Dan Melson: August 2012 Archives

Many people are unaware how profoundly lending policies influence the market for residential property and the various kinds of housing and methods of construction. So I am going to go over the various gradations in available loans for various types of property.

Pretty much everyone is familiar with the standard house, built on site, mostly by hand, from basic materials. Called "stick built" to differentiate it from other building methods, this is the default housing that everyone is familiar with. Once emplaced upon that property, there is no real way of getting it off the property intact, and therefore it is appurtenant to the land. This might come as a shock to people who concentrate on the house, but when you buy a property, you are buying the land upon which it sits - the lot - and the structure comes along because it is appurtenant - attached and cannot be moved off easily. It is this type of property which has been at the forefront of liberalization of lenders loan policies, precisely because it is both universally desirable and non-portable. That land is defined by its boundaries. It isn't going anywhere. The structure isn't going anywhere that the land isn't, because in order to remove it, you pretty much have to destroy it. It's built on a several ton concrete foundation, which, if you nonetheless manage to pick it up, is still overwhelmingly likely to crack if not disintegrate, not to mention ripping out plumbing, electrical, and other connections.

Now because the land isn't movable and the structure isn't either, lenders have gotten comfortable that you're not going anywhere with that structure. Because the combination is so universally desired among consumers of housing, they have gotten comfortable with giving loans for almost the full purchase cost of the property (and I will bet you money 100% financing will be available again on some terms within 5 years), knowing that it takes a special set of circumstances for them to take a loss on the property, and they can charge higher interest rates in order to insure against that. (I am using insure in the statistical, law of large numbers sense that is the essence of insurance.)

Now once upon a time, lenders treated condominiums far less favorably than single family detached housing. But it was always obvious that condominium units weren't going anywhere, and in recent years condominiums, in all their incarnations, have reached a level of acceptance among housing consumers that assures their marketability, and even the price discrimination against high-rise condominiums is gradually dying out. It is far less than it was just a few years ago. For condominiums four stories and less, the only difference their status made until recently had to do with required expenses and Debt to Income Ratio: There is no homeowners insurance requirement, because the association dues pay for a master policy, but there is the additional expense of Association dues to charge against the borrower's monthly income. As far as Loan to Value Ratio goes, condominiums are precisely like single family residences, and you can find the same loans just as easily for them, at the same rate cost trade-offs, or very close. More and more, the fact that it's a condominium is becoming irrelevant to loan officers. Until Fannie and Freddie recently reinstated the requirement, most lenders had completely eliminated the "percentage of owner occupied units" guidelines that used to be such a bugbear for getting condominium loans approved. FHA has also always had the requirement for sixty percent owner occupancy to get loan approval. For these reasons, among others, condominium prices have taken off. In the last fifteen years, they have gone from being about half the price of a comparably sized and furnished detached home, to the point where they are basically proportional to detached single family homes, and in some areas, higher price per square foot due to the fact that they are a viable less expensive consumer's alternative due to (usually) fewer square feet to the dwelling, and so less expensive overall if not proportionately so.

(Fannie and Freddie reinstituted the requirement to make it look like they were doing something constructive in response to their bankruptcy. But truthfully, the only real effect it has is if the complex isn't fifty or sixty percent owner occupied now, it never will be because people who want to be owner occupants can't get loans because they don't have the down payment for other loan types, while landlord investors don't have any problems with the down payment requirements for portfolio lenders or commercial loans. Result: Fewer people can take the first step onto the property ladder.)

The first real step away from the "stick built' house is the modular dwelling. These are piece-manufactured at factories, and assembled in pieces on site. Usually, it's something like one entire room-wall in a piece, with all the necessary plumbing and electrical already embedded in it, although sometimes it does take the form of entire rooms. Think of it like modular furniture, which is manufactured in individual pieces, but those pieces are intended to be put together so that instead of an arm chair and an ottoman, you have a chaise lounge. The important difference is that unlike modular furniture, once that modular house is assembled on that foundation, it's not going anywhere. Try to disconnect the plumbing hookups, or disassemble the pieces, and all you will likely have is much smaller pieces than you started with. Modular housing, once assembled, isn't going anywhere. It is permanently attached to that land. For this reason, lenders are in the process of phasing out pricing discrimination against modular housing as opposed to stick built homes. For some lenders, modular gets the same exact loans as stick-built, for a few, there is a hit to the rate-cost trade-off that may be anywhere from a quarter of a point to a full point. Over half of the residential lenders in my database are happy to do residential real estate loans for modular housing on pretty much the same terms as stick-built. 100% percent financing (when that was available), interest only, even the horrible negative amortization loan were all available on modular homes. As a result, prices of modular homes may be a couple percent lower than those of stick built properties, but they are very comparable and the the investment potential is just as strong and there is no large amount of difficulty getting them sold due to the difficulty of getting a loan. Some lenders still don't want to touch them, but it's pretty easy to find lenders that will, and on the same terms as they do any other property, so the lenders who still will not lend on modular properties are hurting no one but themselves by dealing themselves out of possible business.

The next step away is manufactured housing on land owned by the home owner. Technically speaking, modular housing is a subset of manufactured housing, but when most lenders are talking about manufactured housing, they are talking about homes built at the factory in entire sections, and assembled with only a few total joins at the home site. True manufactured housing is portable, where modular really is not. If you're in Idaho and decide to move that house to your property in Georgia, it's doable.

Now because it is portable, as you might guess from things I've said here about the prevalence of attempted scams that lenders have had issues with people dragging them off. You'd be right. Lenders file foreclosure papers on the land, and the homeowner metaphorically backs up the pick-up truck and takes that residence somewhere else, leaving the lenders with a piece of land and no residence. Because there is no longer a residence on it, it's not worth anything like what it was when there was a residence on it. Lenders have lost multiple hundreds of thousands of dollars on individual properties around here. You get burned enough times, you start getting wise. Those real estate lenders who will lend on manufactured homes require a laundry list of conditions, and even if they are all met, they won't loan 100 percent of the value, or anything like it, and there will be an additional charge of at least one full point of cost on their regular loan quotes. Cash out loans are typically limited to sixty-five percent of value, making it hard to tap equity. Furthermore, due to accounting standards and depreciation, Fannie Mae and Freddie Mac made a rule that manufactured homes were limited to twenty year loans, which drastically limits not only the type of loans available to their owners, but also has the effect of restricting what they can afford to borrow, because the payments principal has to be paid back over a shorter period, and the difference between a twenty and thirty year repayment is much greater than the difference between thirty and forty.

Because loans for manufactured homes are more expensive, harder to get, and amortized over a shorter period of time, this has the effect that even if someone wants to purchase a plot of land upon which the primary residence is a manufactured home, they cannot afford to pay as much for it. Let's say par rate on a thirty year fixed rate loan for a stick built house or condominium is 6.25%. To keep it simple, let's hypothesize that someone can afford loan payments of $2000 per month. That gives a loan amount of just under $325,000 for the stick built house ($324,824). Now because of the minimum one point hit, the equivalent rate on the manufactured home loan, even though it still sits upon owned land, is about 6.75%, and you're limited to a 20 year loan, giving a loan principal of about $263,000. The same person who can afford a stick built loan of $325,000 can only afford $263,000 for a manufactured home. This means that the manufactured home is not going to sell for as much money, because for what most people think of as the same price (monthly payment) they cannot afford as much manufactured home as stick built. This leaves completely aside such issues that magnify this difference as the fact that because the loan terms are more favorable, it's more cost effective to improve a stick-built home, so equivalent stick built homes have more amenities and are therefore even more attractive and more desirable. Not to mention the fact that the lender will require a minimum twenty percent down payment on the manufactured home, where they might not require one at all on the stick built. The people who are in the market for relatively inexpensive housing are first time buyers, and most first time buyers are trying anything they can to make the required down payment as small as possible. Very few of them have the larger down payments. This means that even if they are inclined to purchase a manufactured home, they are going to be constrained to purchase a stick built house by lending policy. That $263,000 loan I talked about earlier in the paragraph is only available if the buyer puts a down payment of $65,750 or more in addition to closing costs. For the vast majority of buyers, this limits their choice to stick-built, or none at all. For these reasons, when people go to sell manufactured homes, one can expect the prices to be more than proportionately lower than those of comparable stick-built homes, and so investments in manufactured homes do not tend to pay off nearly so well as property earlier on this list. They are worth less than comparable "stick-built" properties because of lending policy,

There is one further step down on the list: Manufactured homes on rented land. These are not, properly speaking, real estate loans at all. There is no land involved. If there is no land involved, it's not real estate. Since there is no land involved, the loans are not real estate loans. They are listed in MLS because the people are buying and selling housing, but they are not real estate loans. It is very difficult finding lenders who will lend on them at all, and those few who will mostly do so through their automotive department (Credit unions are one good source for this kind of loan). Furthermore, whereas space rent might be cheap if it's your only cost of housing, it is expensive as compared to homeowners association dues, let alone property taxes, and the loans are still all twenty years or less. Because lenders don't like to touch them, because the down payment requirements are large, and because of the additional expenses imposed by space rent, prices for manufactured housing on rented land are microscopic by comparison with everything else. Even here in southern California, $100,000 buys a really nice 4 bedroom place where by comparison the lowest priced 4 bedroom anywhere in the county right now are $337,000 (manufactured on owned land, and way out in the hinterlands of east county).

Lest anyone think that this is in any way shape or form due to inferior construction, it is not. Because these buildings are manufactured on assembly lines which are largely robotic, there are many fewer problems with things like forgetting to nail at appropriate intervals, workers getting distracted, not getting corners square, and all those sorts of problems. I'd bet that a manufactured dwelling is probably of superior construction to a site built dwelling, all other things being equal. It is purely lender policy, as influenced by the history of their experiences with these kinds of properties, which is driving these differences.

So before you think a property is a great bargain, consider what kind of property it is, because even if you have plenty of income and a huge down payment and these concerns are irrelevant to you, when you go to sell it your prospective buyers will generally not have those things, and every time you eliminate a possible buyer from being able to consider a property, you statistically make the final sale price lower, and you statistically make the sales process take much longer. Eliminate enough potential buyers, and you're going to be very unhappy indeed.

Caveat Emptor

Original here

It has become a trend for real estate agents who think they're being "smart" to require an automated underwriting approval.

These are automated underwriting programs from Fannie Mae and Freddie Mac saying that Fannie or Freddie will buy the loan providing that everything is precisely as represented. The advantage to automated underwriting is that it will often approve people who might not qualify under manual underwriting rules, but usually due to a particularly stirling credit score Fannie and Freddie will move someone who's marginal to an acceptance. The problem with automated underwriting is that absolutely nothing can change or it is no longer valid.

Let me tell you a true story that has happened to me twice now with different processors. In both cases, I ran automated underwriting on loan and got a full regular approval. Then my processor, for reasons known only to them that neither one of these two women were able to articulate to me, decides to run automated underwriting again on exactly the same refinance and gets a level 3. This is not a good thing. Level 3 acceptance is not the third level up the corporate food chain approving the loan. Think of it like life insurance, where level 3 means you're getting three bumps up the cost ladder because you're a riskier bet for the insurance company. That's what level 3 is. They'll still take you, but they want to charge extra. In each case, it could just as easily moved from "accept" all the way to "caution" (Freddie Mac's code word for "No, we won't buy it") What Level 3 meant in practical terms was that instead of making money on the loan, I lost money but completed the loan anyway because that's good business and the right thing to do for the client who trusted me. However, not every lender follows that business model.

If anything about the assumed scenario changes, automated underwriting that was previously done is useless. The two classics are if the purchase contract is for a little bit more or if the tradeoff in rate and cost gets a little higher rise a tad before they are locked. If the down payment is a couple hundred dollars less, or a slightly lower percentage of the purchase price. If one of the buyer's credit cards lowers the credit limit, resulting in a credit score a couple of points lower, that could trigger a change. The list of possible reasons for a change goes on and on.

There are exceptions and points in the process where as long as something is still within the same basic band of guidelines, you don't have to run automated underwriting again. For instance, if an appraisal for a refinance comes in slightly low but you're still within the same loan to value ratio band, I've funded loans without re-running automated underwriting.

The thing to take away from this is not to put your faith in automated underwriting from Fannie and Freddie. Above the cutoffs for manual underwriting, it is extremely finicky. It can be finicky even below those guidelines, as one of the above mentioned processors found out. Truthfully, if lenders didn't give price breaks for automated underwriting, I wouldn't do it except in those circumstances where the buyer doesn't qualify under manual underwriting rules.

In fact, the real Gold Standard for preliminary approval is manual underwriting. Going through manual underwriting isn't sexy, and it doesn't generate a result that looks like it was Handed Down From On High. "Hey, I put this information into the computer and it said I was approved!" as voices from heaven sing "Hallelujah!" (at least in the mind of that deluded individual). But if a borrower qualifies under manual underwriting rules, then they qualify. Maybe that lender won't give their loan officer that quarter of a discount point for automated underwriting, but they will fund the loan provided everything checks out and there aren't any loanbusters. Somebody will approve it and it will fund.

If there are loanbusters present, automated underwriting won't catch that any better than manual. As a matter of fact, manual underwriting is better at catching loanbusters before it gets that far. If the buyer's ratios are tight and qualification depends upon rates that might not be there tomorrow at a cost they can afford to pay, that shows up quite well under manual underwriting. As a listing agent, if I see someone with a 44.9% debt to income ratio and just barely enough cash to close under the listed assumptions, I know that's a shaky deal at best. Automated underwriting doesn't tell you how close to the line it is, it just tells you the result. Manual underwriting lets you know how resilient the buyer's ability to carry through on the purchase is likely to be if something goes a little bit differently that projected. I don't know about you, but in my experience, transactions where everything goes precisely according to the initial plan are about as common as battle plans that survive contact with the enemy.

(Note however, that the originator of that quote strongly believed in planning the whole campaign out in an extensive and detailed manner beforehand so that when issues happened, he and his officers knew what their options were and were not. As a result, he was the most successful general of his day even if most Americans have never heard of him. While Lee and Grant were mucking about mostly over a small patch of Virginia for years, Helmuth von Moltke the Elder planned and executed two successful winning wars in a single campaign each)

As a listing agent, I will not accept automated underwriting results attesting to the buyer's qualification. I want to know how subject to failure this offer is. As a buyer's agent, I don't write them unless clueless listing agents demand them. The object, after all, is to get the property for the buyer at a price they are willing to pay, and beating the listing agent up on this subject is counterproductive to that, no matter how stupid it is. If you're a seller and want to know how qualified a buyer really is, insist upon seeing the manual underwriting numbers.

Caveat Emptor

Original article here

What happens if a home you signed to purchase goes into foreclosure before the closing date?

We were supposed to close on a home four months ago. On the day of closing we get a call from the seller's realtor that the sellers owe 22K and need time to figure out negotiations w/the mortgage company. We go through a series of extensions & hear a variety of excuses from the sellers realtor (sellers haven't turned in paperwork, wrong forms filled out &new ones were overnighted, etc) In June, a Lis Pendens was filed & our realtor checked it out. He talked to the sellers realtor & found out that it had been filed but has been negotiated off &was no longer in effect. On 8/9 our realtor gets a call from the sellers realtor that they have finally been in contact with the mortgage company &there is 1 more paper that needs to be completed & they are "on top of it". After not hearing anything last week, I check with the online courts to see if anything else has occurred to see that a foreclose decree was noted for 8/4. What happens now? Can we purchase the home from the bank?

Somebody has not been "on top of it". Probably at least two somebodies, and they're not exactly fulfilling full disclosure requirements, either.

Yes, an Notice of Default adds thousands of dollars to fees due. But what do you think the lender would rather have: An already negotiated sale that is consummated and they get (most of) their money now, or go through that whole dismal foreclosure process, not knowing if anyone else will put an offer in for anything like the offer they already have, and knowing that they're going to need to spend thousands of dollars more on the property, and it's going to hit their reserves so there's several million dollars they can't lend?

What is going on here is an undisclosed short sale. What this means is that the lender isn't going to get all of their money, or the transaction would have closed by now.

So what's most likely going on is that the bank is taking their own sweet time about approving it, but your realtor has allowed the selling realtor to feed you a line of BS. Indeed, they've probably actively cooperated. They're probably afraid of losing the commission, but if they keep it open "just a little longer" maybe the lender will approve it.

It's the listing agent's job to talk the lender into approving the sale. Perhaps the bank is imposing some conditions that the seller can meet, but does not want to. Perhaps the bank is demanding some money, or that the realtors reduce their commission, and they don't want to. Perhaps the listing agent is just clueless, but I doubt your agent has exactly covered themselves in professionalism either. A good buyer's agent can talk a clueless listing agent through it.

The person with the power to break the logjam is you. Talk with a lawyer, but if you put in a 48 hour notice to perform, the lender is likely to suffer a sudden attack of rationality, especially in this market. They'll almost certainly net more money through the sale than through the foreclosure process, but if you allow them to go on ad nauseum they will keep the transaction open as long as possible. You see, once the transaction closes they can't get their money back if a better offer comes along. Therefore, they are trying to put you off for as long as possible in the hopes that such a better offer will come along. From their point of view, they have this transaction well in hand, they are just hoping to get more money from someone else, and the longer you allow this to go on, the higher the likelihood they will. If this happens, the lender may be happy but you won't be.

If you don't force the issue, the only possible resolution is unfavorable to you, assuming you really do want the property. There are possible issues with the deposit, and damages they could owe you and you could owe them, which is why you need to be careful. But putting them on Notice to Perform is the thing that is going to break the logjam one way or another, and your agent should probably have done it months ago. You're stuck with this one for this transaction for now, but if this transaction doesn't close you should probably find a new agent. Good agents know that if they are willing to risk losing a particular deal, they will not only better represent their clients interests, but also that they will end up with more deals overall. Approached correctly, it's a way to have even the client whose entire family has their heart set on a particular property understand that you are acting on their behalf, not just looking for a commission, and they will send you their friends, and they will come back to you when it's time to sell, or to buy another property.

I straightforwardly advise buyers to avoid short sales because of issues like this. Lots of other agents dispense that same advice. So sometimes, sellers try and skate by without disclosing the fact that it is a short sale. It is, nonetheless something they need to disclose.

Caveat Emptor

Original here

Is it unwise to use the listing realtor as your purchase realtor?

A house I'm interested in purchasing is being sold by the realtor selling my house. Although she's done a decent job selling my house, I fear she won't negotiate well on my behalf if she has to divide her loyalties between these listers and me (a potential buyer). How awkward would it be not to use my listing realtor to purchase a new home?

I would not undertake dual agency myself. If I do find a buyer for one of my listings, I'll refer them to someone else for negotiations, or at least get them to acknowledge in writing that I am working for the seller only. Everyone in the industry whom I respect agrees with this position. There is a always a conflict of interest between buyer and seller. Anybody who tells you otherwise is trying to rationalize money in their pocket.

It'd be okay to use her for any property she's not listing. If you want that one, however, go find another buyer's agent. You should also be aware that the right mindset, attitude, and skills to be a good buyer's agent are significantly different from the ones for successful listing, and many excellent listing agents don't have the mental tools to be as helpful to buyers as they are to sellers (the opposite applies as well). But there's nothing obviously against your best interests for using to help you buy when she's not the listing agent.

In every transaction, there is a tension between the interest of the sellers and the interest of the buyers. In fact, the only point on which they are more often in convergence than not is whether the transaction should proceed. It is in the interest of the sellers to get the most money possible for the property. It is in the interests of the buyers to pay the lowest possible price. Except in the highly unlikely case where the most that buyer might possibly have paid is the exact same price that is the least that seller might have accepted, and that is in fact the sales price, such simultaneous duties cannot both be met. Since such happenings would be freak coincidence, and not only are they not known until afterward, any such lookback is prone to an agent indulging in what psychologists call confirmation bias.

Furthermore, there is tension between the interests of the buyer and the interests of the seller in other matters as well. Not far from here is a condo conversion project, just recently finished selling out. About 1993, there was a resident of that complex arrested on suspicion of serial murder. I am unaware of whether he was eventually convicted, but I do know they dug up several bodies as I was unfortunate enough to drive by when they were removing them. California law requires the disclosure within three years of anyone dying on the premises, but at three years and one day there is no requirement for disclosure that I am aware of. Nonetheless, if one of my clients wanted to buy one of those units it would be part of my duty of care to that client's interests to make certain they were informed. Would you not want to know about your building being used as an impromptu cemetery for several bodies? But acting as a seller's agent, I would be forbidden from making that disclosure. Which client's interests do I follow? (This doesn't even consider the now-patched foundation, a more important issue as far as I'm concerned)

Suppose my client is having difficulty qualifying for a loan. Okay, obviously I'm not doing the loan, but I cannot force clients to do their loans with me and the only thing I can offer is carrots, never sticks. But suppose that I, as buyer's broker, find out from the loan officer on day 24 that they've been disqualified because the processor told the underwriter something they shouldn't have, and the loan is back to square one. If I am acting as listing agent as well, my duty to the seller requires me to inform my client of this difficulty. But my duty to the buyer is equally clear about it being a violation of my other client's best interests. Whose interest is paramount? Whose interest do I disregard? These interests are in direct conflict - there can be no compromise resolution. Indeed, as a listing agent I will demand information that it it may not be in my buying client's best interest as buyer's agent be disclosed, and vice versa. If they agree of their own volition, or some other agent talks them into it, then we have a willing buyer and a willing seller and full disclosure from my end and best interest of the client in furthering the transaction and so on and so forth. If I fail to ask because I am also representing the other side, I have not represented my client's best interests. If I talk either client into it when I am representing both, then I have, ipso facto, violated that client's best interest by getting them to agree to something which is not in their best interest. Did I do it because such was in their best interest, or the best interest of my other client? Even if I did act in their best interest, can I prove it? Probably not - in fact, I'll bet money against. Can I prove it in a court of law if necessary? No way in hell.

I like to make more money as well as the next person. But accepting dual agency is logically and provably a violation of my duty of care to someone in every case, no matter how the transaction turns out. No matter what you do, it's kind of like the old joke about someone playing chess with themselves. Sure you always win. But you always lose as well, and when you have a fiduciary duty to someone else, setting up a situation where you are guaranteed to lose is in itself a violation of that fiduciary duty.

So I urge you in the strongest possible terms to go find another agent to represent you. There's absolutely nothing wrong with using the same agent to represent you in multiple transactions, even simultaneous transactions. But I would never use the listing agent for a property as my buyer's agent, and I would not allow an agent I was listing a property with to act as buyer's agent. Force them to pick a side and stay on it, and since they've already got a listing contract, they have already made their choice.

This is incidentally another argument against Exclusive Buyers Agency Agreements. If they show you one of their own listings under an exclusive agency contract, they are the procuring cause and you must pay them. Nonexclusive contracts should also have explicit releases if the agent is also the listing agent.

Caveat Emptor

Original here

Continued from Part 1: Preparation and Part 2: Process

This is about the long term consequences of the decision to buy or not to buy a home, and economic benefits analysis into whether you should want to buy. In order to answer the question of whether it's better to buy or rent and invest the difference, you need to compare the costs and benefits of owning to the costs and benefits of renting over a comparable time frame. If you know you're moving in three years or less, it can be hard to come out ahead, just due to transaction costs. On the other hand, if you've got the wherewithal to turn it into a rental property after any future move you already know you're going to make, that can make the owning calculation move decisively in favor of owning. Be advised, all the headaches of being a landlord are greatly magnified if you're not within easy commuting distance to keep an eye on the property yourself. Also, if you cannot achieve positive cash flow on a rental property, odds are good that you should sell it. This isn't a blanket recommendation, just a rule of thumb.

Now it happens that I've programmed a spreadsheet to answer the "buy or rent" question in a time dependent manner, which is the only way it really can be answered. I keep using a $300,000 home and $270,000 loan as my default assumptions here. I'm going to pull a few more assumptions out of my hat, but I'm going to do my best to make them reasonable assumptions. 6.25 first trust deed, 10% second for any loan amount over 80 percent of value. Five percent annual property appreciation (perhaps a tad low in the long term), 1.2% yearly property tax (darned close for most California properties), yearly tax increases of two percent (Prop 13's legal maximum in California), non-deductible homeowner's expenses of $200 per month, 4 percent inflation, $1500 in non-housing deductions on Schedule A, marginal tax rate of twenty-eight percent, and a return net of taxes on any alternative investment with the same money of ten percent. I also assume you're married (That makes a difference on how much your default deduction is).

Since state and local income taxes are different everywhere, I'm going to neglect those. They would functionally move the equation in favor of home ownership, but the effects are relatively minor in most cases. Furthermore, because investments are only worth your net proceeds after you actually sell them, I'm going to deduct seven percent of the theoretical market price of your home investment in any given year before I compare the net benefit of buying a home to renting and investing any money you didn't spend on buying. This is questionable to be sure, as most people will just spend at least a certain percentage, but I'm in the mood to be generous. You'll see why in a moment.

I'm also going to assume here, very unrealistically, that you never refinance, but that's actually a middle of the road assumption, as far as net benefit goes. The actual spreadsheet works a couple of other assumptions, and refinancing every five years and making a minimum payment usually comes out better, while refinancing every five years and keeping a thirty year payoff goal usually comes out worse.

Here are the net results:

Yes, after 30 years you are $552,000 better off from having bought a $300,000 home, as opposed to continuing to rent for that whole period. Not to mention that you own it free and clear for the cost of maintenance plus property taxes, as opposed to paying over $4600 per month rent.

This is a fascinating study in leverage. If, on the other hand, taxes start out at 2 percent and rise by 4 percent per year, the peak year in absolute terms is year 22, at $101,964 net benefit. On the other hand, I'm running rent increases at exactly the general rate of inflation and they almost always go up faster. Back to the first hand, resetting variables in the last set of suppositions to default and changing the appreciation rate to approximately like the long term average - 7 percent - while making a net return of 8.5 percent on investments bumps the net benefits of buying that home to $1,630,195.38. Five and a half times the original purchase price!

One more scenario: Restore to default values. Say you lose $30,000 of value, or ten percent of purchase price, in the first year. It does take longer to be ahead of the game - more than 6 years - and the net benefit after 30 years (as opposed to investing the money at an assumed return of 10%) is "only" $437,223.05. For the mathematically challenged, this is still nearly one and a half times the original value of the property! Yes, the money will be worth less in thirty years. We all know about inflation. Would you turn me down if I offered to give you $437,000 in thirty years time?

I've been playing with this spreadsheet for quite a while now. Under the basic assumptions I've listed above, it's kind of hard to be ahead of the game by buying a house instead of investing in the stock market after less than two years under any kind of reasonably average assumptions. On the other hand, it's very difficult not to be ahead after five to seven, and way ahead after ten.

After thirty years, most sets of even vaguely reasonable assumptions have you so far ahead by buying the home that if you didn't watch over my shoulder as I built the spreadsheet, a reasonable person would be skeptical. Heck, I knew which calculation the numbers favored, but I really never stopped to think how strongly they worked in favor of home ownership. It is difficult to come up with a reasonable set of assumptions and starting numbers where you aren't ahead by significantly more than the original purchase price of the home. Yes, we're all aware of the issues with inflation, and the ratio illustrated here, with a 4 percent rate of inflation, is a little more than three to one (which remembering the rule of 115, seems reasonable, so the first approximation check validates this). So what this means is that by purchasing a $300,000 house that you're going to live in for the rest of your life now, you're adding more than $100,000 in today's dollars to your net worth in thirty years if you just invested the difference between rent and the costs of owning. Actually, it's usually more. That safe, conservative, middle of the road $552,000 net result after thirty years from the first example converts to more than $177,000 in today's money! No flipping, no games, no wild schemes, no re-zoning jackpots and no wealthy benefactors to come along and pay you twice what it's worth. In fact, in this scenario you never talk to another real estate or loan person as long as you live, and you've still effectively "gifted" yourself with almost sixty percent of the property's purchase price immediately upon taking possession.

This should persuade most folks that they should want to buy a home, and that you don't want anyone else to. After all, the more poor schmoes there are, the better this will work for the rest of us. Actually, that last crack about poor schmoes isn't true, because the law of supply and demand is always in effect. But is shows how good for the overall economic health of the nation encouraging home ownership is.

Caveat Emptor

Original here

Continued from Part 1: Preparation

I am considering buying a home, although I have not made up my mind on the subject. This is not due to indecision, but rather due to a lack of necessary information. There are many factors to be considered in my case, and in order for me to make an informed decision about buying, I need to solve for several variables involving cost.

My questions to you involve what steps I can take to solve those variables. Should I begin with a pre-qualification or loan approval? Will a lender invest time and resources in me when I have no specific property in mind, and I may ultimately decide to continue renting? Should I start by speaking with realtors in order to guage what is available in my price range? Will realtors invest time and resources in me when I have no loan arranged and I may ultimately decide to continue renting?

Also, what is the proper sequence of action for someone who is seeking to collect all the relevant information in order to make reasoned decisions about buying a home?

Well, as I said in Part I, a major question is whether you can trust real estate agents to answer the question honestly. Some will, most won't. If they tell you to buy, they make money. If they tell you to keep renting, they don't. Mind you, if you can afford to buy, the numbers are overwhelmingly in favor of that, as we'll see in Part 3. Nonetheless, one trusts that you see the potential for abuse.

Nobody should have a specific property in mind when they first approach an agent. Smart buyers won't make an offer without looking at a certain number of properties first. The only exception is if you're buying the old family home from your parents or something. You've agreed on the price, and the terms, and now you're going to pay an agent to make sure all the paperwork is done and filed correctly and the inspections are done and all of that sort of stuff. This is a smart thing to do, by the way, but most people in this kind of transaction seem determined to "save money" when a low percentage agent's fee or some flat fee would be an astoundingly good investment.

You needn't worry about whether lenders and agents will "invest time in you." Those who are unwilling to spend time on you in such circumstances should be avoided. Yes, I want my time to be spent on people who really want to buy and are capable of buying, which is why a basic prequalification is among the first things I usually do. I don't want to waste your time showing you stuff you can't, or shouldn't, afford any more than I want to waste my own. But there's a lot you can do to qualify yourself, so that you know how strongly you're inclined to buy, and approximately how expensive a property. This way, you know that the agent or lender isn't leading you down the primrose path with properties you cannot really afford. This is a severe problem right now, especially in expensive areas. I've said it before and I'll say it again. You need to know how much house you can really afford in a sustainable situation, and you have to make certain your agent knows and sticks within your budget. The one who shows you the five bedroom house, when you can really only afford the three bedroom condo, is not your friend. I'd fire such an agent the first time they showed you something you could not reasonably get for your known housing budget (which is one reason of many I recommend against Exclusive Buyer's Agent Agreements, and don't ask for them unless I'm giving them something beyond MLS listings for their exclusive commitment). The agent who shows you the three bedroom condo you really can afford when everybody else is showing you the five bedroom house you can't, is your friend, whether the "Oooohhh" factor is there or not, and even if the "Eeewww!" factor is there. Curb appeal is how sellers sucker buyers (and yes, when I'm a listing agent I'll help you with that in every way I can. It's the most important part of my job to help my client get the best deal they can. But right now I've got my buyer's agent hat on, and my job is to help buyers see the diamonds in the rough and not pay more than they're worth).

Once you've done your self-qualification, that's when I'd go find a real estate agent. I wouldn't worry about an actual lender's prequalification as long as you know what your credit score is. A good agent is going to do a prequalification anyway, and if they're a loan officer as well, they'll set you up there. An agent who doesn't do loans should be able to provide recommendations for someone to do the prequalification, and if they don't recommend the same loan provider for the loan as did the prequalification, I'd go back and check with the provider who did the prequalification anyway, as well as finding other prospective loan providers, not to mention pointedly not accepting the new recommendation for a loan provider. Despite the fact that I'm a loan officer who also does real estate, I'm not sure I'd trust a real estate agent with my only loan application. I came to being an actual real estate agent from being a loan officer for several years first - and then I went and learned how to do real estate. The average real estate agent who does loans never spent an apprenticeship doing loans, never learned the ins and outs, and has no clue whether they can deliver what they put on the Good Faith Estimate (Mortgage Loan Disclosure Statement in California). They just figure "It's the same license, so I can, and it's an easy way to earn a lot more money from the same clients!" They don't really know loans, they've just figured out that it's a way to make more money. Furthermore, there are too many shady personalities out there, and way too many real estate agents think they know how to do loans but don't. There are a fair number of crooks and incompetents and just plain gladhanders, who only care about whether they're getting a commission on this particular offer, out there, but most of what I do as a real estate agent can be plainly seen and understood by my clients. What a loan officer does is much less transparent to even the most sophisticated borrowers until it is too late to change to another provider. I've seen way too many people burned by only applying for a loan with one provider, and am very upset that lenders and the government are making it more difficult for consumers to obtain a good loan. I've only ever not been able to do one loan on the terms quoted and locked (and I did my darnedest to help the provider who could, where most loan providers in my shoes would have obstructed to the best of their ability, as I've also learned by bitter experience), but I've seen a lot of people who applied with the loan provider who talked a better deal but who couldn't deliver any loan at all, much less the one they talked about. Many times they have come back to me in desperation two days before escrow expires, or seven days after it was supposed to expire, and I can't always help them in time then. Be very careful in choosing your loan provider, especially if it's a purchase.

Take any newspaper advertisements you see about rate, however, with great heaping cargo ships full of salt. I'll cover what's really available later on, but for now what you need to know is that loan companies advertise with teasers like negative Amortization Loans and short term ARMs and hybrid ARMs that takes five points to buy the rate and you still won't get it when it comes time to sign the final papers. The whole idea is to get you to call, so that they can sell you what they really do have. I don't think I've ever seen a real rate on a real loan that I would be willing to get for myself advertised anywhere, in any medium. Even the so-called "best rate" websites and newsletters are notorious for cheating. I've gone right down the line calling them and asking about loans that were supposedly the standards they were quoting to, and gotten not one answer that was within half a percent of the rate quoted on the website or in the newsletter. Nor were any of the websites or newsletters I've complained to (or my company complained to, when I worked for an internet lender that was signed up with them) interested in enforcing the rules. I don't know one single loan provider who advertises actual rates that they can actually deliver anywhere. Those few companies who are actually willing to do it have all quit advertising in disgust and gone to finding clients in other ways.

Concluded in Part 3: Consequences

Caveat Emptor

Original here

I am considering buying a home, although I have not made up my mind on the subject. This is not due to indecision, but rather due to a lack of necessary information. There are many factors to be considered in my case, and in order for me to make an informed decision about buying, I need to solve for several variables involving cost.

My questions to you involve what steps I can take to solve those variables. Should I begin with a pre-qualification or loan approval? Will a lender invest time and resources in me when I have no specific property in mind, and I may ultimately decide to continue renting? Should I start by speaking with realtors in order to guage what is available in my price range? Will realtors invest time and resources in me when I have no loan arranged and I may ultimately decide to continue renting?

Also, what is the proper sequence of action for someone who is seeking to collect all the relevant information in order to make reasoned decisions about buying a home?

Well, a major question is whether you can trust real estate agents to answer the question honestly. Some will, most won't. If they tell you to buy, they make money. If they tell you to keep renting, they don't. One trusts that you see the potential for abuse.

The question here of "Should I Buy A Home" really separates into two basic questions: "How much home do I qualify for?" and "Is there a better alternative, financially?" You can then decide if buying or renting is the better alternative for you.

Qualifying yourself to buy a home, or to use better phrasing, figuring out how much home you should buy, is easier than most folks think. You can look in the classifieds section or on any number of internet sites to find out what the asking prices for properties like ones you might want to buy are in that neighborhood.

The personal information needed is easily available. First, you need to know how much you make per month, as you make mortgage payments monthly. Next, how much your mandatory payments are. Third, about what your credit score is.

Most people know how much they make per month. "A paper" guidelines go between thirty-eight and forty-five percent of gross income for your total of all required monthly debt and housing payments. Subprime lenders will go up to anywhere between fifty and sixty, with most limiting your debt to income ratio to fifty or fifty-five percent. I'd recommend staying within A paper guideline, but calculators are easy to use. So multiply your monthly income by thirty-eight percent, forty-five percent, fifty percent, and fifty five percent. This gives you a set of four numbers, which you may call anything, but I'm going to call A0, B0, C0, and D0. They correspond to what should by standard current loan guidlines be easy total debt service payments for most folks, moderate payments, difficult payments, and extreme payments.

Now most people have recurring debt of some sort. Credit card payments, car payments, furniture payments, student loans, etcetera. This does not include monthly bills that you are paying as you go. You know what your monthly obligations are. Whatever this number is, call it $X. Subtract $X from each of those four numbers above, so that you have the numbers that you really have available to spend on housing in each of these four scenarios. Obviously, the smaller $X, the more house you will be able to afford on the same income. I'm going to call these numbers created by subtraction A1, B1, C1, and D1.

These numbers you have must cover all the recurring costs of owning a home. These include not only the principal and interest payments on the loan, but property taxes, homeowner's insurance, homeowner's association dues if applicable, Mello-Roos districts here in California, and anything else that may be applicable where you want to buy. Within the industry, the acronym most often used for this is the PITI payment, for Principal Interest Taxes Insurance, with the understanding that it includes anything else necessary as well. Association dues and Mello-Roos districts are a function of where you buy. Every condominium or coop is going to have Association dues or some equivalent. Mello-Roos districts are limited time property tax districts assessed to pay for things like municipal water and sewer service for new developments. Most newer developments here in California have them, and the equivalent districts are becoming more and more prevalent in newer developments elsewhere. Homeowner's Insurance is mandatory if you're going to have a loan - no lender is going to lend money on an uninsured property, but note that even the best homeowner's policy does not include flood or earthquake coverage, so if you're buying in an area where that is a consideration, the extra cost of a flood policy or earthquake policy is probably worth it. Condominium owners should have a master policy of homeowner's insurance paid for by their association dues, but it's still a good idea to have an individual policy for your unit, called an HO-6 policy here in California and by the NAIC.

Property taxes are paid to city, county, state and possibly utility districts, but your county tax collector should be able to quote overall rates. There is no way to know how much they will be from here, but you can make an estimate, if nothing else by calling the county and asking. Note that they usually quote taxes in terms of a percentage tax value per year. Multiply assessed value by tax rate to get a per year tax bill, then divide by twelve to get a per month value. In California, there's a rule of thumb that property taxes per month are approximately one dollar per thousand dollars purchase price per month in most places (it will be more if there's been a bond issue approved or any number of other circumstances), so take the last three digits off the purchase price and that is usually close to your monthly tax liability. $250,000 purchase price? $250 per month. $500,000 purchase price? $500 per month.

By subtracting off all those figures, you get a range of monthly payments for the loan that you can actually afford. Call these A2, B2, C2, and D2. Armed with these and your credit score, you can figure out what kind of rate you might qualify for. When this article was originally written thirty year fixed rate A paper purchase money loans of no more than eighty percent of the value of the home could be had without points at something between 6.25 to 6.5 percent. When I originally wrote this, "Piggyback" seconds would go to 100% of the value of the property, but that is no longer the case, so if you don't have 20% down and you aren't a veteran, you're going to pay PMI in some form. You can usually get significantly lower rates by being willing to accept a hybrid ARM (I've been doing it for fifteen years), but some people aren't comfortable with them.

Knowing the payment you can afford, the interest rate, and the term of the loan, you can calculate how much of a loan you can afford. Knowing any three of principal, interest rate, payment, and term, a loan calculator can tell you the fourth. Do this with your four values, A2, B2, C2, D2, and you get four potential loan principal amounts, A3, B3, C3, and D3. These correspond to loan amounts where the payment should be easy, moderate, hard but doable if you are disciplined enough, and a real stretch. To this, add any money you have available for a down payment, and subtract projected purchase costs (maybe $1000 plus 1 percent of home value). This gives you four values A4, B4, C4, and D4. These correspond to the purchase price of the homes you can afford under those four prospective loan amounts. You can then compare these amounts with what is available, and at what price, in those areas you might wish to buy.

Continued in Part 2: Process

Finished in Part 3: Consequences

Caveat Emptor

Original article here

Can I qualify for first time home buyer financing if I buy a duplex and live in one and rent out the other?

I thought if I bought a duplex, lived in one side and rented out the other would be a good idea to help pay the mortgage. I would live there for a couple years then move and rent the entire duplex as an investment property

It would be very popular to answer "yes".

However, the fact is that the only nationwide first time buyer program in existence, the Mortgage Credit Certificate, explicitly disallows all multiple unit property from participating.

Furthermore, I've dealt with the federally funded local first time buyer programs throughout southern California (in excess of forty different municipalities). In every single case I'm familiar with, it's a requirement that it be a single family residence. Just like the MCC, no duplexes, no apartment buildings, no "2 on 1" properties. Condos, townhomes, and PUDs are fine, but nothing intended for more than one family to live in.

People sometimes get confused because of the way residential property is defined (1-4 units), but just because something qualifies as residential property doesn't mean it is eligible for a first time buyer program.

Finally, for every first time buyer program I'm aware of, the government assistance goes away (as with the MCC), or worse, becomes immediately due should you move out. For example, in one San Diego suburb they have a very nice "silent second" program. It means you only have to actually pay the mortgage on a potentially much smaller amount, usually wiping out a need for PMI or a conventional second mortgage, while the city's second accrues at a very low rate. But if you move out, they'll call the loan, which means you've got thirty days to get them their money somehow before they foreclose.

(They also flatly refuse to subordinate, meaning you're not going to be able to refinance without paying them off, so you'd better choose a fixed rate loan that you can really afford for your primary mortgage in the first place)

There may be municipalities somewhere where this is permitted under their local programs, but I've never heard of one, and I do suspect it's prohibited in the legislation and regulations for the federal administration that funds these local programs. The First Time Buyer programs are intended to stabilize neighborhoods, and make it a little easier for people to be able to afford to buy housing they intend to live in. They are not intended to help you build a real estate empire - as a matter of fact, that's somewhat counter to their purpose.

First time buyer programs are also never free of strings. If you intend on taking advantage of these programs, it would behoove you to make certain you understand what those strings are, as well as all of the implications, before you've got a purchase contract. Some of the strings on first time buyer programs are real deal-killers. For example, a city about a half hour's drive from my office has one that looks really nice at first glance, but restricts both who you sell to and what you can sell for, eviscerating the economic benefits of ownership and making you essentially a renter who also pays maintenance and property taxes. Unless you're just going to live there forever, which may not be under your control, that's not a desirable situation. Probably better to buy in the city next door to that one, which has a more useful for your financial future "silent second" program much like the one described above. You need to be careful with first time buyer's programs, lest you end up in a situation that does not justify your expenditures with future benefits.

Caveat Emptor

Original article here

There's an old saying in sales: "The best way to achieve your dreams is to help others achieve theirs". I wasn't able to run it down to the original attribution, but it is as true a saying as can be imagined. The first thing to understand about any transaction that doesn't flow from the point of a metaphorical gun is that all parties are made better off thereby. The way to get as much as possible for a property is to show prospective buyers that they are getting as much as possible for their money.

As a seller you have real property. As fantastic an investment as it is, it is also completely illiquid. You can't go up to the counter at the grocery store and pay with a couple square millimeters off your lot. You have to have cash and for whatever reason, you have decided you want cash. You can't spend real estate, just like you can't live in cash. Buyers have cash or the ability to get what is cash to you via the loan they take out to cover the difference, and they want a property. Therefore, you have the makings of a real exchange that leaves both parties better off provided that you can persuade them that your property is the one that they want.

What you want is for prospective buyers to be willing to pay you as much cash as possible. Since Make-believe loans are no longer with us, this means you have to show real value to them. At the present time, the only widely available loan that does not require a down payment is the VA loan, and selling to someone with a VA loan has its own set of issues. What this means is that the buyers need a down payment, and they are going to have to qualify for a real loan with an ongoing income stream. Neither one of these is easy. Buyers understand money they had to build up for the down payment dollar by dollar out of their paychecks is real money much more clearly and at a more visceral level than they have the same understanding about money they borrow. They understand the payments they are going to have to make at least as clearly, and neither one of these is subject to the same kind of handwaving "let's pretend you can do it" loan qualification as they were a few years ago. Therefore, buyers are aware of value today in a way they were not aware of it a very few years ago.

One thing that you must understand in your bones before your property hits the market is that buyers are shopping for the lowest possible price for the best property they can get. Nobody ever bought a property because it was that property's "turn" - quite the opposite in fact, as the longer it's on the market, the less valuable a property is perceived as being. They bought it because it was the best value for them that they could afford. If there's a better property out there cheaper than yours, that's the one buyers will want. They will not automatically come to your property when that one sells, either, unless you're the best remaining value on the market. If another property comes on the market that's a better value, that's the one people will want instead of yours. It's what you did when you bought. Understand that's what everyone else wants to do when they buy. You are competing for those buyers attention and you are competing for their desire.

Fortunately for sellers, every buyer values property in slightly different ways, and therein lies your potential for profit. Some buyers want the absolute cheapest property they can get, while most people will pay more for certain amenities. But what every single buyer has in common is that you have to offer them something that they perceive as being more valuable to them than the difference in price between yours and the cheaper property down the block or around the corner. Not more valuable to you, the owner. More valuable to them, the buyer. Otherwise, they're going to buy the cheaper property, or at least make an offer on that one instead of yours.

Each and every buyer has a mental list of amenities they are willing to pay extra for, and ones that they are not. If your property is priced higher because you expect them to be willing to pay more for something in particular and they are not, your property is stricken from their list. The more things you try this with, the narrower your marketing niche. This is why you need to understand how prospective buyers think - what marketing folks call "hitting a target market" You or your agent need to understand the target market for your property, and work to hit it. This is not to say that no property ever sold to someone who wasn't in the precise target market, but those people are not usually willing to offer as much money, which defeats your aim in properly marketing the property because you want the people who are willing to pay the most for your property. People are willing in general to pay more for beautiful kitchens, good floor plans, extra bathrooms and nicely landscaped yards they can actually enjoy, but not every person and every target market is so willing. Your area, your neighborhood, and your location also influence your target market, and most particularly, the target market's willingness to make an offer and their willingness to make a higher offer in negotiations. Practically everything else in the way of amenities means you are trying to hit a narrower target market in order to get the most money, and any time you narrow your appeal, you have to make even more effort to be more attractive to the prospective buyers who are left in your target market.

Another thing to understand is that if the prospective buyer cannot see the property with their own eyes, they are not likely to make an offer, and they are definitely not going to make a good offer. The phrase "pig in a poke" comes to mind. Fewer people who are able to see your property means a lower selling price. What this means in practical terms is make the bar to seeing the property as low as you possibly can. Yes, it's a pain when someone wants to see the property and you had a quiet day at home planned, but think of it this way: Your property is probably valued around $400,000 (at least in San Diego that's a good ballpark mode, in the mathematical sense of the word). If it makes a difference of 1% to your sales price, you are effectively paying yourself $4000 for a month or less of making your property accessible - and 1% is a very low estimate of the difference this makes to sales price. Put the heirlooms away, put the dog in a run or a portable kennel, get a lockbox on the door so people can see it when you or your agent aren't there (both conditions make it much less likely you'll get an offer). If it's tenant occupied, anything you spend to negotiate with them to make the property completely accessible will likely more than pay for itself. When my clients ask me "can we see the property today?" and the answer is "No, because it's tenant occupied and we need to have 24 hours advance notice" what do you think happens? We go see other properties, and if they like one of those, they're no longer interested in yours. When that happens, you're left with something you don't want - an unsold property. If you still wanted it, it wouldn't be on the market, now would it?

Caveat Emptor

Original article here

One of the worst things about the loan process, and indeed, found throughout the whole real estate industry, is the idea that if you can just delay telling the client about something they won't like, it's more likely they'll continue with the transaction anyway.

The horrifying thing from a consumer's perspective is that it works.

Hundreds of thousands, if not millions or tens of millions of people, become victims of this common psychological fallacy every year.

This makes use of the fact that longer something goes on, and the more they do towards it, the more heavily that people become psychologically invested in that particular goal, even to the point of obsession. This happens in other areas, too. For instance, whether you're for or against the Iraq War, you've probably noticed that as time goes on, and the more the other side of the debate does to further their position, the less they're likely to be disposed towards consideration of yours, the more shrill they get, and the more hardened in place their mental armor, regardless of the facts. I'm not writing this to take a side; I'm writing this to illustrate that this is something both sides have observed - accurately - about the other.

So what is the practical effect of this in the real estate world? The honest practitioner who tells you right away that something is wrong loses the business, while the shady character who pretends everything is proceeding right on course gets rewarded. If it's a loan, in neither case is the loan they initially talked about going to be delivered, but by pretending that it is until such time as the final papers are ready, the shady character still gets the business. The practitioner who tells you the truth, and tells it right away like they should, behaves like everyone says an ethical practitioner should behave, loses the business, while the crook who pretends nothing is wrong still gets paid, because when the final documents are submitted they're still not going to point out the differences - so if you don't spot them yourself, you're going to be unknowingly signing far different documents than the loan you initially agreed to. I've said this before, but in loans, it's good if they tell you about problems right away.

In the practice of buying and selling real estate, agents often face analogous situations. Leaving aside the fact that the listing agent is working for the seller and not the buyer, you need to understand that if a buyer's agent conceals bad information about a property until after the contingency period has passed, they've got a much higher probability of a sale, and therefore getting paid. A good agent will tell you about all the issues they see on every property as you go, while the agent you might wish on your worst enemy is enthusiastic about every property. The former is due diligence and properly discharging that fiduciary duty I keep writing about, trying to make certain the client understands what they're getting into because there is no such thing as a perfect property. The latter is about grabbing the easiest commission they can, as quickly as they can. A good buyer's agent will be present for all inspections if they can; a bad one is too worried about getting sued. A good buyer's agent wants that inspection and appraisal and title report done the instant the purchase contract is fully executed, if possible, and goes over them with you. A bad one delays ordering them, and mails or hands them to you without comment. There is a seventeen day contingency period for loans and inspections on the default contract; if anything is concealed longer than that without there being an obvious reason why it couldn't have been discovered until that moment, you have been the victim of such a practice. It isn't like them not telling you means the property doesn't have that problem; it only means you don't know about it yet. If you buy the property in ignorance of a defect, though, it will still be present and you'll still have to deal with it - and without any help from the current owner who has gone their merry way with your money.

I get emails every week from people who have been burned by both of these, and there isn't a way to fix it retroactively, and I only have a few thousand regular readers. This stuff happens all the time, and quite often, people don't even realize it has happened to them. So how do you defend yourself from this situation, knowing that this is where the incentives lie?

For loans, ask questions. Be forgiving if your loan person tells you about a difference between their quote and the final numbers right away, particularly if they tell you why. Most important of all, read your final closing documents carefully. Until then, they can pretend that everything is all sweetness and light, and the crooks do.

For property, it's a little bit harder and starts earlier, when you're looking for a buyer's agent. Go out looking with several, and keep looking at least until you find one that tells you bad things about every property as a matter of course. There really is no such thing as a perfect property. Never use the listing agent as your buyer's representative, as they have an obligation to get it sold, for the highest possible price, and telling you the whole truth isn't conducive to that. Always shop by purchase price, never by payment, which varies with loan rates anyway. And most importantly, go over those reports yourself. Be there for the inspections and appraisal, and go over all of those and the title report as well. Above all, make certain you never sign anything without a full understanding of what it says. Many times, critical disclosures get hidden among trivial stuff that happens with every purchase, so they can catch you off guard.

Real estate transactions are for a lot of money, and people in the professions do get paid thousands of dollars per transaction. Nonetheless, trying to save yourself commission costs is far more likely to cost you more money than it is to save it. But with such large amounts at stake, you want to take precautions against being sold a fairy tale that has no chance of actually ending up with happily ever after. The real world is what it is, whether or not they tell you about it. If someone made an honest mistake about something, the sooner they tell you about it, the more likely it is they are honest. If they delay telling you, all by itself that's a stronger indictment of their ethics and practices than anything a grand jury can do.

Caveat Emptor

Original article here