There are strategies available to buyers that take advantage of this stupidity. Most of the common ones are variants upon the classic sales trick of the sales "take away". Get the seller wanting your offer, then make them work for it, doing things they would never have done for what they end up getting. Once the seller has chosen one offer and everyone else wanders off feeling demoralized and let down, that chosen buyer has a lot more power than they had previously, at least if they use that power carefully. The property goes back on the market two or three weeks later, and everyone looking at it in MLS is going to wonder what's wrong with it. I don't like using these strategies and definitely prefer not to, but some listing agents practically beg me to do so.

Another thing that can help quite a lot is your Buyer's Agent Presenting The Offer In Person. Theoretically, listing agents are required to honor this request or show written instructions to the contrary signed by their client, the seller (Clue to a certain nameless agent who knows who I'm talking about: A "forwarded email" is not acceptable for this). All too often, however, listing agents throw roadblocks in the way. It's actually in everybody's best interest for buyer's agents to present their client's offer in person, but many listing agents obsessed with control (or with getting both halves of the commission) throw so many roadblocks and so many delaying tactics that it's not worth fighting over. This is yet another excellent reason for sellers to write into the listing contract that the listing agent will not get the buyer's agent half of the commission! Maybe an extra half percent as a concession for doing the other agent's job as well as their own, but not the entire thing. I never accept dual agency, and every agent I respect agrees with this position. If someone insists upon me writing an offer on one of my own listings, Winforms has a very simple one page form called a Buyer Non-Agency Agreement that spells out that I am acting solely on behalf of the seller, and I'm just doing whatever it is because that seller's interests require me to, not because I'm accepting agency on their behalf. Nor is the buyer's agent presenting the offer something you can do on every property - the chances of it happening on lender or corporate owned property are pretty small. But if your buyer's agent presents your offer in person, that's an opportunity for humanization - making you into a human being that the seller can empathize with, not just a faceless pile of paper with markings on it. It's also an opportunity to stress the desirable parts of your offer.

As far as money itself goes, every client I have in a multiple offer situation gets asked two important questions:

1) If you got the property for this price, would you be happy or not?

2) If someone else got the property for $1000 more, would you care?

The proper answer to the first is "ecstatically happy!" If the happy part isn't in there, they're offering too much and need to reduce their offer. It doesn't matter if similar properties are selling like hotcakes for twice as much. If the client isn't happy, it may mean they need more discussion of the market, or alternatives to that property, but they shouldn't be offering that much money. The answer to the second should be "no", an indication that they really are offering what the property is worth to them. Not that they have to offer that much, just that they might. If they want to offer some lesser amount, I'll still do everything I can to get the offer accepted, but in that circumstance my clients are accepting the increased likelihood that someone else gets the property for a price less than they would have been willing to pay.

A question that's never misplaced is "Are we wasting our time with this offer?" It communicates quite plainly to the listing agent that under the current circumstances, this is the best they're going to get from you. You just have to be willing to walk away without hesitation if they say "Yes." It's not necessarily the end of the line for you and this property, it's just the end of the line for now. If the property is still on the market weeks later, a renewal or even a lesser offer can often move it "Pending" in your favor. It has to do with credibility, and steadily worsening circumstances for would-be sellers of real estate. Quite often the agent or seller who isn't willing to talk rationally in April is desperate in July. It's their own fault, if they had negotiated in good faith in April the problem would have been solved on terms more favorable to them.

Caveat Emptor

Original article here

A couple years ago, I took a look at a lender owned property a few miles from my office. It was ugly. I mean ugly. The yard was a mess, there was a deck that was rotting. The facade looked like it hadn't been painted since before President Kennedy was shot, and really needed to come off besides. Inside, the carpet was gone, the vinyl in the kitchen and bathroom looked like it was waiting for the return of President Truman, and most everything else looked even older. The color scheme was something out of the art deco age, too. You know the pastel salmon and blue.

But it had good intrinsics! Dynamite location within a mile of three freeways, although it didn't get traffic noise from any of them. The area is a resurgent one, and it's within fifteen to twenty minutes of just about everything, even during rush hour. The schools - especially the high school - are top notch public institutions. The property itself did not have any basic structural flaws that I could find - just an old and ugly surface. And that's not mentioning the fact that it had excellent sight lines and a pretty darned good view.

I tried real hard to get one set of prospective clients, a couple with two kids, to put an offer in on the property. Based upon what they had told me, they could afford the property with a thirty year fixed rate loan with good amount left over, even at the asking price, and the property was livable as it was. It just wasn't modern or gorgeous, and they still had room in their budget to fix it up. They could have spent roughly $40,000 for professionals to come in and fix the whole thing, or they could have cut those costs in half or more by doing it themselves. At the end of the process, they would have had a wonderful property worth at least $120,000 more than they paid for it, with at least $80,000 in smart sweat equity. Furthermore, the property taxes would have been lower, they would have had plenty of room in their budget for disasters, and on and on the list of advantages goes.

These people decided not to pay attention to me. They wanted something that was beautiful now, and someone else persuaded them to stretch past their real the limit to buy into a fairly new PUD on the other side of that particular suburb. HOA dues, and no room in the monthly budget for anything to go wrong. Not to mention they had to use an interest only 2/28 to qualify, and they called me about a year later and said they've got a late payment, but they were hoping I could do something for them. The answer was unfortunately no. I really hope for their sake that the market gains a lot of value soon, because otherwise they're going to be hosed as far as refinancing goes, and they're going to need to. I didn't say a thing even implying, "told you so", but to my surprise, he volunteered the information that he now wished he had listened to me. Unfortunately, he can't go back in time with what he knows now.

A flipper ended up buying that property for cash. He did a light surface rehab, and it's beautiful. He spent less than $500 getting someone to clean up the yard and haul away the wood from the old deck. He stripped off the old facade and put good quality siding on. Carpet went in before he even moved in, the vinyl is now a fairly nice tile, and the two bathrooms he basically resurfaced, one at a time. Kitchen cabinets he re-stained, and updated the sinks, the faucets, and the appliances. Put up a white picket fence, seeded grass, painted the inside, and now the property is on the market again. After all the costs of rehabbing and selling, he's going to come away with at least $40,000 pure profit, assuming he paid to have all the work done. Plus, he got a place to live for six months out of the deal, at least a $10,000 value even for a rental.

My point is this: Flippers aren't the only ones who can do this. In fact, the math works even more strongly in favor of someone buying a place to live. No seven or eight percent cost of getting the property sold. The lower purchase price means lower taxes, which last as long as you own the property. I know that career and kids are tough enough, but the property was livable as it sat, and you have however long you want to get it rehabilitated. Net difference to their situation: almost a year and a half of the income it would have taken to qualify. If I offered you a year and a half worth of pay to work overtime for less than six months, most people would jump at it, kids or not. Add to all of this the fact that this is money you didn't borrow, so you're not paying interest on it every month. At 6% interest, every $1000 you don't borrow saves you $5 per month, and this was a fair number of thousands of dollars.

Most folks are going to replace the carpet and paint the place anyway. It makes no difference if it was last painted by someone on an LSD trip in the sixties, or the carpet is a filthy nightmare shade of avocado green unseen since 1977. If you're planning to make it go away, it makes good economic sense to choose stuff that's ugly now, so you're not paying a premium for something beautiful you plan to replace anyway.

There is a reason Why There Is Money in Fixer Properties. I can understand if you're a big executive who needs to move into something beautiful now so you can have social professional or client sales meetings there right away, but this just doesn't describe most people. Not to mention that those folks aren't looking to scrape into a property - they make the money to easily afford the beautiful modern six bedroom home overlooking the ocean.

I'm not going to say that you'll never find a bargain property that isn't already beautiful. I'm saying you're at least a hundred times more likely to find this sort of bargain in a property that isn't beautiful yet, and that the vast majority of the time, the big stroke in the pocketbook goes to the people who make it beautiful. I had another couple a few months ago,and they listened to me about fixer properties, more than even I was really comfortable with. They bought a property that was almost a century old with some systemic issues (electrical, plumbing and sewage), and all through the inspections, I kept saying things like, "I expected worse." Turned out the property was more solid than I gave it credit for. I drove by a couple weeks ago, and the property has been fixed up significantly. Furthermore, I'll bet they could sell for a profit, even now, and there's still a long way to go. These people have basically zero pressure on their pocketbook, and zero stress in their life. They can still save money. They can still live like they were accustomed to. The only difference is that now they are owners rather than renters, and they have placed their cost of housing forevermore under their own control, they get the tax advantages of owning, and so on and so forth.

People stretch beyond their real means to buy that beautiful new gorgeous eye candy property all the time. It's never a sure bet, and when the market isn't going up twenty percent per year, it's considerably more risky. Far better to restrict yourself to a property you can afford with a sustainable loan, and that gives you some monthly cash flow for emergencies. You shouldn't plan to have a need to refinance for at least five years, but if such a need should happen, you're likely to be able to do so. If you'll buy a solid property that needs some updating and beautifying, it's likely to be a financially rewarding experience, and any number of professional property fixers can attest. There's no reason why you can't take advantage of this fact to find a property to live in, instead of the quick flip for profit. In fact, it makes even more sense to do it for a property you intend to live in for a long time.

Caveat Emptor

Original article here

I've been aware of this scam for some time, but with a larger than normal number of people in foreclosure or otherwise at the end of their rope, it's probably past time to cover this. It is a pure scam throughout, but it's legal as far as I know.

I'm not going to go into more details than I can avoid. The universe knows there's enough people pulling this right now, but the bad guys already know about it, so let's even the level of illumination a bit. Here's the general way it works. The owners in default, and there's no way they're going to bring the loan current, as the lender can require once the Notice of Default hits. They do not have the requisite cash. Along comes a blackguard masquerading as a white knight, and makes the homeowner a proposition: Sign the property over to me, and I'll bring it current, rent it back to you long enough for you to get back on your feet. Pay the rent on time for two years, and I'll sell it back to you. There may even be a small amount of cash involved, as compensation for your equity "in case" you end up unable to purchase it back.

People desperate to stay in their property will agree. They think they'll be saving their equity, their kids won't have to change schools, and nobody will have to know they were in foreclosure. Of these, only the fact that the kids will be able to stay in their schools a little longer might be true.

Here's what happens: These scams are usually structured as a sale subject to existing deeds of trust, with all of the problems entailed in that, but not always. A signs the property over to B. B now owns it. In the absence of a contract for future activity, B can do whatever the heck they want to with the property. Usually, B will try to talk A out of demanding any actual written contract, and a verbal contract isn't worth the paper it's printed on. Without such a contract, what's preventing B from evicting A is essentially B's goodwill.

But with a contract or without, B is usually motivated to keep A in the property by the fact that they're going to charge A an above market rent - usually enough to pay not only the mortgage, but a significant monthly profit for B. I had a guy come to me a couple months ago who had accepted such an arrangement. His monthly payments had gone from $3100 to almost $4300. Where else is B going to get that kind of rent for properties that normally rent around $2000? And, of course, A is going to maintain the property. After all, they still think it's theirs.

If you can't make the payment now, let me ask you what makes you think you'll be able to afford a much higher payment? What makes you think you'll be able to pay it on time, as the contract, assuming there is one, demands in order to retain your right to re-purchase the property? It isn't going to happen. If you had that kind of spare cash, you would have brought the property current yourself. If you could afford the payment in the first place, you wouldn't be in this trouble. You probably wouldn't have been behind in the first place. But people will tell themselves all kinds of things, because "it's only temporary".

Now it's worth noting that for the ones of these structured as sales subject to existing deeds of trust, B is going to make a point of having some late payments on that mortgage. These hit A's credit rating. Chances of A being able to qualify for a better loan, that they can actually afford, when the two years are up? Zilch.

Even if they're not structured as sales subject to existing deeds of trust, the chances of A being able to qualify to buy the property back at the end of those two years are basically zero. There's going to be a late payment somewhere. "Sorry, but you're in default upon the contract terms." They can take the contract and a decent lawyer to court, and paint themselves as being a saint who kept A in the property, tried to give them the opportunity to buy it back, and was rewarded with default on the rental agreement and this lawsuit. Chances are that A ends up paying for B's lawyer, as well as their own. Even if A somehow manages to make all the rental payments on time and in full, they are now even more broke than before. No cash for closing costs, or anything else. Particularly in the sort of lending market we have now and expect to be having for the next several years, A is not going to qualify for the loan they need in order to repurchase the property.

What does the blackguard who pretends they're a white knight get out of all this? Well, they won't do it for properties without a good bit of equity. So for an investment of a few thousand dollars to bring the loan current, they get a property with 10% equity at a minimum, and usually more. They get a positive cash flow from having it rented above market for up to two years. And if A should somehow manage to leap all the hurdles to repurchase the property, that repurchase contract will give them back every penny they invested with cash to spare. And for the vast majority where A is unable to repurchase the property according to the terms of the contract, I'll bet that they get a good chunk of change, not only out of the equity built in to the deal, but also out of the differences between the market now and the market two years from now.

For being in denial, and unwilling to face the fact that they can no longer afford the property, A loses basically all of the equity they have built up. They would have lost some of it anyway, as it's not free to sell a property and in this market, you're unlikely to get top dollar for anything. But this ends up costing them more - tens of thousands more.

If you get into a situation where you're looking at losing the property, and someone pretending to be a white knight rides up and offers you this kind of deal, you're better off selling outright in pretty much every case. Yes, you've just lost the property. But you would have lost it anyway, together with basically every penny of equity if you accept one of these deals. How is that better than being responsible and realistic enough to accept the situation as it is, and sell on the regular market for the best deal you can get?

Caveat Emptor

Original article here

I've seen more changes in the lending industry in the last few months than the previous five years. But those changes mostly restored us to the place we were a few years ago.

There is plenty of money available, rates are so good right now because lenders want very badly to lend money. For all the howling and gnashing and grinding of teeth you see in the media, and elsewhere, I can get loans at rates that are very low, historically speaking. 100% conventional financing may not be available any more, but it's going to come back, and I do have 95% conventional loans, 96.5% FHA loans and 103% VA loans.

You just have to be able to prove you can afford the payments.

And that's the rub. Starting a few years ago, and increasing until the house of cards collapsed, many real estate agents and loan officers stopped worrying about whether or not their client could really afford the property. The question was could they get the loan funded, and let the client worry about whether they could really afford it later.

The relaxation of lending standards was like manna from heaven to the less ethical members of my professions. Agents could sell people who could barely afford a condominium in reality a beautiful huge detached house with its own yard in an affluent community with great schools, and loan officers could make it look like they could afford the payments. Talk about your easy sale! The clients expect a chintzy little condo in a rough neighborhood, and the agents shows them a beautiful five bedroom home half a block from the beach, and says they can get it for the monthly payment they told the agent they could make. Prices skyrocket! People who bought a couple years ago and are strapped for bills refinance into these ridiculously low payments while getting cash out for all of the toys they can imagine! New SUV? How about two new SUVs! Some loan officer needs to get paid for a loan, and everybody has a thirty year fixed rate loan they got at 5.25%? Offer to cut the payment in half!

Never mind that the real interest rates on these loans was much higher. People just naturally assumed that if they kept making the payments, they'd pay the loan down, and eventually, off. After all, that's what loans are! Except that wasn't the case with the Make Believe Loans that were so popular. That small minimum payment, way below the real cost of interest, caused thousands of dollars to be added to the loan balances, where the above market interest rate could be charged on that money also - and the lenders could report all of this as income, doing wonderful things for their revenue and stock prices!

Some others may not have gone in for negative amortization loans in a big way. Instead, they put people into "interest only" loans where the loan and interest rate was fixed for two, or maybe even three years. They may have used stated income, or they may not, but they put people in unsustainable loans where the clients could barely afford the initial payment, and never mind thinking about what would happen, sure as gravity, when the adjustment hit. When the loan started to amortize at the same time the rate jumped by two percent, they affect to be somehow surprised that their former clients cannot afford the payments!

Or perhaps they used stated income only because the clients had two thousand dollars of other debt service per month. Well, hello! debt to income ratio is the most critical measure of whether someone qualifies for a loan there is. It protects the lender, and it also protects the borrower, and this intentionally short-circuited it. Yes, they could have afforded the property if they didn't have have this debt. It's not a distraction; it's the central, single most important issue in whether or not they qualify for that loan!

For those who were taken advantage of thusly, may I recommend finding a competent real estate attorney? The last couple years have seen some very interesting court decisions. One court in Ohio started it off by ordering a negative amortization loan rescinded due to failure to disclose its nature sufficiently. For a while, there were all kinds of lawsuits going on. Unfortunately, they pretty much came to an end when the bailouts happened. I was looking forward to seeing criminal trials for the worst crooks, but it appears as if orders have come down from Our Beloved Political Class not to put anyone in jail. Probably fair enough, as Our Beloved Political Class was at the heart of the reason for the bubble. Still, it doesn't precisely discourage a repeat of the whole mess, does it?

All of that is neither here nor there, really. My point is that the only thing that's changed is that the lenders have woken up to the fact that was evident all along - that they were the "deep pockets" who were liable to eat most of these losses from the price collapse, and from people who couldn't make payments on unsustainable loans, particularly after the payment started adjusting. The lending standards that contributed to the bubble are gone, and they are not coming back any time soon. Forget about them. That was then. This is now.

The lending standards in effect now are very livable. Bankers transported from the fifties would be horrified at how lax they are. Until 1997, there was precisely one lender that would loan 100 percent of the value of the property (when they bailed out of the 100% loan market in late 2005, it was the first sign that collapse of the lending market had actually started). When I originally wrote this, I still had at least a dozen lenders who would go 100%, but they wanted to see proof you can afford the payments. Failing that, lenders wanted to see enough equity (which means down payment in the case of purchases for you real estate agents reading this), so that if the loan were to go south, that lender would still get their money.

This means real affordability and down payment have become a lot more important to the purchase market, and if you're looking at a refinance, you had better be able to afford the real payments. If you can't, that refinance is not going to happen. Even the new 125% refinancing programs require documentation of enough income to afford them - they're in existence for loss mitigation, and loss mitigation only. If you can't afford the loan, even Fannie and Freddie are going to cut their losses by foreclosing.

If, on the other hand, you're willing to restrict yourself to properties you can really afford, welcome to ownership! For every person who can no longer qualify because they can't document enough income, there's someone else who can, and who has the down payment. Down payment requirements are very achievable for anyone who is reasonably frugal and doesn't make a habit of stiffing their creditors! Affordability of property has increased dramatically, and at this update, most properties in reasonable condition and with realistic asking prices here locally are going for the asking price.

The catch is that if you can only afford the payments on $300,000, then $300,000 is all you're going to be able to borrow. I've been selling my clients what they can really afford all along - the only difference it makes to me is that I'm no longer competing with the jokers that can only sell houses by showing clients the beautiful property they can't afford. I've been telling people about real, sustainable loans all along. The only difference this makes to my loan business is that I'm not competing with jokers who sell negative amortization loans by the minimum payment to unsuspecting people who don't understand what's going on.

What this means is that lazy agents and loan officers are going to have to bite the bullet and sell the client a property they can really afford with a loan they can really afford. Agents can have people make offers on property they can't afford, but they're wasting their time and the clients'. Loan officers can tell people about this loan and that loan they used to have, but they're wasting their time and the clients'. Possibly the clients deposit, inspection, and appraisal money too, in both cases. The loans to make this nonsense happen do not exist any longer.

On the other hand, low to (in some cases) zero down financing still exists for those who can afford the payments. But they have to be able to actually afford the payments. This means working within a budget, and settling for what you can afford within that budget. Settling is a very hard message to send someone who's going to be spending six figures on a property and is all emotionally tied up with how they want it to be beautiful, and in a great neighborhood with wonderful schools and all of the usual things that have buyers gushing - particularly when everyone else is telling them they don't have to settle. They really did have to settle, all along, and those that believed ethical practitioners when they were told that are doing just fine, thank you, while those who didn't are in real trouble. The real world has come crashing back into real estate. The fantasy may have been nice while it lasted, but the real world always comes crashing back.

Among those real world facts that have come crashing back is that all of the long term benefits of owning over renting are just as real, just as relevant, and just as true, as I painted them back when I wrote those articles. Let's review a few:

Should I buy a Home?, Leverage in Real Estate - Making a Decent Investment Spectacular, Why Renting Really Is For Suckers (And What To Do About It) (and its counterpoint, When You Should Not Buy Real Estate), Save For A Down Payment or Buy Now?, The High Cost of Waiting To Buy A Home, Real Estate: Getting From Where You Are To Where You Want To Be.

My local market in San Diego County has been on the bleeding edge of all of this, because it's such a desirable place to live, and our housing supply is probably the second most constricted in the nation (after Manhattan, and although the City of San Francisco also has a decent claim it covers a much smaller area). Between natural obstacles to growth and zoning codes constricting the building of new housing, I think we've had about all the downwards adjustment we're going to get. If you can't afford to buy a detached house, buy a condominium, townhome, or PUD (indeed, how dead the condo market has been the last three summers has been directly attributable to two factors: Over-conversion or apartments, and the fact that lazy agents were selling people properties they couldn't afford because it was easy), or think seriously about moving out of town, because with the number of people who want to live here, it's only the current meltdown in lending that's causing the hiccup in prices (and what effect do you think over-conversion of rentals will have on the rental market?). With local housing demand trends going the way they are going, even the prices at the peak of the bubble are going to look pathetically cheap in a few years, and that's pretty much the facts of the matter, albeit perhaps not so strongly where there's still room and the building codes to allow growth People are able to qualify here locally. Right now, the only thing preventing them is irrational Fear and Greed, exactly opposite to but caused by exactly the same psychological factors I wrote about in February 2006, back when everybody else thought the market was still going gangbusters, and updated here. But psychological fear and greed are difficult to maintain. People have figured out, en masse, that the economic basis is there to support the sales that are happening. Actually, the economic basis is more than there to support current prices - We've seen a definite increase in sales prices already. Buy something you can really afford, and be ready to see it increase in value.

If you buy something you can really afford, the moderate increases in value I expect to see will leverage your money favorably, such that you will be better able to afford something more expensive, more quickly, than if you saved your money, even if you invested those savings in the stock market. Even if you never move up, the fact that you have fixed your costs of housing now means that if you can afford those costs now, you will be even better able to afford those costs in the future, assuming inflation and all of those other economic factors we've gotten accustomed to these last fifty years. Homes are not going to continue at today's prices any more than candy bars are still ten cents, or that you're going to be happy working for today's wages thirty years from now. What's going on right now is still an opportunity for buyers, and an opportunity for those who would like to be able to continue to afford to live here for the rest of their lives. If you decide to wait until future events prove me right, that's your prerogative, but neither I nor anyone else will be able to bring the market back to today's state. The moving finger writes and moves on.

Caveat Emptor

Original article here

Real Estate information is asymmetrical. One of the central facts of real estate transactions is that the seller always knows more than the buyer. They've lived in the property for years, and had to deal with any defects first hand. Even if it was rented out, the chances are that the tenants contacted them over every defect those tenants encountered. It's not like tenants are noted for their desire to spend more money on behalf of someone else. The vast majority of the time, that seller could quote you chapter, verse, and receipt number for every repair they've had done, tell you more than you ever wanted to know about the time the tenant called them at 3AM to take a plunger to the toilet, or about the time the water heater exploded while they were on vacation and they came back to a property filled with water up to the window line on the second story. Water bills, stucco cracks, the cracked slab that was revealed the last time the floor covering was replaced. The question is: Will they?

The law is quite clear. The owners are required to inform prospective purchasers of any known issues, or for that matter, issues that they reasonably should have known, that a reasonable person might consider in their decision of whether or not to purchase that property, and by obvious (and well precedented) extension, on whether or not to purchase it for a particular price. Failure to do so can make you liable for the entire purchase price, repairs, legal fees, and even damages. Please, consult with a lawyer as to your responsibilities. I'll bet you a nickel, in advance, they advise you to disclose whatever issues with the property there may be.

There are exceptions. The major one where the sellers really don't know anything is lender owned property. The others may be legal exceptions like inherited property - but I'll bet you Junior knows all about the problems with Mom's property even though he may be legally exempted.

Nonetheless, two factors stop a lot of owners from proper disclosure. Particularly in this market, those owners may be hoping just to get out even, or even simply owe less money in taxes than they might after the lender accepts the short payoff. The old "blood from a turnip" argument. It's one of the maxims of the legal industry never to sue people who are broke. You can get a judgment. What you won't get is the money.

The second factor is that the current owners intend to shield their assets (via homesteading, etcetera), leave the country, or simply hope you're not going to sue due to one of a number of reasons. Mostly, these amount to denial. If you've got to put out $50,000 to get the property into the condition you were lead to believe it was in when you bought it, it's worth their while to pay the lawyer and chase you down.

The various inspectors are your friend. Quite often, I encounter resistance from clients about spending the money for the inspection. I make it very plain that I will try my best to spot defects, but I am not a licensed inspector of any kind, and there aren't very many agents who are. I've met exactly one who was, and let's just say that I'll bet significant money that my clients end up happier than his, and expect to win a lot more arguments and disputes with him than I lost. Especially if our respective clients were asked how happy they were five or ten years out.

Admittedly, inspections cost money. However, on the scale of the value of real property, this is money you need to spend. Maybe $400 to make certain that a $500,000 property is basically sound. Look at it this way: Would you spend an extra eighty cents for a third party vouching for quality on a thousand dollar item? Particularly if you can sue them if they're wrong? Say you were looking at a $10,000 used car. Would it be worth $8 to you to have your favorite mechanic tell you what, if anything, was wrong with it? I'll bet every single one of you who drive answered "Yes," and that's even without the liability issue. The point I'm trying to make is that these are equivalent bets. It's just that "$400 is a lot of money." Well, $500,000 is a considerably larger pile of money than $400, and it's no less real if you happen to be borrowing the whole amount. In fact, it's even worse, because if you lose $500,000 cash, all you've lost is $500,000. If you borrow $500,000 and lose it, not only do you have to pay it back, you have to pay interest on it until you do. Not to mention that it's kind of hard to refinance, among other problems.

However, you don't want to be putting out that $400 inspection fee for properties you're not going to buy anyway, because there's something wrong that a knowledgeable agent can spot before it gets that far. Nor do you want to spend it before you've got a fully negotiated contract, especially in the current market, because the fact that you've spent $400 inspecting their property before negotiating a contract can be interpreted by sellers as giving them more power. Furthermore, negotiations post contract are always subject to whether the other side wants to be reasonable about their end of what the inspection reveals. You've already got a deposit in escrow, and my experience has been that it's easier for the owner to break an escrow that's not going anywhere, than it is for the former prospective buyer to force the owner to release their deposit money from that same escrow. You'd really prefer to find out about Vampire properties before you put an offer in.

This is one of the many areas where a good buyer's agent pays for themselves many times over. If they spot the vampire property before you make an offer, that's a minimum of about two weeks and $400 you saved, and it's likely to be a lot more. If you put a $5000 deposit down (and nobody sane accepts offers without a deposit), now you're wondering whether the other side is going to return it, which not only might necessitate hiring a lawyer, but also impact your Loan to Value Ratio until and unless you get it back, and could very well impact your Debt to Income Ratio. Time, money, headaches. All saved because your agent spotted the problem before you put an offer in. There aren't any spaces on the HUD-1 to document them for the government, but they're all real.

So when you're going around looking at properties, it's a lot more important for your agent to look critically at what might be wrong with the property, and compare and contrast it with other similar properties on the market, than it is for them to tell you about how the floor goes so well with the walls, or how gorgeous the view is. Most people really can figure those latter qualities out for themselves, and if they really want input, a good agent is happy to provide it, although most people will only be asking for confirmation that other people feel the same pain in the optic nerve that they do. The real job of a buyer's agent is to consider things other than the transient decorations that are likely going away. Physical situation (including defects!), orientation, and of course, location, location, location. How easy will be to maintain or improve the property's value? What will it be like to live there? What does the future hold for the neighborhood, at least according to current plans? What's the commute like? How's the grocery situation? What about other shopping? City services, how far to common activities? Most importantly for most people with kids, What are the schools and how good are they, really? None of this stuff is part of the standard disclosures from seller to buyer, because the buyers are theoretically just as capable of finding it out as the sellers. Not true in practice, I might add, because the seller has usually been dealing with these and other neighborhood issues the whole time they've owned the property. These and other questions are some of the reasons why good agents can only cover so much area, and why it's a real good idea for even current residents of a neighborhood to find a good agent and use them to help them buy a property.

Caveat Emptor

Original article here

I got a search for how one spouse could sign while the other was out of town, and act on their behalf. Since both spouses usually need to sign real estate papers, this is a real concern.

Actually, almost anybody you designate can sign for your real estate transaction, whether or you're available. The usual thing is you're out of town for some reason when closing happens, and so your spouse signs for both of you, themselves in their own right, and you by Power of Attorney. This actually covers all kinds of situations, not just real estate.

It is to be noted that real estate documents can usually be signed anywhere in the United States, so long as there's a notary available. I've had documents sent across the country multiple times. It's only when the principal is out of the country that life becomes difficult, as there's a requirement for the documents to be signed in the United States. The only way I'm aware of to have that done abroad is at an US embassy, where according to international law, the grounds are US territory. The chances of a US embassy having a notary are excellent, as they are employees of the US State Department, after all, and such services are part of the ones they exist to provide, but they're typically on a forty per week Monday through Friday schedule and their fees are higher than most. I have done one such transaction, and I do have to report significant potential stumbling blocks.

The document required for someone else to sign documents on your behalf is called a Power of Attorney. You must sign it and have it notarized that it was really you that did so. In the case of real estate, it will be recorded along with the document it enabled your representative to sign. In it, you designate one particular person who has the right to undertake an action or group of actions, and they then act on your behalf, as your "attorney" for this matter.

Powers of Attorney can be made for all sorts of things, not just real estate transactions. For instance, pretty much everyone should have a Durable Power of Attorney for Health Care. Powers of Attorney can be very broad and ongoing or limited to one specific action in a limited range of time. You set this up at the point in time when you execute it. Whatever terms you set up when you signed it are binding, both upon you and the person you designate. Most stationery and office supply stores have ready made ones where you just fill in a few blanks and you're ready to have it notarized. I've seen ones with check marks, but those are dangerous in my opinion, as when a particular check mark was placed on there is a matter for considerable legal dispute. I'm not an attorney, but you don't have to be an attorney to be able to understand the potential problems there.

It is a misconception to believe that this person must always be an actual licensed attorney. In general, they need not be an actual attorney, only a competent adult. I'm sure there are circumstances when being an attorney is necessary, but it is not necessary most of the time. There may be circumstances where you may want a licensed attorney even where it is not legally necessary, but there's a major difference between being legal and being smart.

I've seen not only spouses used, but other relatives, close friends, and professionals such as accountants and attorneys. Note that the person you designate does not have to accept, and does not have to act on your behalf even if they accept. The idea is to get their consent first, and make certain they know your mind in the matters you designate them for.

Extremely important: You really need to trust the person you designate to act in your best interest, as well as to make certain they understand everything they are signing. If they sign something that you would not have, you must honor the contract, as long as it is within the mandate of that power of attorney. Whatever contract they signed on your behalf, you can be legally forced to live up to the terms. Your designate doing something you would not have is a side issue between you and the person you designated. That person with your power of attorney designate's signature on a contract can force you to live up to that contract, which is how it should be. Otherwise, nobody would accept powers of attorney as valid, and they would be regarded as one more way to run a scam. They're not supposed to be a scam at all, it's intended to be a way for one person to do another person's business legitimately. If they weren't as enforceable as the contract you signed yourself, nobody would accept them, and the business would have to await your ability to deal with it in person.

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. Most people in wanting a loan on investment property end up choosing a somewhat higher rate to keep the initial costs down a bit. When I originally wrote this and the general atmosphere was that 100% financing was widely available, I had to continually explain why it wasn't available to investment property. As far as I can tell, there was never any lender that would do a loan on investment property for more than 95 percent of the value, and most of them at this update want the investor to have minimum 20 percent down payment plus closing costs, while I still have a couple financing 95% programs and lots of 90% programs for people buying themselves a place to live.

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. HELOCs are comparatively low cost, and I have a couple that allow cash out to 80% of value even in this market. Depending upon market changes, 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.

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 used to 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.

Now there is no such thing as an easy documentation investment property. There never was even in the Era of Make Believe Loans. Indeed, for any loan, for all real property you have to show the full breakdown for each property you own. You used to be able state your overall income in most cases (and indeed, most folks with investment property had to do stated income due to the cash flow computations being so restrictive.)

When I originally wrote this, prices in urban California had gotten so high that it was just about impossible to find 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 was one of the things that convinced me California real estate was overvalued. Well, now investment property often does "pencil out" with a positive cash flow, even by lender standards, even single family residences. Condos have become cash machines again.

But you need to be very certain that you do have that cash flow. When I originally wrote this, you'd have been looking at $360,000 purchase price with a first loan at about 6.75 percent on $288,000, which gives a payment of $1868. 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 have formerly considered 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 was always a big non-fan of these loans, but was willing to do them for people in this situation 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 have always questioned whether the risks have been adequately explained to the forty percent of all local purchases that were at one point being financed by these. At this update, they don't exist any more, but they could come back.

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

Caveat Emptor

Original here