Dan Melson: September 2012 Archives

Is there any problems with having all your money in only real estate?

That was a question I saw.

The answer is YES there are problems!

1) No diversification. The real estate market tanks, like it has right now, and you are hosed. The more so because of the leverage attaching to most real estate investments. If you own five properties with a total value of $3.5 Million maximally leveraged, and the market loses 20% of value, you may have lost more than the entirety of your equity. If you need to get out now for some reason, the fact that prices are down hurts you much worse in real estate than any other investment except maybe commodities. If you had other investments, you likely would be able to hold on until market recovery and still make money.

2) Most people who do it get too strongly leveraged. Leverage is great, it makes your money work harder. But you've got to do some heavy thinking about how much leverage you're going to accept. If your cash flow is positive or tolerable, you can last out downturns. If you get into a situation where you can only make the payments for a certain amount of time, that can create desperation, and force you to accept an offer that leaves you owing money to the lender, and money to the IRS.

3) Real Estate is not liquid. This is the real kicker that drives the first two. You can't just call your stockbroker and get cash in seven days or less. You have to find the right buyer to get a decent price. If you need money in a hurry, this can force you to sell property for less than it's worth. If there are no good offers but you need to sell, you can find yourself forced to accept a bad one.

4) Landlord issues. The more properties you have rented out, the more likely that either blind chance or one of your tenants is going to do something to one of your properties which requires a lot of money in a hurry. If you're maximally leveraged and have no money anywhere else, where are you going to get that money? Particularly if the nature of the damage renders the property uninhabitable, in which case you're not likely to get any new loan on the property until it is fixed, and your lender might just decide to keep any insurance money in order to cut its losses.

If they're not rented out, of course, you're flushing cash every month.

Don't get me wrong. Real Estate is a great way to make money. In fact, given the phenomenon of leverage, you can make more in real estate with less risk than in practically any other investment field. But you've got to have some money somewhere else, and the larger your investment in real estate, the more money you need in other investments.

Caveat Emptor

Original here

Unpermitted additions are popular in California because of property tax implications. You see, due to Proposition 13 back in 1978, taxable assessments are based upon purchase price plus no more than 2% per year since acquisition (although if you bought prior to 1975, it's based upon the taxable basis in 1975). Let me say that this is a very good thing, because someone who buys property today has a reasonable assurance they won't be taxed out of their property, something you could not say prior to the passage of Prop. 13, where the legislature had more than tripled property taxes in the three years before it passed. Indeed, Prop. 13 has been one of the background factors leading to the elevated values today. If you bought a property for $40,000 in 1975, your taxable assessment 33 years later would be a little shy of $77,000. In the open market, it would probably be about a $500,000 property, perhaps even $600,000, even with the market having taken its recent tumble. People who bought in the early nineties are sitting around $200,000 assessments for the same property, and even those who bought back around the time of 9/11 have assessed values of perhaps $300,000.

However, one exception to Proposition 13 is if you build an addition. New additions are assessed based upon the value it adds to the property when it is built. So in the case of the person who bought in 1975, expanding the living room or putting in a new bedroom could double the owner's property taxes. A new master suite could go much further than that. Building a second story to add multiple rooms could make your tax bill resemble a new purchase.

But if the county never finds out about it, and never updates their records, they don't make the new assessment, and the property taxes don't go up.

The way the county keeps track of all of this is via building permits. The theory is that anyone making an addition is going to get the proper permits, have all the inspections done, and happily pay their newly increased taxes.

Yes, I'll wait until you're done laughing, but it works out to be the intelligent thing to do, as we'll discover.

This is aside from all the usual headaches of dealing with your self-interested bureaucracy. Predictably, a lot of people decide that they will do anything they can to keep the county from finding out about that addition. No permits, no plans, no inspections, no bureaucracy, just do the work and enjoy the results.

Well, not quite. Licensed, insured contractors have legal and insurance based requirements to make certain any work they're involved in has all the necessary permits, inspections, etcetera. Go to Bureaucracy, Go Straight to Bureaucracy, Do Not Pass Go, Do Not Collect your nice little tax evasion. So this also encourages the use of unlicensed contractors, who as a group aren't precisely known for their unswerving dedication to high standards of construction and repair. Their work may or may not adhere to code, it may or may not do what it was supposed to, it may not continue to do so even if it does initially, and it may or may not even be structurally safe. Not to mention you're going to need Divine Intervention if someone gets hurt building it, or even on that portion of the property at a later time. Homeowner's Insurance companies have been known to be sticky about such details, and for excellent reason.

But if the county finds out about it, you've got all the issues you were trying to dodge right back at you with penalties and compound interest. I said if, but it's really more a matter of when.

You see, most folks want to sell the property at some point in time. When they sell it, they want to get a price appropriate for the property. They've got a 4 bedroom 2000 square foot property now, so the owners want the price 4 bedroom 2000 square foot properties are bringing in the market, not a 3 bedroom 1400 square foot price. When that happens, somebody usually notices that what they're trying to sell doesn't match county records for the property. It's one click on MLS to find out. The Era of Transparency bites everyone with something to hide. An agent I know told me he once asked someone in the assessor's office how they found out about cheaters. The answer? Mostly Real Estate Agents, but the context and way he told the story leads me to believe that the real answer is more properly "people unhappy with some other party to a transaction that may or may not have come off." It doesn't take much. Given even an anonymous tip, there isn't a judge in the world that's going to deny the assessor the right to investigate, especially given that you're on record trying to claim it had something more in order to sell it for a higher price. It's not like MLS records are private, or that the county assessor doesn't subscribe. Unless you've got some trick to make the extra room vanish when the tax man knocks on the door, they're going to find out the truth.

If the addition happens to be to code - current code that is - you can get a retroactive permit. The process isn't too horribly much worse than if you'd done everything legal in the first place. But you're still going to pay all those back taxes, plus penalties and interest.

However, it's rarely to current code. Building codes get updated all the time, and when you get a permit legally and dot all the i's and cross the t's, you almost always get grandfathered into any code updates along with everyone else. It was fine and to code when you built it, so unless it has somehow become unsafe, you're still cool as far as the code goes. I see stuff every time I go looking at property which couldn't get approved now, but because the permits were obtained, the work was done, and everything was legally signed off however many years ago, it's still legal today.

Grandfathering doesn't apply, though, if you didn't do things the legal way. It's the code now that's important, and if it's not to code now, they can and will make you bring it up to current code standards. This often entails completely demolishing it and starting over, or simply putting things back to the way they were originally, if anyone can figure out what that was. Whatever happens, you're going to have the county inspectors looking over your shoulder every minute until the situation is resolved, and the licensed contractor you're going to have to retain isn't going to have much sympathy for what you did to yourself without paying a member of his brotherhood (most contractors are male). Upshot: It's going to be a lot more expensive and time-consuming than if you did it correctly in the first place.

It can be, and often is, worse than that. If the addition is unsafe, if you don't bring it to code within a specified period of time, they can make you demolish it. Actually, they can make you demolish the entire structure if it's bad enough. Suppose there's other stuff done there that was legal at the time, but there were no permits needed then? Nobody believes liars and cheats, and that's you at this point.

Sometimes, the additions are not compatible with zoning, set back regulations, etcetera. In that case, they're coming out, end of story, and the entire structure may be condemned. Granny flats are one common issue that often impacts setbacks and or zoning. I may not like it, but it's not like I've been elected dictator for life. We've got to deal with the law as it is, not how we would like it to be. We can work to change it, but in the meantime, it is what it is.

Now, about buying such a property: Are you really comfortable plonking down your hard earned cash (or worse, borrowing money so the seller can have cash) for a property where part or all of it may be at risk of being demolished, when (not if) the county finds out? Particularly the same price the your new neighbor paid for his fully permitted property? I don't think that's likely. Not many inmates of insane asylums are purchasing real estate, and when they do, they need to get their trustee involved. I can't see any trustee agreeing to it either.

There is one potential loophole: If you can show the property was as it is when you bought it, then the addition will be treated as part of the sales price, and you can potentially get forgiveness as an innocent purchaser, but it's still got to be to current code. See above for issues with that. There's a also time limit on this, usually two years is my understanding. The issue is this can be difficult to show without the cooperation of the former owner, who's going to be assessed for the difference, plus penalties and interest, and is therefore unlikely to cooperate! I understand there are other limits upon this loophole, but these are the most important ones.
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Even if you manage to unload one of these white elephants upon some unsuspecting fool, you're not in the clear. It can come back to bite you. I heard about one case not too long ago where the seller bought in 1986 and sold in 1999, and they swore it was like that when they bought, that they had no reason to suspect it was unpermitted. All to no avail. The judgment was rendered against them, and they're going to have to find the people who sold it to them to get any satisfaction in return. Good luck with that, especially if they're dead.

One final issue: In the era of make believe loans, anything went, but lenders are once again balking at lending at properties with unpermitted additions. In particular, they're not willing to lend based upon the current configuration, but based upon what's in county records if at all. As one lender fairly close to my office found out when they tried to sell their repossessed 1500 square foot lender owned property that the county records showed as 640, this can put the kibosh on the vast majority of potential sales. How good of a price do you think you're likely to get when the buyer can only get a loan for about fifty percent of value, and the lender wants to treat that as 100 percent financing? Result: It sat for eight months until a buyer came along with the resources to deal with it, and that buyer got a fantastic deal as the property was essentially ineligible for a loan.

(Question: How many "get rich quick in real estate" seminars mention that most of the very best deals happen for buyers willing and able to sink a lot of cash into the property for the time it takes to deal with the issue that's preventing everyone else from buying it?)

in short, unpermitted additions are a landmine waiting only some random event to explode, and it can do so years after you thought it was no longer your problem. They can be good news for buyers with the resources to deal with them, but they can cripple your ability to sell the property, particularly for a good price. They can actually cause you to be forced to sell for a price below what you'd get without doing any of the work at all. Looking at the costs, I find it difficult to believe that anyone considering things rationally would willingly do this, but in looking at MLS and visiting 20-30 properties most weeks, I see a lot of hard evidence that not everyone thinks these things through.

Caveat Emptor

Original article here

There's really nothing mysterious about this. There are some subsidiary tricks and issues, but the most important thing is obvious. The economic games theory is crystal clear, as is the research into what really happens. But most people don't like what the theory says, and think it somehow doesn't apply to their ego wonderful property.

Price the property correctly in the first place.

Negotiating strategies are variable. In seller's markets, your optimum marketing and negotiation strategies are significantly different than in buyer's markets. But every optimum strategy, in every market, starts with the same piece of advice. Price the property correctly from the moment it hits market. That price won't be the same price it would have been six months ago, and it won't be the same price it would be six months from now. But just because it changes over time does not mean there isn't an optimum price now, and now is when you're trying to sell it.

A good listing agent can keep you from under-pricing the property, and can keep you from giving away the farm or losing the sale in negotiations. But nobody can reliably get you more than the property is really worth, and the attempt is almost certain to end up costing you lots of money.

Here's how things work if you price the property correctly. You put it on the market, you get people coming by to view it because they can afford it and the basic numbers fit. If middle class properties are priced correctly, you're going to get offers within the first two weeks - probably more than one, even in the buyer's market we have going right now. You all negotiate in good faith, you reach an agreement with one of the prospective buyers, you go through escrow in about 60 days (30 days or less if there's no loan), and within ninety days the property is sold.

But when you over-price it, here's what happens: When buyers compare your property to the others that are available and competing with yours, yours falls short. Result: They make offers on other properties, not yours. It's as if you wanted to sell a $20 bill for $50. Guess what? It's precisely the same situation with a different commodity.

Time goes on. You spend money on the mortgage, the property taxes, the insurance, and the upkeep. Plus any number of other possibilities, for instance if there are HOA dues. Even if there aren't, let's consider a median sales price in the zip code my office is in: $390,000. Let's say you've got a loan for eighty percent of the value at 6%, pro-rated property taxes at 1.25%, and $100 per month for insurance. You paid $1560 in interest charges for one month. That's cash, right out of your checking account! I don't count the cost of principal because you're paying that to yourself, but pro-rated property taxes would be slightly over $400 per month, and add the $100 per month for insurance and you're well over $2000 that not selling for that month actually cost you, plus the phantom of another couple hundred dollars principal out of your checking account that you're essentially giving the bank to hold for you until the property sells - unless that extra month decreases the eventual sales price, which it will. It's worse than this if your property is highly encumbered, or caught upon the fact that prices are receding in most of the country. That $390,000 property today would have been $500-$520,000 at the peak of the market, and lots of folks were buying then and are discovering now that those prices weren't real. So if your property doesn't sell for 4 months (the average days on market locally), that's nearly $10,000 out of your pocket that you're not getting back.

Actually, it's much worse than that.

Your period of highest interest is right when the property hits the market. The longer it's on the market, the fewer people will come by. The buyers who already looked have already made their comparison and decided they're not interested. The buyers who are new to the market will see that it's been on the market for thirty, sixty, ninety days or more and the idea foremost in their minds is going to be "What's wrong with it?" What's wrong with it is a completely preventable problem - It was overpriced when it hit the market. The only cure for this problem is expensive: cut the price further than the price it would have sold for in the first place.

The larger the "Days on Market" counter goes, the less inclined buyers will be to go view the property. Remember, at this point it's all numbers as far as the buyers are concerned. You can stage the house, paint it, remodel the kitchen, replace the carpet, landscape the yard, and nobody will notice because these don't translate to attention grabbing numbers. The property is what it is, has what it has, and the counter is ticking up, and every day this property sits . The only number you can change to induce people to come back is the asking price, and guess where it has to go? That's right, down. At this point, you have to give them a reason to come back and look that has its root in numbers. If you're now the cheapest property in your class in your area (or more precisely, the lowest asking price), that has a good chance of working. Maybe if you're now the second cheapest, you'll get a smaller amount of interest. But if there are still a significant number of lower prices in your class, this won't work. Nobody comes back to look at the 18th cheapest 3 bedroom home, even if there are 1000 others in the zip code, despite the fact that these numbers say you're in the best 2%. You've got to be priced significantly below the market to drag people back, where you didn't have to be nearly that low if you priced it correctly in the first place. Furthermore, attempting to negotiate the price back upwards is extremely unlikely to work. People came to look and made an offer based upon your implicit representation that the asking price would be an offer you'd be happy to accept, and if that turns out not to be the case, expect them to walk away no matter how hot the seller's market.

Tricks exist to reset Days on Market, of course. The various MLS affiliates are wise to most of them and getting better at catching them. Not to mention that the buyer's agent is going to check back and see if it's been on the market anytime recently, if they don't happen to recognize it off the top of their head. Listing Agents are becoming correspondingly more reluctant to play games to reset that Days on Market because they can lose the ability to place properties in MLS altogether when MLS catches them playing games. Buyer's agents are tired of this game, and many of them are perfectly willing to put their competition out of business by bringing their malfeasance to the attention of the MLS operator. I haven't done it yet, but I'm becoming more tempted in a couple of cases.

I see a lot of nonsense put into MLS by owners, and by agents who know better about how high the automatic valuations, CMAs, and appraisals for a given property are. These are all worthless. For one thing, this data can be manipulated, and sellers have just a little motivation to want it manipulated in their favor. More importantly, none of these influence sales price, and representations that they do or should is worthy of ridicule. What influences whether you get any offers, and from that, sales price is how good of a deal prospective buyers think they're getting, which in turn flows from the asking prices for comparable properties, as well as recent sales. If there's only two properties available for sale in the Zip Code that thousands of buyers want, sales prices are going to be increasing rapidly. Reverse this if the opposite situation applies. Incidentally, these are reasons a buyer's agent needs to be a fount of information on both the attractive points and the not-so-attractive ones.

With this information freshly in mind, what does all this say about the competence and ethics of an Agent who accepts the listing at a too-high price "to see if we can get it"? Nothing good. They're deliberately inducing the seller to harm themselves in order to get that listing. It's hard to put a monetary value on hurt feelings of betrayal when the agent starts pressuring them to drop the price the instant they have the signature on the listing agreement, but for a lot of folks, that's even worse than all of the cash it's going to cost them.

Lest anyone mistake me, this is no way relieves the need for an agent, and a good one. How many of the comparable properties that sold in your area in the last few months were you in? How familiar are you with all of the competing comparable properties? Try and put it on the market without that knowledge, and you're basically spinning the roulette wheel as to whether you're in the right ballpark, price-wise, with completely predictable downside if you're not. Who's your target buyer? What are the effective ways to attract their attention to the property? How to convince them they need to make a better offer? I guarantee that buyers don't care about "what you want to get" for the property! If real estate were easy and obvious, anyone could do it about as well as anyone else, and that is definitely not the case. Finding a good agent isn't trivial, and their pay isn't what most people think of as "cheap" but it will more than pay for itself in time and money.

The attitude of the seller is also critical. Sellers that expect to be treated like royalty are royally hosing themselves. If everything has to be convenient for you, you won't get as good a price as if you make everything convenient for the buyer, and in buyers markets, it often makes the difference between a good price and not selling at all. What are you willing to do in order to sell your property, to make it more attractive to buyers with special issues? Especially, what are you willing and able to do if it will get a higher price? Being willing and able to offer things that other sellers are not is an excellent way to appeal to buyers with special needs, perhaps even to the point where they have a choice of your property or none at all, no matter how many properties are "for sale" where the owner can't or won't. Do you think that might induce someone to offer a good price? To use some examples I've encountered recently, are you willing and able to carry back part of the purchase price? That's one way to give yourself an advantage over competing properties in any kind of market. Are you willing to work with someone who has a need for immediate occupancy? Can you carry the property for an extended escrow period if you're properly compensated for it? A good agent can use all of these, and others, as wedges to get the property sold, sooner and for a better price, but they can't do these things for you. You have to be willing and able to do them.

There are a few other things: Have the property ready to show before it hits the market, do what you can to enhance visual attractiveness (it's amazing the difference polishing furniture that's going to leave with you can make!), and especially make showings absolutely as easy as possible. It's a better sales tactic to get the family heirlooms and other valuables out and type, "Just Go!" in the showing instructions than just about anything else (although "5 minutes notice so we can leave!" is even more effective), and permissive or restrictive showing instructions can make all the difference. If you've got tenants in the property who want 24 hour notice, you're in a world of hurt in a buyer's market, and even in a seller's market you're going to find that your traffic and final sales price will suffer because of it. If you want to sell your rental for a good price, offer your tenants something that makes them willing to cooperate or get them out.

The asking price should take all of these factors, and more into account (and almost entirely as subtractions from a theoretically perfect sales situation), but choosing an optimum or near optimum asking price in the first place will make more difference than anything else, because the money a seller ends up with is about the time it takes to sell as well as final sale price.

Caveat Emptor

Original article here

It's the same reason the phone company doesn't want to compete, General Motors doesn't want to compete, Wal-Mart doesn't want to compete, Disney doesn't want to compete, and Microsoft will do everything in its power to appear as if it doesn't have to compete. They make less money when they have to compete, and they have to provide a better quality of product.

But people know that all of the above have competitive alternatives. If you don't like one brand of automobile, there are dozens of competing alternatives. Ditto retail outlets. "Kid safe entertainment" is a bit more of a niche market, but there are competitors if you'll look. Finally, we should all be aware that computer OS's are one of the biggest Drazi Wars there are. There is competition.

But many agents and loan officers make their living by pretending there is no competition, or by actively manipulating consumer choices to preclude the possibility of competition. This takes many forms, from requiring large deposits for loan officers through exclusive agreements with agents. There's nothing fundamentally evil about this - everyone needs to make a living. But there's nothing that says any particular consumer - by which I mean you - has to put up with it. Furthermore, the agent or loan officer who is confident enough to work without these devices is likely to be a better, stronger practitioner. Ask yourself who you'd more easily believe has more on the ball: Someone who tries to keep you from considering the competition, or someone who's happy to compete? If you were interviewing two applicants who want to work for you, who'd be more likely to get the job: The person who walks out as soon as they find out you're considering someone else as well, or the person who gets their act together and out-competes the other applicant? If you were interviewing with two companies who wanted to hire you, which offer would you be inclined towards: The one where you have to hide the other interview, or the one who's willing to compete head-on for your services?

Nobody's going facilitate competition for the job they want. Nonetheless, it is to your advantage to force them to compete. If you don't understand why, consider that for all the griping about various phone companies, the situation is far superior to what it was when there was only one. Here's a particularly poignant reminder of that era.

Here's the facts of the situation: If you're only going to talk to one provider, they can quote you anything they want. There is no check upon the situation. If I were the only loan provider in California, I could charge anything I wanted. I'd auction my services to the highest bidder, work a couple hours, one day a week, make as much money as I wanted and go on to spend the rest of the time having fun with my family. If anybody didn't like the level of service, that would be their problem. But that's not the case. In fact, the further it is from being the case, the harder I have to work, the less money I make per transaction, and the better the service I need to provide. It's also the case on the voluntary level, which is to say if you voluntarily restrict yourself to one potential provider, as well as the involuntary. If you only talk to one, there might as well be only one. It doesn't matter how many loan providers and real estate agents there are, what matters is how many you talk to.

People in the real estate business get told all the time that the way to success is to avoid competing, especially to avoid competing based upon price. If ever a week has gone by without some clown wanting to charge me a thousand dollars to learn how to avoid competing on price, or avoid competing, period, I certainly can't remember it. They work, by and large, on two levels - pretending you're the prospect's friend while engendering fear of the competition. "You know I'm your friend, George. You know there are sharks and cutthroats out there who will take your money and leave you high and dry, but you know I won't do that, George." And there are sharks and cutthroats out there. The guy talking to his pretend friend George here is one of them. This is the way he talks George out of checking up on him, comparing his services and prices to either objective standards or to any other provider's. Nor are women any superior - in fact, I've had a report of one of the worst sharks I'm aware of preaching a "female solidarity" line of attack to cut out her competition. Other sharks attack via ethnic or religious solidarity, or even political similarities. What these have in common is that none of them have anything to do with competence at real estate, and they may not have anything to do with conscience. I've seen people preaching the gospel about taking care of your fellow man while extorting thousands of dollars from their client's pockets. Newsflash: The sale of Indulgences went out with the Reformation, and for good reason, too. I'm certain it happens with other religions, as well, it's just that there's fewer members of those religions around.

One of the ways I constantly see this abused is even people who should know better advising their readers to "ask someone you trust for a referral." Well, referrals are great - if the person making the referral knows what they're talking about. If they don't, it's just another goat lined up for sacrifice, willingly led in by the previous victim, If not worse. Here's an article from illustrating someone who used this process to gain victims (HT: FraudBlogger.com, who always has a relevant example of bad behavior handy). No matter how trusted the source, it still needs to be fully vetted - you need to do your own due diligence, and part of that is comparing them to some other potential service providers.

There just isn't any valid advantage from the consumer's point of view to forking over a large deposit or the originals of any documents to a loan provider. They don't need originals, and the only thing that large deposit does is give them some money to hang onto if you find a better loan. All of the better loan providers I'm aware of work on the basis of "fees at point of service," not requiring a deposit in advance. In fact, a cash deposit can induce people to accept loans that are many times the amount of the cash deposit worse than other, available loans. People understand that check they wrote out of their account is real money, where most of them are a little bit hazy about loan costs paid by rolling them into the loan balance. I saw someone pass by a loan I had that was four thousand dollars cheaper up-front and would have saved them $1000 per year they kept it because another lender already had a $1500 deposit from them. Here are a few more pointers on shopping for a real estate loan.

Admittedly, I have come to the reluctant conclusion that it is in the consumer's interest to list their property for sale via an Exclusive Right to Sell. However, this doesn't mean you shouldn't shop agents extensively before you make that commitment. This only means that you're going to make that commitment to one agent once you have done that research. Failing to do so risks locking your property up with an incompetent agent. When you ask "what's so bad about that?" ask yourself if you'd be happy taking ten to twenty percent less for the property (or worse!), after you keep paying the mortgage six more months? Around my area, with the median sale being $423,000 last month, and assuming a loan at six percent on eighty percent of value, not only does signing up with someone who can't get the job done cost you $42,000 on the sale, it'll cost you about $2200 cash for every month that property doesn't sell! Realize it or not, you're risking a lot of money on an agent, and just because you're not writing a check to them directly at sign up in no way changes this. However, I don't advise going with the agent who asks for a short term listing, either. That's an appeal to cowardice - decide by theoretically not deciding, and make no mistake, you are deciding when you sign a listing agreement for any period of time. This isn't to say you can't bargain the time for commitment down if you're willing to take a chance on a less experienced agent - it's just saying don't decide by pretending not to make a decision. That way lies disaster. Here are a few more tips about Shopping for a listing agent.

For buyer's agents, there really isn't a reason for an Exclusive Agency Agreement, except to allow an agent to wrap up your business for whatever period of time. There isn't hardly an excuse. The only place I can see it being an effective alternative for the consumer is if they're working the foreclosure market, and that agent is spending the money for all of the "quick notification" services so that the client doesn't need to. But the vast majority of the time, agents are locking in people who simply don't know any better with an exclusive agency agreement. I've seen listing agents who wouldn't show a property without an exclusive buyer's agency agreement - a clear violation of fiduciary duty to the seller, not to mention a huge Conflict of Interest if they actually want to put an offer in on that property. Non-Exclusive Agency Agreements protect the buyer's agent just fine, but they also give you the right to fire non-performers by just not wasting any more of your time. You can also use them to separate the wheat from the chaff among buyer's agents. Sign any number of Non-Exclusive agreements you want. The good agent will still do their work; while the lesser agents will select themselves out. While we're at it, here's a few more tricks to finding a good buyer's agent.

Agents and Loan Officers don't like this. It means they might not get the business when they're exposed for the buffoons that some of them are, and it means they might not make as much money for the time they put in. Nor is exercising your choices as an informed consumer simple - far from it. You also need to consider what agent services are worth how much to you. But considering the average price of real estate around here, and the cost of the loans that most people need in order to buy, doing proper diligence beforehand will save most people more money than they make in a month - perhaps more than they make in a year, possibly more. When you consider the differences in that light, the hourly pay for doing your due diligence about agents and loan officers and forcing them to compete is absurdly high.

Caveat Emptor

Original article here

Hi--I just found your site today. The best I've ever seen/read, etc. Thank You!! I do have a question I didn't see addressed regarding our current situation/dilemma:

Our present home, which we've lived in for 8 years, is worth around $180,000 (yes, it's a small town...), and we owe $105,000. My husband has been working for about 5 years now, & has a pretty good salary (around $100K) but we have a LOT of debt --mainly a result of having had 2 babies while in school. We have about $40 K in credit card debt, a $775/mo. student loan payment, & a $500/mo car loan which will be paid off in 18 months.

We've been planning on moving across town for a few years (MUCH better schools there), but had been holding out as long as we could with the idea that the longer we waited, the better house we'd be able to afford. And besides, the kids are still young, & their elementary school isn't intolerable, etc.

The problem is that the school situation DID become intolerable about 3 weeks ago, at which time I began to homeschool them, which is also intolerable! So we need to get this moving across town show on the road!

My question is this: I know we need to at least take out a home equity loan so that we can pay off the credit cards. Some of the rates are outrageous, and I'm sick of fighting with them. That would put our equity at $35,000. But since we want to move ASAP now, I assume we could just use the sale proceeds of the house to pay off the cards, & use the remainder as a down payment. Or, am I wrong? Our current debt to income ratio is so poor--will the lenders even consider our current plan to pay off that debt using sale proceeds, or will we have to refinance now & wait a period of time before pursuing a new house to show them that we're not just going to rack the debt up again? Oh, but we haven't incurred any new debt or put any new charges on the credit cards in about 3 years--does that make any difference?

Also, the houses in the neighborhoods we are looking at are around $300,000. I'd sure appreciate your advice on this. We really want to move immediately, but not if waiting until later, like this summer, would be be better...

Your situation is a classic example of the urge to hurry a situation, and how to come out better if you don't.

You don't mention how the market is in your area, or what your credit score is like, and yes, it does take a while for bills to show as paid off. It can take over sixty days. I see some options for you, all of which have drawbacks. This is a complex situation, and I don't have nearly all of the information it takes to recommend a particular solution.

You can refinance, sell, or do nothing with your current residence, and you'll want to rent it out if you don't sell. You can rent or buy a new property, although you do want to buy before long. There's some issues that need to be dealt with, and they take a little time to deal with them properly. You can rush the situation, but doing so will cost you some big bucks.

You don't mention what rents are in your current area. By the time you pay for the refinance, my guess is your balance would be $150,000, maybe a bit higher. I'm as certain as I can be without full workup information that you're in a sub-prime situation, which means you can choose a very high rate or a prepayment penalty that'll run you about another $5000 if you sell while it's in force. The high rate is the better choice, because it's only for a few months, but it also has implications for your debt to income ratio. The reason I ask about rents is that I'm wondering if they'll cover your mortgage on the place. The rate you'll get might be higher or lower, but let's assume seven percent. That's principal and interest of about $1000 per month, plus taxes and insurance. Now your husband makes plenty to afford some negative cash flow on the property if you folks have to and the rest of your debts are gone, but not a huge amount of it. You'll only get credit for seventy-five percent of the rent, as opposed to all of the expenses, but better to have it rented for a little bit of a theoretical loss than not to have it rented.

Whether you refinance or sell, it's going to take a grand total of about four months to get your bills showing as paid - about two months to get the refinance done, and two more months for your current finance companies to get off the dime and report the accounts as paid. It might be longer if you sell, depending upon how long it takes to get a good offer made and the sale consummated, then add two months. On the other hand, if your property is in good shape, vacant properties in good condition show very well. Understand that nothing happens immediately in real estate, and new regulations supposedly aimed at protecting consumers (while in reality protecting big banks from competition) have added at least a month to the time it takes to get a loan done.

With your new property, your debt to income ratio is going to sink your loan if your current bills aren't paid off. Unfortunately, A paper has an issue with paying off bills after your initial credit is run. If it's a credit card or other revolving debt, guidelines have issues with paying them off in order to qualify. If you pay off a credit card, the wisdom goes, you could turn it right around and charge it up again. Even if you pay it off and close it, the reality is that you could get another. So they qualify you based upon your current situation. Even paying off installment debt to qualify is at the discretion of the underwriter, and I have seen them turn it down. So you want to have the debt paid off, and showing as paid off, before you make the offer for a new place. That can take up to two months after they actually are paid off.

So you're going to want to wait at least two months after you pay the debt off before you make your offer on the house you want to purchase. This means either staying where you are for now, which I can see is unacceptable, or interim renting something in the area you want to live, which is likely to be better, and you might get a line on an extra-good deal if you are living in the area. Yes, you want to buy, but you don't have to do it all in one step.

So I'd most likely go rent a place - which gets you into the new school district now - while I tried to sell or refinance the current place. If you're not living there, be advised that a refinance is a cash out investment property loan, which carries higher rates and more difficulty. I'd probably try to sell instead, but that does place you at the mercy of the market, and not only do I not know your market, but (when this was originally written) we're still in the worst time of year for sellers. Which means settling for a lower price than you might otherwise get, but you will be rid of the debt without the headaches of being a landlord at a stressful time in your life. You can learn that situation later.

Now, if you sell, you get a down payment for the new place. If you refinance, you probably don't. Your credit score may dictate the sale option; I don't know. It should improve after everything is paid, but I can't guarantee that, and I definitely can't say by how much with the information I have. Better to plan on the status quo than to bet on it improving.

Now, a couple of months after the debts are paid, you'll be a a position to make an offer on a home you want to raise your family in. When I originally wrote this, If you had a semi-decent credit score (620 or above), 100 percent financing was no big deal deal, provided you stuck with a property and a loan you can document the ability to afford. If you've got serious credit issues, you're going to need a down payment. For the school year, you may want to delay until late spring or summer to give the kids some stability for the rest of the year. Worst time to buy, but you're looking at moving again in February if you get on the stick right now.

It's a real pain to move a household once, and here I am telling you to plan on moving twice. Let's look at what happens if you risk the solution that cuts the Gordian Knot.

Your husband is an attorney. I don't know what attorneys make around your area, but around here they can make several times $100,000. So somebody advises you to do stated income, state that you make several times what you do, and just make a bid right now on the home you want to raise your family in, while putting your current home up for sale. And if your credit score is decent, I could get such a loan done pretty easy at the time I originally wrote this. At this update. stated income has gone the way of the dodo and the only 100% financing generally available is the VA loan. However, let's consider what happens next in the original context.

Now you not only have your current debt load, but you also have the payments for a brand new $300,000 loan on a $300,000 house. In California, with good credit, that would have been 6.125% when this was originally written on the first, maybe a little under 10 percent on the second (Now it would be a little lower, but since second mortgages aren't going 100% loan to value, you'd have to have a down payment and accept PMI). $1460 on the first, $530 on the second, plus property taxes (California would be about $315 per month) and insurance of about $100, more or less. Total obligations added: about $2400 per month, on top of what you're paying now.

You don't say, but if you weren't struggling at least a little bit, you would have paid those debts off by now. So you are fairly close to the edge. My best guess as to your reserves: Non-existent. Now you have to come up with another $2400 per month. Where can it come from? Borrowing is the only thing that comes to mind. Charge up the credit cards, personal loans, payments start getting behind, your credit score drops - and it won't come back quickly if you start making those payments on time. Especially if mortgage payments on either place end up being late. Meanwhile everything is compounding, eating up your equity, even if the house sells fairly quickly. As I've said, we're still in the worst time of year for sellers. Its entirely possible you won't sell until Spring, no matter how good a job your listing agent does. In short, things get desperate quick. Not only is your cash flow unsustainable, you get motivated to sell for a lot loss money than you might have otherwise. With everything compounding, it's very possible that you end up selling to a shark for less than you need to get out from under your debts. This perpetuates the situation you're trying to get away from, and makes it worse because your credit is likely to take major hits.

So tempting as it is to take the situation at one go, you eliminate a lot of risk and stress by taking it in stages, and you render yourself a lot less of a target for the sharks of the real estate world. Yes, it adds something to your cash flow to go rent for a while, but not nearly so much as if you just bought straight away, and you give yourself a line of retreat if you have to take it.

There are a lot of things that could change this. As I've said, there's a lot of stuff I'd need to know before making a final recommendation for a client, but I've sketched out the biggest stuff that needs to be considered.

Caveat Emptor

Original here

In an attempt to debunk some of the slanders that are floating around out there, this article is an itemization of how lenders and brokers make money on loans.

The first method is obvious: Origination or discount points charged to the consumer. This is money that the person getting the loan is paying, or someone else is paying on their behalf. One point is one percent of the final loan amount, two points is two percent, and so on and so forth. There is an actual difference between origination and discount points, but they have become almost interchangeable in their usage by many lenders and loan officers who often claim origination is discount. Origination has to do with a fee charged for getting the loan done. It's not a trivial amount of work to get the loan done, and unless you're a close relative or have repeatedly saved their life, the person doing the loan is going to get paid somehow (and often, the family member or close friend gets rooked the most). If you're uncertain just how they are making money, you should ask. Discount points are theoretically a cost that the actual lender is charging in order to give you a rate better than you would otherwise get, but many brokers camouflage origination points as discount points and many banks also camouflage origination points as discount points. The former makes you think the bank is making the money when it's the broker, while the latter makes the consumer feel like the lender isn't charging them origination, but that you are actually getting something most consumers quantify as real for their money (This also makes you feel like you're getting something for nothing, always a good selling point to anything - suckers eat it up).

Related to this are junk fees or markups of legitimate fees that are required to get the loan done. I do not believe I've seen a fee that some lender or another hasn't tried to mark up. If in doubt as to whether there's a markup, insist upon paying it directly. If they can't explain exactly what it was for in easy to understand words, it's probably a junk fee. Again, real fees usually run to about $3400 on a loan, although many lenders and loan officers are adept at hiding this at loan sign up.

The second way that lenders and loan officers make money is in rebates, also known as yield spread. This is pretty much limited to brokers, as neither traditional lenders nor packaging houses get direct rebates from lenders. Once again, rebates can be thought of as negative discount points and discount points can be thought of as a negative rebate. There should never be both discount points and a yield spread on the same loan. It is fundamentally dishonest. If there is a yield spread, you are being charged origination, not discount. Period.

The third way that lenders make money is in the sale of the loan. This is usually far and away the largest amount of money made on a loan. It is only applicable to actual lenders, whether traditional or packaging house or correspondent. Brokers never "own" the loan, so they can't sell it. Mortgage loans, particularly grouped in vaguely compatible bunches varying from $50 million on up, are (usually) among the most secure of all investments (indeed, in terms of historical risk, only US Treasury bonds are superior). Because they are very low risk, the lender makes a nice premium on them. As I originally wrote this, CMO bonds trading at 5% even were basically at par, while 6% bonds were earning about a 3 percent premium. At par means the bank gets the face value of what they're selling, whereas a 3% premium means they get an extra $30 for every $1000 of bond value. For a $50 Million CMO offering, this is $1.5 Million. (There are other factors such as underlying quality, whether there is a pre-payment penalty, what tranches they may be assigned, and so on, but this is a basic article on the phenomenon.) By comparison, on a random fairly good "A Paper" lender's pricing sheet at the same time, 5% was not available and 5.25% carried a discount point and a half while carrying a premium on the secondary market of half a percent or so, so the lender was making two full percent on that loan at a minimum, and unlike a broker's yield spread, this is never disclosed to a borrower. Nor is there any limit as to how much this can be, but with even decent to good A paper lenders getting 2% or more, it shouldn't stretch your mind too much to find out that this number can go to 6 or 8 percent in the subprime and negative amortization markets. 6 percent on $50 million is $3 Million dollars the lender gets for selling $50 million worth of loans - this translates to about 100 regular 3 bedroom homes here in California. $30,000 each, over and above any points and fees these people may or may not have paid, and for holding onto the loan for maybe one month. Lenders are not hurting - and many even have the guts to badmouth brokers who may make $5000 while cutting the consumer's actual cost by $7500 to $10,000 and the bank still makes $20,000 per loan. (Note: these spreads and premiums used to be much larger 30 years ago when people didn't reliably refinance or move about every two years).

What brokers do is essentially play these lenders off, one against another on a professional basis, to see which one will cut the best deal on your behalf, because brokers are never captive audiences while the lenders regard you as theirs from the time you walk in the door.

Also, the point needs to be again that cost of a rate is always inverse to the rate for precisely the reasons of yield spread and bond premium. The lower the rate, the higher the cost. The higher the rate, the lower the cost. Some lenders and brokers may have better cost/rate tradeoffs than others, but there is always a trade-off.

The last method of receiving traditional income is to actually hold the note and receive the interest. This is actually rare these days on the part of lenders. More often, what the lender will do is sell the loan itself while retaining servicing rights (for which they are paid, of course). Most often, the lender can make more money by selling the note to Wall Street - whether or not they retain servicing - than they can by holding the actual note themselves. Keep in mind that the premium they get from sale of the note is immediate, and they can "sell the same money" several times per year, as opposed to just holding on and collecting the interest as it accrues.

How can (and should) you compare a broker's offer, where compensation is disclosed, with a bank's offer where it is not? First off, make sure that they are on the same type of loan at the same rate. My questionnaire here is a good start.

(At this update, lenders have changed the market so that locking upon loan sign-up like I used to do will cost me and all my future clients large amounts of money, but I will go back to doing that immediately if the lenders change back). None of the standard federal or state forms are binding in this sense; not the Good Faith Estimate, not the Mortgage Loan Disclosure Statement, not the Truth-In Lending form, and not the application form itself. Furthermore, keep in mind that for all third party items, such as title, escrow, attorney fees, appraisal, etcetera, they are able to exclude them from the precomputed costs of doing the loan, so most lenders and loan providers do. Not coincidentally, these are the biggest items in the closing costs section of your loan. Insist upon full disclosure of each item, and ask them to guarantee the total.

And once you are certain that the loans you are being told about are actually the same loan or the same type of loan, then you can make the decision as to which is better by choosing the one that actually gives you, the prospective client, the better loan.

One more thing, the most important: Choose loans based upon the bottom line to you, not based upon how much the loan provider makes, or whether they even have to disclose it at all. If you were shopping for a refrigerator and got a price of $500 at store A versus $520 at store B for the same model, would you care that store B paid $40 more for the refrigerator wholesale, so their margin is lower? No, you'd buy the $500 refrigerator at store A. The same principle applies here. Choose the loan that delivers the best terms for you. Type of loan, interest rate, cost to get it, you need to consider all three, because there are always tradeoffs. Failure to consider any of them is a good way to end up with a rotten loan.

Caveat Emptor

Original here

Fed Buying Maximum Legal Limit of Treasury Debt

The Fed is creating virtual money to buy 70% of new debt issued by the federal government.

This is what financial failure looks like boys and girls - except that your average family don't have access to the federal reserve handing them newly printed money so they can keep buying stuff even though they're broke, destitute, and so deeply in debt there's no way they can keep up with the payments.

This will have major consequences for the dollar, as the available pool of dollars represents a fixed amount of value (in the minds of the financiers, as well as those economists who are still sane and rational)

When the number of dollars keeps rising but the value of what it represents does not, what do you think happens to what you'll be able to get for the dollars you've had all along?

If you said "their value will decrease proportional to the proportion of new additions into the system" you have the first level of understanding. Actually, it's worse than that, as this sets of a cycle of "print more, devalue more" with the only people left out being those people with fixed numbers of dollars who don't have access to the printing press for more.

Yes, this amounts to a tax on those with fixed incomes and fixed assets, which does not, generally speaking, mean the wealthy. A *huge* tax, on those whom the Administration claims to want to help.

This is endgame. The government is going to face a crisis when the markets start wondering if it ever intends to pay those who hold its debts. Quite possibly, the fact that the election is so close may be all that is holding this crisis at bay. While I am not confident Mitt Romney or Gary Johnson can get us past this crisis with the United States as we know it more or less intact, I am quite certain Barack Obama not only will not try, he won't understand that there is a problem, even when the military starts selling its hardware so it can buy food for service folk and their dependents

It may not come as a shock to you, but loan officers, along with many other salesfolk, speak a different language than the rest of the population. What will probably annoy you, however, is the number of times they'll say something that sounds like a phrase out of English, but really is from Salesgoodspeakian, a bizarre tongue in which the true meanings must be learned by osmosis from the particular subculture's dialect, while intending to communicate something entirely different to the poor schmuck who, after all, doesn't understand salesgoodspeakian.

This post is intended partially as humor, partially as education. I'm going to start it with a few of the most common ones, and update it by adding more and reposting from time to time. If you've got a good one, either with or without translation (and whether from one of my fields or not), please send it to me along with the context, if appropriate (dm at). Even if you don't have a translation, I'm pretty good at major dialects of salesgoodspeakian. It is to be noted that these phrases are not red flags, but more in the nature of yellow flags. If they just occur on a stand-alone basis, it's something that's likely to proceed from yellow to a red flag, particularly with repeated yellows. On the other hand, if the person uttering them proceeds to issue a clarification in plain English, issues an amplification rendering the translation void, or translates and explains the salesgoodspeakian, it's possible you've just been given a real world green flag that this is an ethical person. For instance, my absolute favorite loan to do is a true zero cost to the consumer A paper loan (and no prepayment penalty!), which I usually explain as "Nothing added to your mortgage. You've just got to do the paperwork with me, and come up with the money for the appraisal, which will be returned to you when the loan funds". And it's also possible you've been given a reinforced red because they lied.

And yes, I've had clients who came to me report every one of these. Some of the translations are a little exaggerated to make the point, but the spirit remains the same.

The salesgoodspeakian to English phrasebook:

Mortgage dialect:

"Stress free loans" two percent higher than you'd qualify for with better documentation and a little more work and less greed on the loan officer's behalf.

"Won't cost you anything out of your pocket" - Six points and $5000 in well-padded closing costs added to your mortgage loan balance, though.

"Thirty Year Loan" fixed for the first two, if they're feeling generous that day, but it does have a thirty year amortization. With five year prepayment penalty of course!

"How does a 1% rate sound?" Like you're a misleading weasel trying to get me to do a loan that digs me in deeper every month with a three year prepayment penalty that keeps me trapped even after I figure it out (See Negative Amortization Loan)

"Industry standard" - Everybody else at this company does it that way, too, because the boss says to, and I don't know any better. (This is very much the "G" rated translation. Please note that there are industry standards - things that pretty much every company in the industry does. Some of these standards need to change, some just are, and some are actually beneficial).

"Everybody knows there's 2% origination fee." Actually, everybody knows no such thing. But if I told you about it in the first place, you might have gone with somebody honest.

"Brokers can charge you anything they want" - so can I, but brokers have to disclose their compensation and bankers don't.

Found on the same billboard:

"Rates as low as 4%!" on an "adjusts every month" loan that's going to 6% next month and who knows what thereafter. With five points. While I have you on the phone, let's sign you up for it.
"No Points!" we've got no points loans. Not on the loan we quoted above. I'm really so terribly sorry you misunderstood. Now, about that 4% loan, what's your name?
"Low Fees!" compared to the multi-billion dollar graft of the stimulus or Obamacare, $23,000 is low. Now about that 4% loan, what's your social?
"Easy paperwork" but the start rate goes to 6% for the first month, adjusting to 8% next month. Still five points. Not for the rate we quoted above. I'm really so terribly sorry you misunderstood. Now, about that 4% loan, when can you come in to sign?

Real Estate Dialect:

"Sure houses are expensive, but the loan is cheap" No, this property isn't worth what they're asking for it. But since you don't know any better than to buy based upon payment, it lets us get you into a loan that you're going to think you can afford, until long after we have our commission!

mortgage humor real estate—

Caveat Emptor

Original here

I have decided not to renew my subscription to World of Warcraft

They had, for a long time, a check mark in the interface that prevented you from inadvertently becoming vulnerable to pvp (player versus player) attacks. Since that's not my idea of a good time, I left that protection consistently checked.

However, in the run-up to the new expansion, they removed that, with the result that gangs acting an awful lot like classic teenage bullies have discovered they can now get in your face, and your toon will eventually (as in "within a few seconds") do something that enables them to gang up on you, repeatedly killing your character.

The game gear that's best against other players is also NOT the game gear that's best against virtual monsters, so this further encourages these killjoys, as the odds are with them even if they happen to be alone - odds are the other guy has the monster gear on and they will be able to kill them easily. They proceed to do so repeatedly. This entire cycle happened to me twice today. So it took these groups of wannabe thugs less than two weeks to figure out that protection that was previously provided is now absent. If my experience with the online gaming community is any guide, this problem will get worse, not better.

Since Activision, Blizzard, and World of Warcraft are no longer catering to the type of game I prefer, I'm declining to give them any more of my money. This might change if they revise their policy, but judging by the attitude of the official response my complaint got, I do not consider this likely.

I am making a recommendation for anyone considering buying World of Warcraft or returning to the game after an absence NOT to do so.

I've seen many new home developments with vaulted ceilings, mini-vineyards, huge houses on little tiny lots...Why can't some developer built some homes for us regular people? A normal sized home with plenty of closet space and a decent (not designer) kitchen that is set more than 3 feet from the neighbors house. I realize that they need to make money, but more people could afford homes in this state if the builders weren't catering to people who already own 2 and 3 houses.

The developer has a certain amount of LAND for a development. That's all they have, and they are not getting any more. For this, they paid a set amount of money. Furthermore, once they have it, it's likely to be years going through the permit process before the can even build. That money they invested in the project, both upfront and as the project goes along? If they wanted to invest it in say the stock market, it's be earning income - for years - before the first spade of earth gets dug. If it's three years from purchase to completion, that's a 33.1 percent necessary return just to break even from the opportunity cost (at ten percent per year - very doable). If it's five years, as is more likely, they need 61 percent. If it's seven, 94.9 percent. To this, add property taxes as they go, the costs of environmental studies and obtaining the permits and paying for inspections and certifying everything. If there's a loan going on, they have the cost of interest going on as well. Now there are ameliorating factors as well, but given the sheer amount of work that has to be done before they nail the first two boards together, a rational person could maybe be forgiven for thinking that society wants housing to be prohibitively expensive, because that's what the evidence says.

Furthermore, it's silly, but people buy a property based upon the structure and the amenities. Well, it's not silly to make that one of the factors, but people go overboard. They will buy a 5 bedroom 2800 square foot house on a 3000 square foot lot before they'll buy a 3 bedroom 1800 square foot house on a 20,000 square foot lot. The same structure is really worth a lot more when it's on a bigger lot, and even a lesser structure may really be worth more if it's on a bigger lot, as is likely to be the case here, but for most folks, we're talking emotional appeal, not rational thought process. In other words, like many people looking for a mate, they see the gorgeous sculpted toned and tanned member of the opposite sex, and ignore the abusive personality behind the beautiful exterior. I'm not certain I've ever met someone who wanted to live in such a development, but they sure sell like hotcakes! Add travertine floors and granite countertops and the fact that it's new to the 2800 square footer, and you've got people willing to pay $800k for the first property as opposed to maybe $550k for the second. In their mind, the first property might be a "flipper's investment" while the second is "the keeper" that they are going to make improvements on for the rest of their lives, but economically, we vote with our dollars and it's looking like a landslide for the status quo. If you opened your wallet for the house where you don't have any land, guess what? You're voting for developers to keep building them. You know something else? That brand new cheek-by-jowl development isn't going to be new forever. Considering market returns, that older $550,000 3 bedroom on half an acre is a better investment, even if it needs updating. Curb appeal and house bling and "ooh, it's new!" are the best ways I know of to sucker buyers into paying too much money.

The developer knows this at least as well as your average real estate agent. The developer has all of this researched down the the last centimeter of the lot lines. They are not in business to build wonderful homes that people are going to be happy in forever; they are in business to make money, and the blinged-out houses on the smallest possible lots bring in the most money for that developer. The fact that you're the very first person to live in the house is a further attraction to the kind of person who buys new cars, which is to say, most of the population, and it's worth serious money to that developer's bottom line, although it will cost you money in the long term.

Nor is the developer alone in this endeavor. They wouldn't make the most money from homes like that if people didn't pay the most money for homes like that. You want the real culprits in this scenario, look around you in any large crowd. It's all to easy to blame the developer, but the desires of the average home buyer and the regulatory environment both played huge factors in getting the state of new housing to where it is now.

There are ways to potentially fix the problem. They start at real consumer education, easing environmental restrictions and the permit process, particularly for high density housing, which may not be desirable, but when your front yard is the size of a postage stamp and most people wouldn't use it anyway, doesn't it make more sense to put all the community lawns together in one park that someone can actually get some use out of? Say, a place for kids and dogs to play? People say they hate condos, but condos, townhomes and row homes are all that's available to the average buyer if the price of land and developing it stays where it is. Environmental regulation and slow growth policies are fundamentally at odds with affordable housing in high demand areas. I'm not saying throw them out entirely in the name of putting up cardboard shacks, but I am saying that we can certainly choose a point friendlier to low cost housing than we have chosen. I can only conclude that society must value the environmental status quo more than it values lowering the cost of housing, in which case the status quo is the correct choice.

None of this has any measurable political support. Everybody is for lowering the cost of housing, at least for the poor, but put it on the ballot against loosening environmental protections and it loses. There are a certain number of additional reasons why this happens, of course. Multimillionaire developers are not politically popular, but Least Tern environment is. Rarely do people stop to consider that by constricting the supply of housing, you unavoidably increase the price. Nor can you do anything by governmental fiat to fix the problem that doesn't price even more people out of the market. Demand is a given - it not directly controllable. There are 300 million Americans and they all want housing they can afford. Even kicking out the estimated 11 million or so who are in the country illegally wouldn't do a whole lot to really solve this problem. The only way to treat the issue is by increasing the supply, which does seem to include being nicer to those multimillionaire developers, but in this case the issue is more affordable housing for everyone, and being nicer to the developers means that you get more housing units, which drops the price of housing from whatever it would have been without being nice to the developers. Because any time someone else enters the United States, whether legally, illegally, or simply by being born, you create a housing need. Every time there is a new American without another place for that American to live, we create somebody without a home. We price somebody out of the market. We now have an American who cannot afford to buy a home.

Now how to handle this issue until such time, as any, as society changes its mind and decides to make housing more affordable? Your best bet is to find a good buyer's agent to defeat the problem on a retail level, that is, for yourself, because wholesale solutions are not likely until people get rational about solving society's problems. You can't make people build the kind of housing you say you want. But you can make informed choices between what's out there now, and a good buyer's agent will look as far out as you tell them to.

Caveat Emptor

Original here

One of the most common things I'm seeing as I roam about the East County looking for bargains: Agents not doing their jobs.

Even when there were 40-plus sellers per buyer, single family detached homes that are priced appropriately were selling, and for appropriate prices. Condominiums weren't moving unless they were brand new with lots of glitter, but appropriately priced detached homes were selling. I can find all of the evidence of this you would care to see, because I've already seen it. Willing buyers and willing sellers. It's just that what an appropriate price is has shifted.

Let's change mental gears here for a moment. Here's the real differences between sellers markets and buyers market: Competition. Specifically, which side of the sale has to compete the hardest. In seller's markets, which is the mindset most sellers and most listing agents are still in, buyers are competing to buy the properties that are for sale. Because of this it is the buyers who have to compete to look attractive - highest offer, quickest offer, fewest contingencies. They have to offer more money or a bigger deposit or something else that the seller wants and nobody else wants to do. With the buyers market, it's the sellers who have to compete, and most of them were not doing it very well.

I want to make very clear that sellers are always competing against other sellers, even in the strongest seller's market possible. It's not enough to have your property "out there." In a seller's market, the prices might catch up to unrealistic asking prices, given time. In a buyer's market, prices are not increasing, and in a strong buyer's market, they are going down. In other words, the longer it takes, the worse your property looks. You have to have some stand out aspect to your property. It can be physical attractiveness, or it can be low price. Price will get buyers in the door, but it takes a strong agent to sell a fixer to the average buyer, no matter how attractively priced. For several years, the scumbag down the street would show the buyers something more attractive they couldn't really afford, relying upon with a negative amortization loan, done stated income to make it look like they could afford the payments. Buyers who haven't had this explained to them ahead of time will think they've just gotten the Taj Mahal for the price of a dirt floor shack, except of course, they haven't (Fortunately, this particular tactic has gone the way of the dodo because those loans are no longer available, but there are other ways to be able to quote low payments that aren't in the client's best interest).

The other way to stand out is to be priced the same, but have a more attractive property. Don't tell buyers you'll give them a carpet allowance, replace the carpet. Don't tell buyers that all they have to do is spend two months and $20,000 fixing it and they'll have a property worth $20,000 more. That won't wash in a buyer's market, if it ever does. The party who does the work, even of engaging a contractor, gets the payoff. Why should your buyers take the risk and do all that work and spend $20,000 cash that most buyers don't have (and cannot be part of the purchase money loan) when they can go down the street and find all of that work already done for maybe $10,000 more - or even the same price? Some other seller just out-competed you for that buyer's business. The only good news for sellers is that most of your competition isn't trying very hard, so small bits of competition can look very attractive.

Even lenders are still in denial for their lender-owned properties, and they are the ones with the hardest issues of all. They must get rid of the property. They don't have any choice. Even if it was in the same shape as surrounding properties - which it rarely is - they have a deadline to get rid of that property, and everyone knows it. Furthermore, the property is tying up many times its value in working capital because of regulations. They also have other constraints that other sellers do not. These make the property worth less, as they rule out certain buyers and make others less willing. In a buyer's market, every buyer counts. I had two clients putting in offers on different lender owned fixers in the last two weeks. One might comp out at the asking price of $450,000 if it wasn't lender owned - which automatically makes it worth about ten percent less than the comps. Add the fact that it's an ugly fixer that would be worth maybe $400,000 at most if it wasn't lender owned, and they will be extremely lucky to see $360,000 out of it. Not supposition, not guesswork, fact. The fact is that there's a beautiful owner occupied comparable on the same block asking $459,000. It's even a bit larger. There is no doubt in my mind whatsoever that the beautiful comparable would take $450,000. Actually, when I checked again the beautiful comparable was in escrow. One owner that competed well, one that is not competing well. I told the agent for the lender's fixer this, and she said, "I've been in this business forty years and I know what I can get for that property!" I offered to bet her $10 she couldn't close escrow on it within ninety days for over $390,000 net - essentially a zero risk bet from my point of view. From hers also, if she thought the property was really worth more. She wouldn't take me up on it - declining to risk even $10 of her own money upon getting a price within 15% of what she told her client whom she has a fiduciary duty to was an appropriate asking price. Furthermore, she's violating her fiduciary duty by not explaining this to her client. Doesn't matter how long she's been in the business. What matters is whether she reacts well to this market.

About five miles away, another lender owned fixer asking $480,000 because that's what the lender is on the hook for. And you know, it is a better neighborhood. Unfortunately for them, just because you were silly enough to lend them that much when the market was peaking doesn't mean someone else will pay you that much for it when the market is in the tank. What matters is the comparable properties, and there's one just around the corner that anyone would rather have listing for $470,000. Above par house for a below par price. Hasn't gone into escrow yet, but it will go fairly soon, unless someone else lists a better property cheaper. Even in the buyer's environment we had, they got a little bit of a bidding feud on it. Fast forward a couple of years and the market has turned. Properties priced correctly are seeing bidding wars, while properties priced incorrectly are still sitting without offers. This lender owned fixer is in rotten shape and has several issues that turn the average buyer off. I initially thought my client's offer was lower than it should have been, but the more I thought about, the more I think my client came closer to the mark than I did initially. Horrible floor plan, necessitating major work to make it attractive. Yard not suitable for children, despite the fact that there's a school on the same block that the agent is using as a "come-on". These people will be lucky to get anything over $350,000 for it, but the agent sent me a blanket, "Anything less than $400,000 will be rejected without counter," despite the fact that I explained how much work it will be to bring it up to the neighborhood standard. I left her some messages, and she didn't respond. The implication to me was clear: She is in denial, and doesn't want to hear plain facts explained. She's got dozens of REO listings. Maybe she schmoozes well, but she's not dealing well with the market. I don't know if she doesn't know market conditions or just acts like she doesn't. If nobody is willing to pay enough to get past the blanket rejection, it doesn't make much difference, does it?

Buyer's markets are the times when good listing agents really earn their money, as the gentleman listing the $470,000 comparable did. It may not be the great publicity of getting the highest price ever in the neighborhood, but getting it sold quickly and for something like asking price in a buyer's market is a real achievement. Especially with as many distress situations as are out there - people that have to sell, for one reason or another. (I did very well for my buyer clients, but it's depth-charging fish in a barrel. You really find out how good someone is when the market favors the other side of the transaction.) You find out how good someone is as a lister when there are dozens of FSBO and discounter listed properties in the neighborhood, sitting on the market for months. The last six months of Canceled, Withdrawn, and especially the Expired sections of MLS have all that and more, but that one property sold quickly, and sold for a good price. That agent earned every penny he got paid before the property was in escrow or even had offers.

The person who "buys" listings, telling the people that they can get them more money than anyone else, more money than the market will support, had a nice long run. When prices are moving up strongly and there aren't many houses to be had and everyone wants one, well a monkey could sell that house at that price given enough time, because given a few months the market will catch up to all but the most egregious of overpricing.

That is not the way things are in a buyer's market. Buyers have all the power, and they know it, because buyer's agents like me have told them if nothing else. When I originally wrote this, inventory was over nine months worth of sales, more properties were coming on the market and it was the worst time of year for sales. Given these facts, What do you think is going to happen? Where do you think the market is headed, at least in the short term?

(and incidentally, what kind of bargains do you think those few buyers willing to get off the sidelines can drive?)

The longer listing agents wait to talk some sense into their sellers, the worse it's going to be. The more days on market, the further the market falls, the more the sellers will have to move to meet it - and the more unhappy they will be with their listing agents. Actually this always applies, but it applies much more strongly when the buyers are in control. The agents I respect will refuse a listing rather than ask for a price they aren't going to get except by freak coincidence. They get the same no transaction either way, but if they refuse the listing, they haven't created unreasonable expectations, they haven't failed to live up to those expectations, and neither party has wasted months finding out what that agent should have known in the first place.

I saw agents telling people that because interest rates have stabilized or even moved down, that will revive the market. This is complete and utter nonsense in buyer's markets. I initially wrote something stronger, but my internal censor really wants to keep this family friendly. Yes, payments drive the market - when it's a seller's market. Buyer's markets are driven by the bottom line, because there are lots of sellers and only a few buyers and if this seller won't cut them a deal, the one down the block who is a little more motivated will. When every listing gets three offers within a week and buyers are getting desperate, they'll bite off on another $1000, $5000, or $10000 because "It's only $10 (or $50 or $100) more on the payment. They shouldn't, but they will. When buyers have the power and they know it, they'll tell the sellers to pay that $10 per month, because they're not paying the extra in the first place. It is the sign of someone who does not understand supply and demand to think otherwise, and I certainly wouldn't want that sort of numbwit as my agent. Your agent is your expert. If they are not an expert, why are you hiring them?

When I originally wrote this, I told people that the only way to change market momentum was to clear some inventory. Inventory can clear in one of three ways: the owner finds an acceptable alternative (such as loan modification or the 125% refinance if their loans are held by Fannie or Freddie), the owner decides to get serious about competing for a buyer's business, or the lender takes it over and eventually cuts the price enough to sell it. I've mentioned that the lenders are evidently still in denial, but they have legal requirements to dispose of those properties within a certain amount of time. The closer they get to that time expiring, the more desperate they'll get. Once the regulators climb onto that lender's back, they don't climb off cheaply, nor easily. But my real point is this: Sellers can compete on the individual level any time they want to, and the sooner they want to, the better off that individual is likely to be. Eventually, the seller's aggregate is going to have to compete much harder for the business of the buyers that are out there, and for the buyers they want to lure off the sidelines. It took a long time to sink in, but the fact did sink in to prospective buyers that the market got overextended. If you're selling, you can ameliorate your expectations and come out as well as possible, you can hope for the bigger fool of a bygone day, or you can take it off the market.

Caveat Emptor

Original here

Zero Hedge

Romney: [The] former head of Goldman Sachs, John Whitehead, was also the former head of the New York Federal Reserve. And I met with him, and he said as soon as the Fed stops buying all the debt that we're issuing--which they've been doing, the Fed's buying like three-quarters of the debt that America issues. He said, once that's over, he said we're going to have a failed Treasury auction, interest rates are going to have to go up. We're living in this borrowed fantasy world, where the government keeps on borrowing money. You know, we borrow this extra trillion a year, we wonder who's loaning us the trillion? The Chinese aren't loaning us anymore. The Russians aren't loaning it to us anymore. So who's giving us the trillion? And the answer is we're just making it up. The Federal Reserve is just taking it and saying, "Here, we're giving it." It's just made up money, and this does not augur well for our economic future. You know, some of these things are complex enough it's not easy for people to understand, but your point of saying, bankruptcy usually concentrates the mind.

And that is how the Fed effectively took over control of the United States, as without it, it is game over. This is also why the ongoing presidential election is a farce, and has absolutely no bearing or significance for the future of the US, whose true ruler does not reside at 1600 Pennsylvania Avenue, but instead holds America hostage in a powerful Stockholm Syndrome grip from the deep recesses of the Marriner Eccles building located, paradoxically, on Constitution Avenue.

Don't worry though: like any "true democracy", the real "leader" of the nation will never be eligible for popular vote. Ever.

This is the last beleagured, overwhelmed, line of defense of our welfare state. When people with money worldwide realize what's happening, they will be forced by economic reality to stop accepting dollars. When people with money to lend won't prop up the government, and people with things to sell won't accept dollars, the whole thing falls apart, and it's going to happen unbelievably fast.

At any given time, I will usually have at least one set of clients who really need to consider a condo or townhome who nonetheless have their hearts set on a single family residence. I agree to include single family residences in their search knowing full well I am going to get phone calls like this:

"Dan, a property just popped up on our search! It's right where we want to live and it's within our budget and we like the neighborhood and we want to buy it!"

And then I'm going to look at MLS and 999 times out of 1000 there is going to be a note in there that tells me there is no way lenders will touch the property (in 9 out of ten such properties that don't have it, it should have been there). Net result: the vast majority of all buyers can't touch it, and I have to tell Ms. Client exactly what's going on:

"I'm sorry, Ms. Client, but that property has a broken foundation which no traditional lender will loan money on. So if you can come up with about half the purchase price in cash, we have a possibility, but otherwise that property might as well be the most expensive property in the city, because while you could afford it if you could get a traditional loan, the reason it has such a low price on it is that you can't."

Put yourself in the seller's shoes: They want to get as much as possible for the property. There just aren't a whole lot of people who go looking for ways to give money away that they could have gotten. Even if they are a philanthropist, they give the money to charities, not to anonymous buyers they don't know. Therefore, there is a reason for a low asking price relative to everything comparable around them, and the reason for a major price differential is almost always some defect that prevents a normal residential real estate loan from being obtained.

Agents don't put this information in the public area of MLS or any other advertisements they do for one reason and one reason only: doing so would restrict their ability to attract buyer clients who don't understand either this or the fact that calling the listing agent is about the stupidest thing a buyer can do. I don't recall ever having a listing in this category, but I would make it absolutely the first thing I mentioned. There is no point getting my sellers worked up with showings to buyers who cannot buy the property, and my responsibility is to my clients, not to luring prospective buyers in my own front door. That is a major priority of mine, but helping me find clients is not why people sign my listing agreements.

Here is what is going on. The sellers have a property with a defect that makes most lenders unwilling or unable to risk money on a loan against the property. A slab crack is the classic example, but there are many others. Unpermitted additions are another potential deal killer. Properties that don't have a working bathroom or kitchen. Properties without hot and cold running water, or without heat. I can go on and on, but these are the ones agents see time and time again.

Now because traditional real estate loans with traditional real estate lenders are out of the question, the only lenders who can touch the property are the so-called "hard money" or "private money" lenders. Traditional lenders are publicly held companies loaning Other People's Money and they have to conform to what the SEC and Federal Reserve tell them to do. Hard Money loans are individuals and groups that have gotten together specifically for the purpose of loaning money to this market. They can do pretty much what they want, but the lowest rate on a "hard money" loan that I can remember seeing is about 12%, and right now hard money lenders want to see a 35 to 50% down payment minimum.

I keep saying this but it cannot be repeated too often: The Mortgage Loan Market Controls the Real Estate Market. The vast majority of everyone needs a loan in order to buy, and if they can't get a loan on a given property, it might as well be a storage area for what comes out of a sewage filtration plant. Such a property is worth much less than surrounding properties of otherwise equivalent features simply because of this defect. In fact, most such properties are still priced too high - the asking price reduction should be larger than it is - which is yet another piece of evidence on violations of fiduciary duty most agents will commit in order to get a listing agreement.

In point of fact, probably the majority of these properties go to "all cash" buyers who fix the disqualifying problem as well as making it pretty for Mr. and Ms. Upper Middle Class at a substantial markup from what they bought, making enough money to pay their expenses plus a substantial profit as well. That is the target market the agent has to hit. The fact that a given property cannot currently qualify for a traditional loan, but can be repaired so that it does is a business opportunity. Nobody risks pumping that kind of cash into a property without the lure of a potential profit that makes it all worthwhile, and there is nobody else involved in such transactions who is not made better off by the existence of this class of short term investor.

I shouldn't have to say that if you own such a property, fixing the problem yourself if you can will more than pay for itself. But there are many reasons people can't do this, most common of which is "we don't have the cash and can't get it", and without the people in the previous paragraph, what we all get is an abandoned condemned property of no use to anyone. The people who owned it get nothing. The people who would have eventually bought it (and been ecstatically happy to do so) would not even have considered it. The people who fix these properties are not only making money, they are performing a public service. I get angry when people think that the money these property fixers make is somehow morally wrong. It not only is morally right, it is economically beneficial to the community as a whole and everyone else involved in that transaction.

Nonetheless, if you are a buyer without the requisite cash, the purchase is not going to happen for you. The property might as well cost ten quadrillion dollars, because it is every bit as much out of your reach as a property costing that much. People who don't understand this are taking lenders and loans for granted, and as anyone who's been involved in the real estate market will tell you, you should never do that. Yes, they make good money also. But they also take substantial risks, as any real estate market lender of the last few years can attest.

Without lenders, we'd be stuck in the era before loans. Without the standardized lenders and programs and methods of freeing up money for the real estate loan market that we have built up over the past seventy-odd years, real estate prices would be a lot lower and we'd still be stuck with mostly cash sales with the practical result that the vast majority of real estate value would go "poof" just like a cartoon illusion. It's real wealth, but it rests upon a foundation of our current system of loans being available.

When such a loan is not available for a given property however, that property goes outside the system that we have built up to make home ownership available. Until somebody fixes the property to bring it back inside that system, it really is only worth only a fraction of the value of surrounding, otherwise equivalent properties. And if you as a buyer are relying upon that system of loans to enable yourself to to become a homeowner, such a property is as unavailable to you as if it were somewhere in the Andromeda Galaxy. On the other hand, if you are someone with the cash to buy and fix the property in order to bring it within the system there is serious money to be made - but people who fit in that category already know that.

The usual comment I get from buyers when I explain the above is "Oh, that's a shame," or words to that effect. It isn't a shame and it isn't an unrelated factor - it's the entire reason for the low asking price. If the property didn't have that defect, it would never have come up in your search because the asking price would have been priced completely out of your reach.

Caveat Emptor

Original article here

Expertise and attitude, not control of an informational chokepoint, is the way that things are going.

Let's analyze this from both sides of the problem. The current owner looking to sell really needs a marketer. For better or worse, most of their choices have been made; their main dilemma reducing to how to get rid of the result of those choices in the most effective manner. If I were Ambrose Bierce, I'd say their problem was how to convert their mistakes into cash, because they have that property, and they want is the person willing to pay largest amount of cash possible as quickly as possible. It's worth what it's worth; mistakes and omissions can cost them a huge percentage of what the property might have sold for but it's unlikely that even the best marketing program is going to sell the property for more than it's worth.

It's the buyer that has more need of an all-around expert on housing. They have cash or the ability to get it via a loan, and the want the property that best meets their needs for the lowest possible price. Note that nobody has an unlimited budget; despite all the attempts to pretend otherwise in the era of Make Believe Loans. Even if you're wealthier than Midas (Which many of the wealthy are, if you really think about it. Gold just sits there - it doesn't produce more wealth), you have to accept some constraints upon the property you decide to purchase, and knowledge of how those constraints compare to each other and how they work out down the road can keep you from being in the situation I joked about above, of needing to convert your mistakes to cash, later on.

But the current business models are all built around listing agency. Especially, the large nationwide chains and huge brokerages. Ridiculous as it may seem upon sober reflection, people do approach listing agents about buying property, especially the ones they have listed. I've written more than one article covering how Dual Agency is an invitation for disaster, especially for buyers, as have others, but still it happens. It's not like it's risk free for sellers, either. Some agents do get listings primarily for "buyer bait" and lose their best bait when the listing actually sells, and that's fairly benign compared to some other things that really do happen and aren't as uncommon as most people think. The entire current model of agency is built around listing, with only minor exceptions around the edges, and it's mostly oriented on the big name national chains with ongoing advertising campaigns. Those chains control pretty much everybody from the NAR on down, and through the NAR's lobbying arm mold the environment to their advantage. Due to the way the business is structured, It's very hard to succeed in real estate without listings, and it's much harder for independents to get listings than it is for the major chains. This is going to change no matter how many "campaign contributions" NAR makes, at least to a degree and possibly completely.

This whole set-up is a holdover from days when agents and brokerages could control access to market information. I shouldn't need to say this era is over, and the agent (or brokerage) that pretends they are entitled to three (or six) percent commission for access to the market is doomed, but the NAR seems to be leading the charge off the cliff, most recently with the move towards requiring agents to have hardware "dongles" in addition to a user ID and password to access the various local MLS services. They justify it as security, but what they're really trying to do is "protect agents from themselves" by making it difficult to share their MLS access with outsiders - attempting to control information. Where 99% of the information needs no access to MLS in order to obtain, this is ridiculous. Note to NAR: Most real estate information is public record, and can be obtained these days by visiting the appropriate county website. A lot of it can be retrieved automatically, via what we called "batch file" thirty years ago. There are dozens if not hundreds of places to obtain information on properties for sale, and a goodly percentage of them do not have their sources in MLS. Therefore, trying to justify what you make by creating an artificial information chokepoint is not going to succeed - all you're going to do is succeed in encouraging alternate pathways to the information.

There is no reason why any given local MLS can't have competition. The NAR doesn't own the concept - only the name. There's no reason why some smart techies can't set up their own service in competition, national or local, supported by whatever mechanism they can get to pay their bills. Furthermore, agents (Realtor or not) will line up to submit their properties to any competing service - it's fiduciary duty, after all. It's only the non-existent policing efforts of most such sites that have prevented them from taking more market share from official MLS affiliates. When this changes, so that a member of the general public can read a listing advertisement on an MLS competitor and have some confidence that it represents a real listing, these competitors will lose most of their handicap. If I had a dollar for every time a client called me asking why I hadn't shown them this wonderful bargain they found on a non-policed site, I could pay my office rent for a couple of months at least out of it (Buyer's agent recording 2201: "Because it's not a real listing - it's someone chumming for leads, and to avoid wasting your time with salespeople advertising things they haven't got is a small part of why you hired me"). It is only this lack of policing that is holding the competition back now. But sooner or later, those that are trying to be destination sites will figure it out. When they do, you can kiss MLS' dominance goodbye, and with it any illusions as to holding an information chokepoint.

Eventually, people will be able to put their properties on the market by going to a website and entering the information, or calling a toll free number if they're luddites. They'll need to show they are authorized to do so, but that will be the essential nature of the process. Buyers will be able to access the information for some very nominal price, like putting up with advertising or paying some nominal fee. That's where we're heading; the only items in doubt are how long to get there and what the exact pathway will be. Agents are in no way mandatory to this process of putting a property for sale on the internet or finding out which properties are for sale on the internet. The only way to survive and prosper as a profession will be to provide expertise that the average person has little to no opportunity to acquire. In other words, really learn things such that buyers and sellers of real estate can make a profit (or avoid a loss) by paying you, and make a living selling that expertise, not access to the system. Question 1: In the general economy, are there fewer expert consultants today than thirty years ago, or more? Question 2: Do the good ones among them command lower fees (even adjusting for inflation) or higher?

The issue lies in convincing people your advice really is that good. Holding an information chokepoint won't do it, and the chokepoint is going away within the next few years. But knowing what to make of that information is an expertise for which well-informed clients will pay and pay well, knowing that the system will be passing along those costs (along with a hefty markup) to those too stupid to pay. In other words, we've got to demonstrate and emphasize the fact that our compensation is an investment that returns more than it costs.

I'm not going to be saying listing is easy - it isn't. I learn more about the listing game, and how much more there is to learn, with every one I list, and not infrequently, I learn something important about listing from working the buyer's side (and vice versa, as well). As I have said in the past, I figure I'll have it completely down sometime in the next century or so. That said, the future of the listing game is easy enough to predict: How to make this property stand out amongst all the others, and how to attract the attention of the buyer who is suited to the property. Every property is unique; but for the vast majority of all buyers, there is a substantial list of properties that will serve their needs about as well. If you're any kind of a decent listing agent, you're going to be able to answer the questions of why this property is worth more to that buyer than the alternatives that are cheaper, and why the alternatives that are more expensive aren't worth the extra, secure in the knowledge that if they don't agree, they aren't the right buyers for this property and another set will be along shortly who are. If you're a top-of-the-line listing agent, you can do this without ever meeting prospective buyers. The seller's problem reduces to how to attract those suitable buyers, and the value of the listing agent to sellers lies in getting them a better offer sooner (Hint for those consumers reading this: It's not agreeing to list the property for a higher price! That's actually counter-productive on both counts).

That said, everything the listing agent needs to know pales beside what a good buyer's agent needs to take into account. I doubt I or anyone else will ever have the buyer's game completely down. It isn't that I know everything or will ever be some sort of shining exemplar of buyer's agents; I'm simply one of the best that happens to be available. I look at between 20 and 30 properties most weeks, every week of the year - 1000 to 1500 properties per year - and I learn new things pretty much every time I go looking. I learn things about the clients needs and desires by listening, and keep on listening. The future of the buyer's agent side is making sense of the information overload, debunking bogus information which lazy sellers and listing agents insist upon proliferating, and sorting better alternatives from those not so good, including knowing how to spot a Vampire Property. This starts at learning what a given buyer's priorities and needs are, and figuring out what areas they may be happy in and can best afford, and going from there to making comparisons between available alternatives.

In neither of these alternatives is simply having your real estate license and NAR membership certificate up on the wall going to help you extract an agent commission, particularly a larger one as opposed to a smaller. That license may get you in the door at the dance, but it's not going to fill your dance card. For that, you've got to bring something real to the situation, and the one thing clients are after, and always are going to be after, is expertise. Access, they're going to be able to get anywhere, but someone who really understands what's going on in this hugely complex transaction involving debt that most people are going to be paying for the rest of their life, and distills the specifics into something these clients can understand. Furthermore, agents relying upon chain affiliations to bring walk-ins to their door? The days of that happening are numbered, and the number is no more than the number of days until someone puts their ducks in the row to really compete with the MLS.

You're also going to need the right attitude. People are getting better and better at identifying shills. Even if you've got an exclusive contract, which are going to become more scarce, even those aren't forever and the chances of an agent being able to enforce it in spite of whether they helped an actual transaction or not are shrinking faster than Lily Tomlin ever did. Whether agents like it or not, it's becoming easier all the time for consumers to walk out on contracts with losers who conned them into exclusive contracts. If you want people to keep working with you, you need to demonstrate that this client's good is the most important thing in your world, and that's not something anybody can fake for very long. If they understand this and the expertise you're bringing to the table, they'll stick with you by choice unless they're con artists or agents themselves. I had one client not too long ago who admitted they'd been planning to ditch me for a part-time relative and decided not to because I was providing things they knew the relative wouldn't and couldn't. The non-exclusive contract which is all I ask for is plenty to discourage that, while leaving them feeling free to ditch me if I don't get the job done - so I'm motivated to get the job done, and they can know they're getting my best efforts risk free for them, not to mention that it would be entirely pointless for me to try and hold them to an exclusive contract they wanted out of. It's both pointless legally and bad business - so why ask for an exclusive in the first place?

However, the real estate profession has made a horrible botch out of stressing expertise and education thus far, which is one reason why discounters have thrived by offering nothing for less. The reason for this is that it would interfere with the profits of those national chains that control NAR. They can't hire newly licensed agents that used to work fast food fresh out of the local shake and half-bake real estate school, dress them up in a suit, and expect them to bring commissions into the brokerages if it's easy for consumers to sort out who has real expertise and who doesn't. The licensing exams themselves are pathetic, and intentionally so, in order for the brokerages to have a steady supply of inexperienced shake and half-bake licensees. No math more complex than a four function calculator, and you can use a four function calculator on the test in California (which is supposedly one of the harder exams). How can it be acceptable for someone who hasn't even been tested on the ability to set up a mortgage calculation on a calculator or spreadsheet to have a real estate license? It'd be bad enough if that license didn't include the ability to originate loans, but it does. There are a couple of questions on "what is this type of structure called?" but none on usages, advantages, disadvantages or weaknesses! I understand there's only so much that can be covered in 150 questions, but the NASD has 250 questions on their series 7 exam covering a far more limited expanse of material. There is no good reason why the real estate exam should not be a minimum of three full days, and requiring all previously licensed agents to take the new exam as well. No reason except that would constrict the supply of naive freshly licensed shake and bake licensees (For that matter, the most important knowledge for agents can't be tested, because it's both local and changes too quickly with time. It makes no sense to ask me about the neighborhoods and market in at the other end of the state - I not only don't know, I can't take the time to learn without forfeiting the time to create and maintain the requisite market knowledge for the area I do work). Alternatively, the state can do away with licensing altogether in favor of simple registration, and let the market develop informational resources as to the competence of a given agent. Consumers would demand it, and they'd be willing to pay for it whether directly or indirectly. Finally, don't get me started about all the "designations" NAR has cooked up that amount to a way to impress the ignorant and gullible ("Sell the agents the right to put some meaningless initials after their name to impress the marks!")

Above all, however, the future of real estate agency is going to be about accountability. If the industry won't develop real and reasonable performance metrics for individual agents, somebody else will. That's living in the age of transparency for you. Furthermore, you can't stand up and say you're the expert in their corner unless you're willing to defend your performance later in a court of law. Brokerages have a proliferation of forms that add nothing to the process except to make it more difficult for them to be successfully sued and distract clients from what is really important. But you can't tell the client you're an expert worthy of hiring, that's going to get paid however many thousands of dollars from their point of view, if you're going to ask them to sign fifty forms that say you're not responsible for the results of your work. Well, I guess some slick salespeople could and do, but it's hardly the sort of thing to inspire confidence in any rational client. We're neither inspectors nor appraisers, and especially not lawyers, but that doesn't absolve us of trying to solve those issues before members of those professions get involved, and do our best to help the clients understand and interpret when and if those professions do get involved. In my experience, ninety percent of inspector and appraisal issues should be solved by the agent before there's an offer, and about the same percentage of legal problems can be prevented by agent diligence beforehand. Especially the major ones. But if you make clients sign forms that say you're not responsible for this, what are they really getting in the way of an expert they can hold accountable? And if you can't be held accountable, what are you really selling besides your winning personality? They can get a better stand up set for forty bucks down at the local comedy outlet. Why should agents make a hundred times that if they can't be held accountable for performance later? The short answer is that we've got to make this confusing process that kills a dozen mature redwoods for pulp understandable and transparent, we've got to perform by making certain our clients can show a profit on the money spent hiring us (at least in the aggregate), and if we're not to be held accountable, what real assurance does the client have that what we have represented is true? Everything we add to the process that doesn't further one of these client goals is either obstructionism or distraction from what's really important, and a counter-balancing reason not to do business with us.

Caveat Emptor

Original article here

I have said repeatedly that buyer's markets are not the time to be selling a property if you have any choice.

There is one exception: People looking to turn around and buy a more expensive property.

It's still better if their budget will stretch to hanging onto the current property while buying the new one, because when the market turns they'll still be able to sell the first property for more than they can now. Nonetheless, it's still a good idea to move up in a buyer's market - even if you need to sell your current property - provided you can afford to do so.

Let's do some math! I'm going to use a real example. Let's say you bought a condominium ten years ago for $150,000. At peak of the seller's market, it was probably worth about $330,000 or more. Now it might be worth $260,000. Even if you bought with 100% financing, as long as you haven't taken cash out, you only owe roughly $130,000. Less 8% cost of selling, you're netting about $110,000 from the sale. Less roughly $10,000 for closing costs, and you're looking at having a 20% down payment for a $500,000 property, and you're still a conforming loan. In my favorite zip code at this update, that buts a really nice 4 bedroom 2000 square foot detached home with a panoramic view of the city and no Homeowner's Association! Not to mention the commute is pretty darned friendly for most folks and the public schools are top notch. Total monthly outlay, for loan, taxes, and insurance: just over $2500 per month ($2507. at more typical loan rates we're likely to see soon, more like $3000). Income to qualify: Just under $5600 per month, and that's with a thirty year fixed rate loan that I could lock right now without any points to the borrower, so the closing costs for the loan and property would be well under $10,000. About half that, in point of fact.

Now, let's say you wait for the market to recover. Let's say everything is a straight linear computation, even though it won't be - I'll bet you money that the more expensive home goes up further, faster, not to mention relative bargaining positions of a condominium owner versus a detached property owner. Let's say the loan rates stay exactly the same as today, which they won't, because in a period of high demand and increasing prices, there's more competition for money and therefore, higher rates. If you waited for that condo to be worth $330,000 again, that property you can get for $500,000 today becomes a $635,000 property. Straight line proportionality. You net roughly $173,000, again less $10,000 for closing costs on the new property. Now you do have slightly better than 20% down payment, to be sure, but you've still got to borrow $471,000. You can either do so with a Jumbo loan, or via a conforming first with a Home Equity Loan on top of that. Even using the full $10,000 for closing costs, your rate ends up higher. Equivalent cost per month that way: $3760. Income to qualify: a little over $8350. For making the exact same exchange, under conditions that I'll bet money are going to be less favorable than this. At this update, the market for desirable single family residences has definitely come back strongly; the market for condos is still languishing.

If you decide to go the route of the conforming first with an equity loan on top, it's a little more favorable: Assuming a 720 credit score, you can have a rate of 8.25% on a fixed rate 30 due in 15, giving you a total of just over $3650, saving you about $100 per month and cutting your income to qualify to about $8120, as opposed to the $6650 you'll need to document to make this exact exchange right now. Some people can work a little harder or longer hours, charge more for their services, etcetera, but most people make what they make. The one is less than a standard deviation over area median income; the other is almost two and a half. That's an awfully large number of people priced out. Assuming a normal distribution of incomes and given San Diego's median and standard deviations, (via Hyperstat) we're talking about the difference between 20.46 percent of the population and 1.30 percent of the population, a factor or 15 decrease. The difference between more than one family in five and less than one in 75 being able to afford said property, holding assumptions constant.

It is to be admitted that market constraints in the latter case might keep the prices down somewhat, but that's only as a counter-weight to all of the other forces, and it is quite easy for a mathematician or economist to prove that the actual equilibrium point will still be significantly less affordable than the current state of affairs. Don't worry, I'm not going to drag you through that. Nor are we talking properties that the average family can afford with this particular example, but the principle applies to every affordability range, from a bottom of the market condo to the top of the line. Nor does it take any great mathematical skill to tell you that the affordability of a good that everybody is trying to buy right now is less than that of the same good when large numbers of people are trying to sell and very few people want to buy. Think any number of hot tech gadgets or "must have" Christmas toys. Real estate isn't that much different, economically, but people can have perfectly great financial futures without the latest tech gadget. It's unlikely they will have an equally bright future without owning at least the property they live in. Right now, property is affordable because lots of people want to sell and very few want to buy, leading to a huge disparity between the number of people who could afford a given property if they wanted, and the number of people actually willing to buy, and thence to greater affordability. When a larger number of people are ready and willing to buy, the affordability will decrease. It's all a matter of simple supply and demand.

Caveat Emptor

Original article here

(This was originally written February 16, 2006, but more people are interested in it now)

One of the occasional questions I get from people has to do with why the housing bubble got so big (or if you're one of those still in denial about it, how prices jumped so far so fast).

This has to do with several factors. Legislation made real estate investments more attractive. Interest rates got low, and nontraditional loans proliferated. People took their money out of the stock market, and wanted to invest it somewhere. The feeling that the housing market could never go anywhere but up. And I will address all of these issues in the coming paragraphs, but the largest factor is and was psychological. People were simultaneously scared that if they didn't buy now, they would be locked out of the American dream, and avaricious in anticipation of buying and flipping properties for multiple tens of thousands of dollars profit.

The first enabling factor happened in 1996. President Clinton sponsored legislation giving huge tax exemptions to the sale of personal residences. There were and are good arguments for doing so, nonetheless it had the effect of making real estate a more attractive investment. When a married couple can make up to $500,000 tax free over their basis every two years, that's a major incentive to start moving into a new house every two years in order to fix it up, or at least hope for a gain in fast growing areas. By itself, this was a minor factor initially, but by making real estate such an attractive investment (literally the best there is, considered in a vacuum), it started the bubble off. Since it hasn't been repealed yet and may never be, the value increase from this aren't really a bubble component, but the value increase for what was a one time systemic shift whetted appetites, even while the dot com bubble (itself a fear and greed phenomenon) was going on.

The second enabling factor was that interest rates got low. This meant prices had the leeway to rise, as most people buy homes (and other property) based mostly upon the payment. When 30 year fixed rate loans go to 5 percent, the same payments buys a lot more house than it does at 7.5 percent. If you could have afforded a loan for $100,000 at 7.5 percent, you can afford a $130,000 loan at 5 percent. Instead of a $300,000 loan, you can afford $390,000 for the same payment. $500,000 becomes $650,000. Even though rates went up after early 2004, this helped start the phenomenon.

The third enabling factor was that people had gotten burned in the stock market as the dot com boom deflated, and the real estate market was doing well. With both sides of "fear and greed" working the equation, this amounted to quite a bit of incentive to chase returns in the real estate market. "I just took a bath in tech stocks, but look at how the real estate market is going!" This is known as chasing last year's returns, but large numbers of people do it. Consequently, quite a bit of personal wealth was dumped into the real estate market. This had negative consequences on the stock market, exacerbating that decline, and for the real estate market, dumping a couple trillion dollars into the demand side of the equation didn't exactly hurt real estate prices. Supply and demand are always working. The important trick is to separate fear and greed, which are real but have mostly short term effects, from real long term changes to the market.

The thing that really drove the whole thing from behind the scenes was that the federal government "encouraged" lenders to expand their creditworthiness criteria. Thirty agencies of the federal government got together and used the Community Reinvestment Act (as renewed in 1995) as a bludgeon to force lenders to lend to minorities at the same rates as non-minorities. Since certain minority groups are statistically less scrupulous about doing things that maintain creditworthiness and financial stability, that meant relaxing standards. The loan market controls the real estate market. When practically anyone could get a no income documentation loan they couldn't afford for 100% of value, macroeconomic constraints upon price vanished.

Members of my professions, meanwhile, did absolutely nothing to slow the madness. Indeed, they added as much fuel to the fire as they could. As I have said elsewhere, buying a home really is a fantastic investment, all things being equal. It literally clobbers renting and investing over the long term, with those last four words being the critical part. There are limits, and many agents and loan officers went over them and three states beyond. Anybody who takes any real estate agent's unsupported word for investments and sustainability probably needs a guardian. Reality check: Here's a person who makes thousands of dollars if they tell you you can do something, and nothing if they tell you you can't, and has very little responsibility in the law for telling you lies. They're not financial advisers, after all. What do you think the average person will tell you in this position? (And before anybody sends me email or comments about the "superior ethics of Realtors®" they were just as bad statistically and worse morally, because they were holding themselves out as ethically superior, thus using the propaganda to allay legitimate concerns. I'll believe Realtors® offer some ethical advantage when I start seeing the Boards of Realtors® imposing some real disciplinary measures upon significant numbers of scumbags that the state regulators don't. Aside from advertising to build brand awareness, I haven't seen anything that the Boards of Realtors® contribute to real estate practice, and they actively work against consumer interests in significant ways.)

So there we are, with these factors doing everything they can to drive values up. This goes on for a little while, and now psychology starts becoming a real factor. "They're not making any more land!" making a scarcity argument. "Real Estate always goes up over the long term!", making a safety argument, and ignoring any number of past bubbles and downturns. Heck, I remember four previous ones in southern California! "You can always sell for a profit!", ignoring transaction costs, which are significant, and flat out misrepresenting liquidity. Real Estate can beat anything else, investment-wise, but it is certainly the least liquid class of investment that comes to my mind, as well as being sensitive to many factors beyond your control.

Couple this with a couple of years worth of twenty percent returns, and the feeding frenzy really kicks in. There starts being a real fear factor - people get afraid that if they do not buy now, they are never going to be able to afford a home. When prices rise by 50 percent in two years and wages rise by six, who can really blame them? Most people do not have the economic background to sit back and consider who buys houses, and what controls housing prices. So the mentality of "buy now or rent forever!" took hold, further exacerbating the rise. People were willing to do literally anything they could to qualify for a home, lest they be unable to qualify forever. And with the thinking detailed in previous paragraphs, they were told that "Even if you have to sell in a year, you'll still come away with a huge profit!" Yes, that's greed again, rearing its ugly head.

Up until this point, things were within reason. But into this situation stepped the lending community, particularly the sub-prime lending community, driven by the federal government breathing down their necks. More and more lenders started being willing to loan 100 percent of the value of the home. "Hey, why risk your own money when the bank will lend theirs?" This drove market leverage to never before seen heights. Furthermore, in an effort to sustain volume, lenders started a trend of competing ever harder for the most marginal case. Stated Income, Interest Only, and short term hybrid ARMs proliferated (The most common sub-prime loan is only fixed for two years). Finally, lenders started pushing the Negative Amortization loans, for those borrowers who couldn't really make even the payments required on the short term interest only alternatives.

Lest anyone think otherwise, the community of real estate agents was fully on board with this. Always higher, and fast increasing, prices meant they made more money in commissions from selling the same number of homes, and the apparent virtues of real estate as an investment of the moment kept seducing those who did not know any better. Those few voices of sanity were drowned out, and many left the business. There just aren't that many people who really qualify to buy homes at the peak prices we had based upon the traditional metrics, even relaxed as they have become, and if you won't put them into something they can't afford, somebody else will. Furthermore, during this period, more and more real estate agents were starting to do their own loans, further isolating any voices of sanity in the loan community. Speak the truth that a client probably cannot afford a loan once, and the real estate agent will never bring you another client again, and will try everything they can to pry any clients that they can away from you. After all, you cost them a commission once. Interest only, and negative amortization loans further proliferate, as agents try to persuade prospective clients that they "really can afford those payments." Forty year loans start making a comeback, where they were all but extinct, and fifty year loans are introduced. Sub-prime underwriting standards are loosened until they ignore what happens when these hybrids adjust (or Option ARMs recast) and concern themselves only with the minimum starting payment. A larger and larger portion of purchasers is forced into the sub-prime market if they want to qualify. And still property values rose.

Or, more correctly, prices rose. The actual property value certainly wasn't growing that fast, only the common perception of value, aka price. People were getting away with these terrible loans, complete with prepayment penalties, because even though they weren't able to make their payments in many cases, prices were still increasing fast enough such that even if they sold relatively cheap, in order to unload the property in a hurry, and paid a prepayment penalty, they were still coming away with money, further aiding the illusion that there was no way not to make money. When workers are making more money buying a house and holding it for two years then selling than they are at their jobs, that's an incentive to keep doing it. That's an incentive for more and more people to get in on the act. And the feeding frenzy builds. Fear and Greed. When someone holds a house for two years and sells for a huge profit despite the fact that they did nothing to enhance the home's value, that has the appearance of easy money. When people start buying with the intention of short term flipping without doing any work (We call this "Hoping for a bigger fool"), and when they'd call to see if I knew of any such properties and hang up when I'd start telling them about properties that really were good investments but needed work, I knew the end was coming very soon.

The first group to holler "enough!" was not the lower income folks who were getting priced out of stuff even at the lowest end of the market. It might be what you'd expect, but it wasn't the case. My theory is that those people simply don't know any better, and didn't think they could afford to wait. It was the better paid, more economically savvy buyer at the higher end who first called "Bull****!" At least here locally, higher end McMansions and such were the first to start sitting on the market. These prospective buyers made plenty of money, and knew they weren't on the verge of being priced out completely. If they were right, they'd buy a better property when things fell apart. If they were wrong, such is life, and they could still afford something. Meantime, they were going to rent.

Lessons here: Always separate psychological factors from real market shifts. The general rule is that once they find something that appears to be working right now, the crowd always overreacts. Many times you will make more money in the long term by bucking the obvious trend, particularly if that trend is Fear and Greed driven.

When I first wrote this piece in early 2006, the advice I gave was these two paragraphs:

If you are in an untenable position with your loan right now, whether because it's negative Amortization or interest only or just about to start adjusting: Either sell now for what you can get, refinance into something fixed for at least five years right now, or be resign yourself to disaster. With the yield curve inverted right now, there is practically no spread between the five year ARM and the thirty year fixed rate loan. Even someone who is as huge a fan of the 5/1 ARM as I am has to admit that, at the moment, the thirty year fixed rate loan is looking very attractive by comparison. When you get a much better guarantee of the rate not changing, for the same price, and the the loans are otherwise identical, what's not to like? As I've said before, you can survive and prosper when you're upside down on your home, as long as you have the right loan for it.

If you can make the real payments on such a loan, I would do it now while appraisers still have the ability to appraise your property for near peak values. If you lose the ability to appraise for near peak values, then you may well be a member of that rather large group in many parts of the country where the market will no longer bear a price greater than the loans on your property. When you owe more on the property than the market appraisal, then for all practical purposes you are stuck in your current loan. If it adjusts, amortizes, or recasts, you're suddenly going to be making much larger payments. If you qualified under one of the less sustainable programs I noted earlier, when this happens you are going to be in a world of hurt, and probably unable to refinance. Most common result: Losing the home, credit ruined for years, and a 1099 from the lender that says "we lost money on you!", for which the IRS will demand taxes. If your loan is going to start asking for higher payments soon, and you can not refinance, or cannot afford to refinance, it's time to sell, right now.

Very few people took this advice then. Lots of people wish they had now. Now, my advice is significantly different, because the local market (at least) is recovering, has recovered some and would have recovered more if not for some legally required extortion and insane economic policy. I'm still not recommending Unsustainable Loans, but the time to be timid about purchases has passed. Fear and Greed are having entirely the opposite effect upon the market now.

Caveat Emptor (and Vendor)

Original here

When and Why does a Mortgage Company Sell your Current Loan to another Mortgage Company?

Lenders sell their loans because the lender can make an immediate premium of anywhere from 1.5 percent to four percent by selling your loan to Wall Street. Yes, this is less than the six to eight percent per year interest that most primary homeowner loans get, let alone second loans, commercial loans, etcetera. Nonetheless, they can turn the money several times per year, earning far in excess of what they could earn from the interest on your loan itself, and that's why they do it.

Selling your loan doesn't just get them four percent once. It lets that lender turn around and do another loan and make more money without getting more money in deposits. Many lenders can turn the money three to six times per year or more, getting them a twelve to eighteen percent bonus in addition to anything they make those few months that they hold the loan.

There are several philosophies on when to sell the loan. The one that seems to have the most adherents currently is the pure packaging house philosophy, where they sell it off immediately upon closing, or within a few days. Given this, they can turn the money a dozen times per year if they work at it, selling the loan for a smaller premium, but getting twelve markups per year, amounting to somewhere between twenty-four and thirty percent on the money.

The second philosophy is one that is practiced by a smaller, but still significant number of lenders, who fall more into the traditional lender's model of doing things, and that is to wait until one payment has been received. Since this eliminates a noteworthy fraction of the fraud that's out there, they get a better markup for their loans. The downside is because they have to hold it an average of two months before the first payment is received, that means they can only turn the money six times per year at most, as opposed to the twelve for the previous model of lender. So they get six markups of three percent or so, maybe close to 20 percent over a year. To this, they add maybe three percent, to cover the interest they actually received from borrowers directly. Net: maybe 22 percent. Furthermore, this leaves them stuck with those loans where the first payment is late, because nobody wants to buy those. Better from their mortgage bond buyer's point of view, not so hot for their bottom line because there is a high percentage chance of those loans becoming what is known as "non-performing." In other words, default. The bond buyers got stuck with the results of default in the first scenario, which the lender views as a much better thing than dealing with it themselves. In other words, this scenario forces the lender to actually live with the results of their riskier underwriting scenarios. They actually can sell those loans, but anybody who's paying to assume that kind of risk is going to demand a commensurately lower price for it, which is reflected in a lower bottom line. So the lenders who hold a loan until after the first payment usually have tougher underwriting than those with pure packaging house mentality.

Finally, there are still a few lenders who wait until they have three payments, giving them the best prices of all when they sell. Unfortunately, it takes about four months for them to be able to do this, so they get four percent for the loan, but can only turn the money three times per year. This actually gives them a chance to fix bill paying problems that might have afflicted the second group, but on the other hand, more people have a late payment somewhere in the first three. Nobody wants to pay a good price for loans that are not current, and a little less if it has been delinquent but is no longer, as that's a flag for possible future problems. These lenders get maybe 12 percent per year in funding markup, plus four percent or so for interest actually received from borrowers, netting maybe sixteen to seventeen percent. Needless to say, this model has largely fallen out of favor by most lenders because it doesn't put as much money into the firm's bottom line, but they still get over twice what the lender who actually holds the loan makes per year.

Selling loans has been part of what has driven rates down from their rates of years previous, as lenders face increased competition from other lenders who "want in" on that twenty-four to thirty percent per year from turning the loans, and are pressured to deliver lower rates by the fact that most of their money actually comes from selling the loan, as opposed to servicing loans they do make. Many lenders actually retain servicing rights when they sell the loan, as this gives them continuing income. Indeed, may people out there whose loans have been sold multiple times are blissfully unaware of the fact, as they are still sending the check to the original servicing company.

Another thing that this has driven is the increased use of pre-payment penalties, as the entities buying the loans, which are mostly large Wall Street entities, are very attracted by the consequences of buying loans with prepayment penalties, and thus, pay more for them. If you know that you're going to get that 7% for at least three years, or get a one time stroke of three percent if you don't, you are willing to pay more for those bonds than if the people involved could just hand you your money at any time. Many times the sub-prime market will offer the same people a better rate with a prepayment penalty than the A paper market will without a pre-payment penalty. It's all well and good to save half a percent on a half million dollar mortgage, which is $2500 per year, but if you don't last the three years you are out $15,000, twice the maximum you possibly could save! Pre-payment penalties are mostly to make the aggregated mortgages more attractive to Wall Street.

Caveat Emptor

Original here

There is no such thing as a free lunch, but lots of people will pretend there is.

It seems to me that many people consider compensation earned by real estate agents as paying some kind of toll. They think of it as admission to the world of MLS, to showings and writing offers. Kind of like a tollbooth on a road somewhere. If there's another place just down the road that offers the same access cheaper, it makes sense to pay your access fee there.

If you think of what an agent or loan officer makes as a toll, just a cost of getting into the arena, it makes sense to go cheap. If you think of it as a payment for knowledge, expertise, service, someone who not only helps you CYA and prevents major mistakes, but makes a positive difference to the result, a different dynamic emerges.

There are existing offices modeled after every level of service from basically nothing on up. It costs them nothing to say "Full service for a discount price," but that doesn't make it true. Like a certain ex-president who "did not have sex with that woman!" you have to consider what definition they're using in making that claim. If sitting in their office with MLS access and a fax machine is "full service" for them, by their lights they are providing "full service for a discount price." Remember how in my loan article Questions You Should Ask Prospective Loan Providers, I listed a whole bunch of questions the intent of which was to nail down how much of the truth they were telling you, you want to ask prospective agents what services their fees cover. Among other things, this exposes the "full service for a discount price" claim to be yet another Great Lie on the level of "I gave at the office," "The check is in the mail," or "Yes, I'll respect you in the morning."

The bottom-most level is essentially a fax machine and MLS access. I've met some where the fax machine was purely a service that converted email to and from from fax. I've even met some where I suspect they didn't have MLS access and were working off one of the free public real estate sites. They never leave the office; all they are about is access. This level might be good for you if you know as much as a good agent, like say, you were a good agent but lost your renewal application in the mail. Otherwise, you're setting yourself up for an experience like my first purchase.

Above that is the level of service that actually help you with paperwork. They still never leave the office, but at least they've got access to WinForms and some kind of checklist for paperwork. They're still not helping you with your investigations or marketing, but at least you might get some kind of more or less complete list of the disclosures you're required to make as a seller, while as a buyer you're going to be quite firmly told to get an inspection. Not that they're going to be there for the inspection, or help you interpret it, or help you figure out if maybe you need something more. They may or may not be aware of a large percentage of traps for the unwary that lie in these documents and the inspection, but at least they help you with the most basic level of CYA.

Assistance in negotiation may or may not become an option at this level. Since the ones at this level never go out and look at property, they can't have any real clue as to its virtues and faults, especially as compared to whatever else has sold in the area in the last few months, but at least they have may have enough of a clue as to general market conditions to keep you from making or accepting the wrong kind of offer. This is the level of the CMA, or comparative market analysis, which takes somewhere between 5 and 20 minutes and about the intelligence of Mongo from Blazing Saddles. At least you shouldn't make an offer or accept an offer that is completely and totally off base for your type of property in your area. The higher up the ladder of service you go and the more involved with the specifics of your market and your property the agent is, the more valuable this service becomes. Top agents that know enough about the property and the "comparables" can potentially negotiate the other side ten to fifteen percent (or more, in a market that favors you) from the numbers that someone using a lesser agent might be stuck with. I know because I've seen it happen - I've made it happen or not happen, and in one case, seen the next buyer pay more than fifty thousand dollars more than the contracted price I negotiated for one buyer who suffered an attack of insanity at closing.

At the next level above paperwork, you've got the agent who may go out and visit the property. For a listing, they're going to measure your property, take some notes for the listing, and maybe give some advice as to how to stage it or put you in touch with a stager who pays them a referral fee. For a buyer, they're more or less willing to open the front door on properties you've told them you want to view. Both sorts will make the effort to sell the property, the listing party more than the door opener. The listing agent's client is only happy when the property sells while most buyers bristle at more than a certain level of sales talk. In both cases, however, they're trying to get that buyer to sign up with them, preferably (from their point of view) with an Exclusive Buyer's Agency Agreement, so the pressure won't be real high in either case. This is also the level at which open houses become something that agents really want to do, in order to snare buyers' business. It is to be noted that there are a lot of agents who think they really are providing as much service as any other agent with this level of service. They aren't. They're still clueless or nearly clueless as to how it compares with everything else on the market in the area, or that was on the market, because they haven't gone and visited any on their own.

Somewhere along about this level of service and above, the agents may actually be willing to get out of the office to meet the inspectors and appraiser. After all, they've now got a negotiated agreement and it's in their interest to further the transaction so that they can get paid. They may also help you interpret what all of these reports say. Not necessarily; but at least it starts being a possibility, rather than pushing all of this off onto the clients or the other agent. This is where a lot of lawsuits start, so many brokerages actually prohibit their agents from being present at inspections - at most they can open the door and leave. I'm not a lawyer, but if I'm presenting myself as being an expert at real estate, not being present for the inspection seems to be evidence of gross negligence, just on the face of it. On the other hand, if the clients are representing themselves as being competent in this area in order to receive discounted service, that's fine with me. I actually make more per hour of my time with less legal liability.

Above this level of service, the services provided by good listing agents and good buyer's agents diverge dramatically. So much so that they cannot even be meaningfully discussed at the same time. Since a listing agent is essentially a marketer while a buyer's agent is charged with analysis and comparison among alternatives, this shouldn't surprise anyone. They are different functions at the heart, and many agents who are very good at one are considerably less proficient at the other. Fact. I can point to great listing agents who are putrid on the buyer's side, and vice versa. Often, it's as simple as attitude. Some listing agents can't stop thinking like listing agents, while some buyer's agents can't stop thinking like buyer's agents, and they are completely different thought processes. It took me a while to learn this, and I can point to a lot of agents whom the evidence indicates have not yet done so.

For the listing agent, the question largely resolves to pricing, plus what degree of staging and precisely how much marketing they are going to do. Note that even the most exhaustive marketing campaign is not likely to get more than the property is worth, but it can mean you get top dollar instead of significantly less, particularly if you price it correctly and have the property ready for the market when it hits the market. Pricing too high to begin with "to see if you can get it," is the mark of an inferior agent "buying" the listing, as you won't be likely to get the higher price and it will almost certainly reduce the final sales price by more than any lucky windfall might be. Particularly in the buyer's market most of the country has right now. These are all obvious things of value - when that agent spends time and money marketing your property, they're spending their own resources, not yours. How to word an advertisement, when to run it, where to run it - all of these are expertise. Go check out how much marketers with far lower sales who don't use their own resources and who draw a salary get paid make in the corporate world before you make a snap judgment as to whether it is or is not worth the money. Here's one example, and keep in mind that this is only a part of what a good listing agent does.

On the buyer's agent side, the question is more singular: How much property scouting are they going to do? Are they going to wait until the client asks to check out a property or are they going to go check out every possibility in the market? Are they going to go out on their own to eliminate definite turkeys before telling you about the cream? Still more important is are they going to tell you about good and bad, reasons why it's good and why it may be deficient, on every property, but that's something you can only observe in action. This is the paramount and unanswerable reason why you shouldn't sign any exclusive buyer's representation agreements unless you are so certain of this agent that your spouse can tear your arm off and beat you to death with it if you're wrong. They need to cover what the property has and what it doesn't, and what it's going to take to bring it up to an acceptable level where it is deficient. Structural flaws, basic amenities, floor plan, lot layout, etcetera, not to mention location location location. Not just now, but for any future sale that you might later decide to make. This whole thing is so time intensive it can't profitably be done on any basis other than the complete combo package of buyer's agent services, and it requires a level of expertise and market knowledge that cannot be acquired on the fly, and aren't cost effective to learn for one transaction. You'd make maybe thirty cents per hour. I might believe fifty or even seventy-five cents per hour in a high cost area like mine. However, if you have an agent with this knowledge and the right attitude, there's nothing else that will make nearly so much difference, both in terms of price and in terms of final satisfaction with your purchase.

If you don't want "the full package", that's fine with me and every other agent I know of who's capable of the full package. As I said, we make more per hour with the lesser packages even if we get paid less. But we can also work with a lot more buyers wanting less intensive service, or a lot more sellers, and make more money overall. Furthermore, it's a lot easier for someone who makes a regular habit of doing "the full package" to perform lesser services than it is for someone who doesn't to perform greater. That market knowledge we get from the other clients we have? It doesn't magically disappear because this client isn't paying me to run around scouting properties. Usually I'm working with multiple clients in my area and while one wants the whole nine yards, another doesn't. Just because I'm not scouting for you doesn't mean I'm forgetting about all the stuff I scouted for someone else. But someone who doesn't make a habit of it is working from the same zero base I'd be working from outside San Diego County.

Somebody once asked me about Hourly pay instead of commission for agents. Just as you'd expect, agents can charge less if the client is going to pay an hourly rate for their time regardless of whether there is a transaction. That's called transaction risk, and is a real risk of this business - the chance that, if you're paid on commission, you can spend dozens to hundreds of hours with someone, as well as lots of money, and not make a thing. If the client chooses to bear the transaction risk, that's fine with me, and they'll at least have the opportunity to pay me less for a successful transaction - although they'll still pay the cash if there's not. As I just wrote, that's the risk they are choosing or not choosing to take. The cash alternative is potentially a lot less expensive, but I haven't met a whole lot of people who like the idea of writing me a check for actual dollars they earned and saved without any certainty of a happy outcome for them. When you get right down to it, most clients do not want to assume transaction risk. But neither agents nor clients can have it both ways.

Some agents have huge lists of what they do, specifying point by point all the services they provide, splitting the services up into the largest number describable to make it seem like more. Others lump them together by more general categories, and may do anything that belongs within the due diligence and responsibilities they agreed to, where the "splitter" figures since it wasn't covered, they aren't doing it. Nonetheless, either way is basically valid. A written representation that they perform specifically named services obligates them to do so, but there is rarely a significant difference between someone who does that and someone who lumps them into more generic categories. I suppose it's all a matter of whether you want someone with a detailed checklist and someone who goes around looking for something they might have missed even though it may not to be on a checklist - but it applies to your transaction.

There are also agents who want a full package price for discount service. Mostly they are working under a well-known chain nameplate and have an extensive advertising campaign telling the suckers how great they are. This procedure, especially when compared with what other agents are offering, will also help you find out about the money you'd waste with them before you sign their agreement.

You may have noticed that I haven't attached any specific numbers to any of this. That's because it's both variable by market and negotiable within a market. The more services you want, the more money the agent will want to make. Ditto with resources, both time and money, you ask them to invest. If you're determined to get the best bargain you can, you need to shop agents and compare their competence and their attitude as well as their price. If you want to negotiate pay with a professional negotiator, well I've got admiration for your chutzpah. Plus I have to admit that it's a fair test of those abilities. Even if those negotiations turn out bad for you, imagine where OJ Simpson would be today if he had a cheap lawyer. Or Britney Spears. Or Bill Gates, the massiveness of whose fortune lies in one legal victory over IBM, as well as his lawyers outlasting the government anti-trust lawyers at a later date.

My service bundle is 100% negotiable, and not being a slave to NAR or the brokerage oligarchy that controls it, I'll fight any effort to change this. My understanding is that any such attempt to force us to conform is doomed under California law (at least), but I am not a lawyer and I'll defer to other expertise there if it wants to chime in.

But I do think it reasonable that agents and brokerages be forced to specify what services they do and do not offer, and what they are and are not responsible for in a given transaction, at least by category. Good full service agents do this now. The next dedicated discounter I see who does this will be the first. The very services which are most time consuming and lead to the largest liability are the very ones that dedicated discounters will not fulfill and will do their darnedest to pretend don't exist. But they're also the ones that make the most difference for most clients, and would rank as most important for those clients if they were asked to rank them.

Caveat Emptor

Original article here

We live in (A California city). In a 2 bedroom 1 bath home on approximately a 20,000 Sq. ft. lot. It is easily worth 500K to 600K with a current mortgage of $116,000. The mortgage/Title is in the name of my father and his wife 90% and myself and my wife with a 10% interest.

My father who is 75 and retired wants to take out about $80,000 cash which would create a new loan of approximately $200,000. He currently has a very small income from investments and lives in a paid off home in (out of state).

He would like to gift this (California) home to us and we would like that also.

Based on your expertise what is the best way to transfer the property to my wife and I and at the same time obtain a cash out stated income loan. How will a lender expect this to be handled? Do we all qualify together and the lender then allows my father to transfer/gift title at the close of escrow?

I realize that whatever lender wants to make the loan they will want to have my wife and I qualified to be on title. Since we have a 10% interest I would assume that we could all be asked to show assets and income. This might be complicated. I am a realtor but I haven't made much money in the last two years because I've worked on a business startup currently breaking even with no income.

My wife has a terrific long term (16 yr) job with a law firm. Gross income $85,000. All of our expenses are very low and the last time I looked our credit was a 785 FICO score. When I do the front end ratio 28 with only my wife's income it appears to be no problem at all. When I do the backend it's a little more snug but definitely doable. I've racked up some credit card debt funding the startup business. I can pay it off but I would like to retain working capital handy for my business.

I believe a stated income loan would be the best way to go.

Here are the assets and documentation I would be willing to show, and the lenders exposure to the property.

1. We would have approx. a 36% LTV at the end of the transaction. 300k+ equity
2. Assets in a 401K of $200,000 +
3. Approx. $30,000 in savings accounts
4. Approx. $40,000 in negotiable stocks
5. I will of course provide credit reports.
6. Employment documentation for my wife only.

I believe my father and his wife have approximately $200,000 in mutual funds plus social security and she has a part time job doing a water district's billing.

This one is fairly complex on the surface. Issues that I see right off:

-family transfer
-documenting current interest
-structure of transaction
-Will your father be selling you some of his interest as part of this transaction?
-likely the cash out quitclaim issue
-Who is going to be primarily or completely responsible for new loan
-verification of rent/mortgage

You say that you are already on title of record, and that the desired end state is to have you and your wife owning the property outright.

The best way to structure this is probably as an actual sale transaction. Your father selling you and your wife a larger interest. Because this is a family transfer, you still would likely qualify to continue having it taxed based upon original acquisition price, but that needs to be checked, either through the county or your title insurance company for the transaction. You also need to scrutinize the current owner's policy of title insurance to see if it will continue coverage. There have been changes in the industry since the property was bought. If it doesn't, you're going to want to buy a new policy.

There is a standard policy with every lender I've ever done business with. If someone is brought onto title via quitclaim, you can't get cash out for six months after that date. This prevents several sorts of fraud. I am going to presume that you've been on title longer than six months.

There are three ways that suggest themselves to structure this transaction. Each have their potential advantages and disadvantages. First though, we need to take a look at another issue.

In all real estate transactions, and for all loans, the method of evaluating the property is the so-called LCM, or "Lesser of Cost or Market," method. Market is what similar properties around yours have sold for within the past twelve months, and that is what it is, and is computed by the appraiser.

Cost is the purchase price. In refinances, there is usually no purchase to consider, because the value has changed since purchase. In purchases, there usually is.

Whichever of these two numbers is less determines the value of the property, as far as the lender is concerned. It doesn't matter if similar properties are selling for four million dollars - if you buy yours for one hundred thousand dollars, the lender will loan as if the value was $100,000. It can't be any higher than that, because the seller willingly sold to you for that amount. If the property was worth more, they would have required you to pay more.

For family transfers (and indeed, any related party) this presumption goes out the window. Parents do all kinds of stuff for their kids that they wouldn't do for anyone else, and vice versa. Lenders still won't loan money based upon a number above nominal purchase cost, however.

Furthermore, there have been a sufficient number of scams over the years that they will take additional measures to protect themselves. The presumption of willing buyer and willing seller is violated on both ends of these transactions, and many times it has been A selling the property to B for an overinflated price for the purpose of getting a loan and departing at midnight, leaving the lender holding the bag. Remember, I told you in my very first article here, is that because the dollar values are so large on real estate transactions, every single one is heavily scrutinized for fraud. There's a reason for that. These additional measures differ from lender to lender, and some lenders will not undertake related party transactions at all. When I'm getting loan quotes from lenders, if it's a related party transaction, then words to that effect are the first words out of my mouth. It saves a lot of time and effort.

Now, I mentioned there being three ways I can see that make sense to approach the transaction?

The first is a full price sale with upfront gift of equity. You buy the property for $600,000. They sell it to you for $600,000, but give you $340,000 in equity in addition to the $60,000 you already own. You get a loan for $200,000 (actually a bit more to pay for costs), the old loan gets paid off, your father gets his $80,000. This has the advantage of being a true picture of what's going on. The problems are that to the lender, this screams fraud. They're not likely to be too worried that its for below market value, but $340,000 is a lot of money. They are going to want to see evidence that there's not some loan going on under the table between you and your father, because that would affect whether or not you qualified for their loan. Furthermore, estate tax isn't dead yet and is looking more likely by the day to make a comeback, and this would have significant estate tax implications.

The second is full sale price with subsequent gifts of equity. Sell it for full price, from you and your wife as ten percent and your father and his wife as ninety, to you and your wife as twenty-five percent and your father and his wife as seventy-five. They can then give you a gift of forty thousand of equity each year. You can even combine this with the initial sale, making your interest thirty percent, which might make the loan easier. In this case, you are all four probably going to be on the new loan to get the best rates, as $200,000 is about thirty-three percent of $600,000 - a larger amount than the equity you and your wife currently have under this scenario. There is a further major difficulty with this lies in the possibility that the complete equity may not be gifted in your father's lifetime.

The third way is to sell the full property at a reduced sale price. Approximately $300,000 would probably be sufficient. Everything here is like the full price sale, but they're only giving you about $40,000 in equity upfront - which is within the IRS single year limits. The bank has less difficulty believing that (although they're still going to want a letter stating that it is a gift!). The downside is that it's still a family transfer, and the fact that if you wanted to refinance within a year there would be appreciation issues on whether or not the bank would believe you.

All three ways have their bumps and walls which you very well might run into. Each lender has their own anti-fraud measures, and sometimes, what might otherwise have been the best way to structure the transaction will fall afoul of them.

As to the loan itself, I have good news and bad news. I'm going to start with the bad. Verification of Rent/Mortgage is going to rear its ugly head no matter what you do. The bank is going to want to see some kind of evidence that you and your wife have been making rent or mortgage payments every month, and from all that I can see in the email, there's no evidence to support this. The only person who appears to be in a position to verify that is your dad - unless you've been writing the checks for the mortgage and can prove it. The lenders may or may not accept your father's word for it, and they are going to want evidence. If you're actually on the current mortgage, this would be extremely helpful.

The good news is that with an income of $85,000 per year which your wife alone makes and you should be able to document, you have a monthly income of about $7083. This means that the back end you'd qualify for on A paper, thirty year fixed rate basis, is about $3180 (about $2690 if we're talking about an A paper ARM). Picking a random A paper lender, I get about 6.25 percent rate thirty years fixed full documentation (rates are much lower at this update) , which translates to a monthly principal and interest payment of a little less than $1232. With the yield curve right now, the five year ARM isn't much lower, meaning there's probably insufficient reason to do that instead.

Take $1232. Add $600 per month, which is about the worst case scenario for property taxes that I see (as I said earlier, you can probably preserve the current tax basis). Add another $150 per month for homeowner's insurance, which is a high estimate for most urban locales. This is still less than $2000 per month, leaving you almost $1200 of other allowable payments before you would not qualify full documentation. When this was first written, they could have done stated income if they'd wanted, but that'd have been giving the bank money they didn't need to.

Because of the multiple concerns, of which the most important are family transfer and verification of mortgage/rent, there are many reasons why the best way to approach this might change, but when you separate it all out, it certainly looks doable.

Caveat Emptor (and Vendor)

Original here

For a period of several months when the market started imploding, I got mass messages from basically every lender I do business with, saying it's time to "get back to basics". My favorite A paper lender became the last to do so. This is a company that to the best of my knowledge, never offered a negative amortization loan, never had a stated income loan for 100% of value, and was steadfast about avoiding all the problem loans that the rest of the industry dived headfirst into. As a result, not only could they offer beautifully clean underwriting and rates that varied from pretty darned good to absolutely unbeatable, but still rock solid today, The differences to their bottom line since market peak are all attributable to declining values that are a background to the industry rather than loose loan practices on their part.

My response to each and every one of these messages, however, has been, "What do you mean, back to basics?"

The dynamics of how to create a happy customer never changed. Oh, you can make them happy right now by getting them into the beautiful McMansion they have no prayer of really affording. But debt to income ratio isn't just for the lender's protection. If you use one of the many tricks available to circumvent it, you can video-record them jumping up and down with excitement and crying for joy on move-in day, but they'll also remember you all through the long process of losing the property, and by the time it comes to move-out because of short sale or foreclosure day, they'll know that you failed to do your real job. What do you think the prospects of referrals and repeat business are? Well, maybe referrals to attorneys and repeat business from the FBI fraud unit, but those aren't things most of us want.

Many people, sometimes surprisingly sophisticated people who should have known better, were ignoring critical factors about finance and economics because after six to ten years of the housing markets going crazy, it must have seemed as if the laws of economics had been somehow repealed. Nope. Not ever going to happen. They're a bit more complex than physics such as gravity, and they are subject to distortion through mass psychology in the short run, but the bottom of that canyon is still waiting, no matter when Wile E. Coyote looks down. You'd think people would learn something through experience after a few repetitions.

Yes, most people want the huge mansion on 64,000 acres. People want hot and cold running servants and manna from heaven, too, but very few people get it. But there are reasons things like that are beyond the means of the average person, particularly in high demand urban areas where all the jobs are. Most of us have budgets that won't stretch to any of the above, and we're better off understanding this fact from the start. As real estate agents and loan officers, it's part of that fiduciary duty we learn about getting licensed to make them aware of these facts as they pertain to real estate and mortgage loans, not encourage them to stretch beyond their means for a property and a loan they can't really afford.

During the era of make-believe loans, it became possible to pretend that somebody was able to afford a bigger, more expensive home than they really could. Many alleged professionals, both agent and loan officer, became aware that they could make the easy sale and a much higher commission check by fudging a number here and a key fact there. They made quite a good living by doing so, rationalizing that if they didn't, somebody else would. Those agents and loan officers who stayed on the right side of things lost a lot of business to people who didn't. It's always possible to talk a bigger better deal, and the last few years have taught those of us who don't how to deal with those miscreants. But whether you believe in karma or not, stuff like that will come back around to bite you. It's one of those laws of economics that can't be repealed by the legislature. One way or another, their time of reckoning is coming. We all know what happens to those hogs at the trough.

So it's not "back to basics." Basics have always been there. Basics has always been the way to make the clients happy, not only on move-in day, but for the rest of their lives - long after the neighbor who didn't pay attention to basics has lost their home and their financial future to the foreclosure process. Basics, and explaining how they benefit the client, is how you build a real book of business, instead of one-time scores that are going to have you fighting lawsuits from jail. This has never changed, and it never will. Basics are the world we all live in, and when you understand them, you understand why.

Caveat Emptor

Original article here

At a very young age, my parents bought me a book of Aesop's Tales. Aesop has gone out of style, probably because these are stories with a moral lesson, and it seems the modern society is actively averse to moral lessons. But one of the ones that has stuck with me was the tale of the dog with a bone and the reflection in the water.

It happened that a Dog had got a piece of meat and was carrying it home in his mouth to eat it in peace. Now on his way home he had to cross a plank lying across a running brook. As he crossed, he looked down and saw his own shadow reflected in the water beneath. Thinking it was another dog with another piece of meat, he made up his mind to have that also. So he made a snap at the shadow in the water, but as he opened his mouth the piece of meat fell out, dropped into the water and was never seen more.

It is precisely this mistake that I'm writing about, and it applies to all real estate transactions. The dog's mistake wasn't that he wanted more. That's normal and natural, and I've certainly never done business with anyone who didn't. The dog's mistake was wanting the other benefit as well as his own, and not realizing he placed the benefit he thought he already had on the line in order to obtain it. But, as he discovered, the goodie that the dog in the water had was only a reflection of his own goodie. In order for the dog to have his own goodie, the dog in the water had to receive his. The same applies to the benefits the seller and buyer believe themselves to be getting. They are mirror images of the same thing, and one cannot exist without the other.

A lot of what gets written alleging to be good financial advice violates this very simple lesson.

Some things are a cost of doing business. If I don't pay for all the things that enable me to serve my clients, I'm out of the real estate business. Yes, they cost money, but if I didn't spend that money, my income would be zero. For consumers, this includes things like property taxes and HOA dues and Mello-Roos. If you want that property, they are inseparably attached. It is correct to include them in calculations as to whether a property is worth acquiring or worth keeping; it is not only pointless but counterproductive to try and get out of paying them.

This applies to the costs of acquisition and selling, as well. Be certain you understand the real costs involved. They may be large, or seem large, but doing without any of the professional services that have evolved is likely to end up being a lot more expensive in the end. If one is cheaper than another, there is a reason. Find out why; and while it may be that someone is just comfortable making less money, other explanations are such as they do not provide important services that really do make a difference are more likely to be closer to the truth. Don't expect them to tell you this, though, especially since most people will just believe fairy tales like "full service - discount price", and won't investigate why prices or loan quotes are lower. It shouldn't surprise any adult that sometimes it's worth paying extra. If this were not true, none of us would have our own cars, let alone seven seat luxury model vehicles. Cars are about the most expensive mode of transportation there is, but the vast majority of all adults in this country own and drive at least one. Including me. The reason is because the abilities they convey are more valuable than the costs they entail. if you don't pay the cost, you don't get the benefit, and yet many people will fool themselves into trying.

Most importantly, though, the lesson applies to negotiations for the sale of real estate. There's nothing wrong with making the best deal you can, but once you have the contract, honor your end of the bargain. Negotiate issues revealed later reasonably, and in good faith, based upon their own merits. It sometimes happens you find out the other side is getting something fantastic out of the deal. That's not a problem. It's a benefit. Insurance they're going to carry through with their end of the deal, which is a good thing because you wouldn't have signed off on it unless you thought you were getting about the best deal possible, right?. Real estate transactions are based upon making both sides happy with their side of the deal. You can't force someone to sell a property to you or buy it from you. Even attempting that is a felony. There can be circumstances that make it more likely someone will accept a proposal that they might not in other circumstances they would not, and very few people have unlimited time, money, or energy for a transaction to happen. But whatever the other person - other people - in the transaction are getting out of it, those benefits belong to them, and if it appears as if those benefits are in jeopardy, the other side can usually get out of a purchase contract. It may cost them something in some instances, such as the deposit, but successful suits for specific performance are rare, and more so where there's a competent agent involved on that side. Not to mention all those court costs.

The practical upshot of all this is that if you fail to act in good faith, that good deal that you thought you were getting is completely gone, and there's a significant chance you'll end up spending thousands of dollars on legal action as well. All transactions flow from perceived mutual benefit. The other side has to believe they are getting a benefit in order to want to consummate the sale. Figure that if the other side wants out, they can get out. In fact, many over-aggressive later negotiations give the other side grounds to exit the contract without penalty. Nobody's going to buy a property where they can't run the water or flush the toilets, but once the sellers agree to fix that problem in an acceptable manner, don't try to get anything extra out of them. If the septic system is bad, they can either install a new one, (maybe) fix the existing one, or hook the property up to the sewer. Asking them to re-plumb the entire house is not (usually) reasonable, and asking them to re-wire the entire house is, in the immortal words of Monty Python (Book of Armanents, chapter two, verses nine through twenty one), right out - and going that far has the same effects as holding onto the Holy Hand Grenade too long. If you find out you're not getting such a great deal, then you're likely to be the one looking to exit the contract, and if they fail to give you satisfaction with a newly discovered issue, maybe you should want to. There's nothing wrong with exercising the inspection and appraisal contingencies, assuming you have them in the contract, or forcing the buyer to consummate the transaction or get out of the way of someone who will, or getting the lender to deliver the loan they said they would.

Greed envy is one of the banes of a successful transaction, and if you don't have a successful transaction, you don't have anything positive, and you quite likely have significant extra expenses. To go back to the dog and the bone, a failed real estate transaction is worse, because not only have you lost your bone, you've lost everything you spent in obtaining it, and you still don't have what you wanted, whether it is your new property or cash for your property or new financing. If you make your initial choices based upon the benefits to you, the fact that someone else is getting a benefit as well is not something to cause you heartburn and make you want to take it away from them. That way lies disaster. Instead, think of it as insurance that you're going to be getting that benefit that you wanted enough to sign the contract or loan application in the first place. And if you're not going to be getting the benefit you thought you were, maybe you're the one who's going to want out.

Caveat Emptor

Original article here

One of the most true sayings in the mortgage business is, "If you can't lock it right now, it's not real."

But many mortgage providers will play a game of wait and hope. They tell you they have a certain loan when they in fact do not, hoping the rates go down to where they do. Or they'll tell you about a rate they actually have, but wait to lock it hoping the rates will go down so they can make more money because when the rates go down, the rebate for a given rate goes up or the cost goes down, and they can make more money.

Sometimes the rate/cost trade-off does go down, and they can deliver. But sometimes the rates go up, too. When this happens, the mortgage provider playing the "wait and hope" game has three choices. They can make less money, charge more for the loan, or punt by playing for time. I shouldn't have to draw adults a picture as their relative likelihoods.

Many times one side effect is a delayed loan. This is probably the number one reason for delayed loans, and one of the strongest reasons I keep telling you that if a provider can't do it in thirty days, they probably can't do it on the terms indicated. Many times they bet on rates going down, when rates actually go up, so they end up with a loan that they can't make any money by doing, so they delay it day by day, week by week hoping the market will move. Note, please, that they usually have zero intention of finishing your loan if the market doesn't move downwards enough. Whether it's National Megabank with a million offices, or Joe Anonymous working out of their home, their motivation is to do what it takes so they make money, and they will keep sweet talking you as long as they possibly can. They're certainly not going to work for free, and many of them will not do it at all rather than compromise their usual loan margin. If you allow them to play this game, when you finally give up in disgust, they still have several weeks after you apply with someone else where they're the only ones that can possibly have the loan done, and if the market moves down during those weeks, they're covered. If you could have gotten a better loan during that period, you likely would. But because you were quoted a price that didn't exist and believed it, they've got what looks to a consumer to be a competitive advantage. And if they call after you've "canceled" their loan and say that they can close the loan now when the new provider you just contracted with isn't ready yet, most people will go ahead and sign the papers because This Loan Is Ready Now.

There are honest mortgage providers who lock every loan at the time you tell them you want it. But there is no way for a consumer to verify that any given loan provider is among them. All of the paper I can put in front of you as regards a loan rate lock can be easily faked. Which brings us back to one of the standard refrains of the site: Apply for a back up loan.

At this update, there have been changes to the loan market. No loan officer can lock a loan quite so nonchalantly any longer. The penalties to the loan officer and all of their future clients for failing to deliver a locked loan have become too severe. As I said in Shopping For The Best Loan In The Changed Lending Environment, this is bad for consumers but it is a fact of life we have to deal with. If I lock a loan that doesn't close, all of my future loans get hit with additional charges, making my loans less competitive and hurting those clients who want me to do their loans in the future. I would very much like to go back to the other way, but it's not under my control.

Another change is that loans take longer now. This is due to regulatory changes and the need for CYA on the part of the lenders. Before the rules got changed in 2008, my average time between application and being ready to fund a loan was about 16 calendar days. Since then, that average has gone up to the low forties. Just a fact of life. There are a minimum of 3 weeks in new regulatory delays built into the new procedure. Oh, the government doesn't call them regulatory delays but they penalize the hell out of anyone who doesn't meet them and saddle that lender with large potential fines and unlimited liability for "misleading consumers". Net result: 3 weeks in new regulatory delays.

There is another issue with regard to rate locks. They are all for a certain set period in calendar (not working!) days, usually measured from the time you say you want it to the time the loan actually funds (not until you sign documents). Assuming your loan is actually locked when you say you want it, this means that there is a DEADLINE. Due to regulatory changes, loans are taking about 30 days longer than they used to. Also a fact.

This means that once you tell someone you want the loan, give the loan provider every scrap of documentation they ask for right away, not a week later. The loan provider is not going to pay for the delay, you are. Many banks will not even look at an incomplete loan package, so it is crucial to have the paperwork organized quickly. If that loan goes beyond the initial lock period, you can pretty much count on paying an extension. Some banks charge one tenth of a point for up to five days, some a quarter of a point for up to fifteen days of extension, some even more, but it's always charged in full from the first day of an extension. Occasionally the lender will give an extension for free if it was obviously their fault, but not very often. More likely, whether it was your fault, their fault or nobody's fault, the extension will be charged. Lenders have no sympathy for going over the lock period, and neither do most brokers. The lenders have set a large sum of money aside for your use, and they aren't earning interest on it. They want some kind of compensation, and when you think about it, this is not unreasonable.

Common rate locks are done for 15, 30, 45 and now 60 days, but they are available in 15 day increments for almost any length of time out to about nine months. However, there is a cost. The longer the lock period, the costlier the loan - as in the tradeoff between rate and cost gets shifted upwards. "Par rate" becomes higher with a longer lock period. You pay more in points, or get less in rebate for the same type of loan at the same rate. The reason for this is simple. The bank is setting all of this money aside for your use, and not getting any interest in compensation. They are doing you the favor, and they will charge you extension fees if you go past the lock period. I'm looking at a rate sheet right now that was valid a couple of days ago from a medium size lender. For a thirty year fixed rate loan, the discount points go up one eighth of a point between the fifteen and the thirty day lock, and another quarter of a point for a forty-five day lock.

The problem with 15 and (now) 30-day locks is that they are useless as an "upfront" lock, when the application is initially made. Especially with refinancing, where you lose a week by law between signing documents and funding the loan, there just is no way to reliably get it done within this time frame. Even purchases are chancy with the best of cooperation from everybody involved. 15-day locks are primarily a tool of those providers who play the "wait and hope" game mentioned above, and they lock just before printing final loan documents. The fact that they are planning a shorter lock period allows them the illusion of quoting something lower, but even if they tell you what the rates are today, they are quoting you a rate that may or may not exist when the loan is actually ready. On the other hand with regulatory changes that "helped" consumers changing things, I've become a lot more willing to wait to lock until just before I order final loan documents - provided the client agrees with my reasoning. I never did these while I had a realistic upfront lock option, but now that things have changed, they've become a lot more common for me. Unless there's a preponderance of evidence that rates are likely to go up, there's a lot less reason to pay for a longer lock. But since at least a week of the new regulatory delays happen after the loan is locked, everything has to be perfect for a 15 day lock to work without extensions.

A 30-day lock was most common lock period for those loan originators who lock the loan immediately. Until the regulatory changes "helping" consumers, if both you and the provider are organized, it was enough to reliably do all the paperwork and miscellaneous other projects, get final approval, and get the loan funded. It sounds like a lot of time, but it wasn't. On refinances, you lose a week due to legal and system requirements. Let's say you sign the final paperwork on a Monday. By federal law, you have three days to change your mind, and they're not going to fund the loan before that period expires. Monday doesn't count, so Tuesday, Wednesday, and Thursday go by before anything can be done. Good escrow officers don't usually request funds on Friday, because when they request funding is when the new loan starts accruing interest. Monday they fund the loan, and the bank has up to two days to provide the funds, then the escrow officer has up to two days to pay off the old loan before the documents record and the transaction is essentially complete. This takes us to potentially to Thursday or Friday of the following week, and that's just the time between you signing the actual Note and Trust Deed and actual consummation of the loan, when the Trust Deed is recorded. Now, with "helpful" regulations delaying loans, 30 days has become the standard "lock when you're ready to draw final documents" period.

If you want an upfront lock now (assuming you can even get one, which has become increasingly unlikely) you need a minimum of 60 days thanks to a clueless Congress in 2008. The 30 day purchase escrow is not reliably doable if there's a loan involved. A buyer's agent should not allow less than a 45 day purchase escrow at an absolute minimum if there's a loan involved, and 60 is much better.

On purchases, there is no three day Right of Rescission, but if the escrow officer begins funding a loan on Tuesday you are still talking about potentially hanging over until Monday of the next week. Funding doesn't usually take this long, but it does happen.

75, 90 day and longer locks are primarily useful for purchases where there is something external holding the loan back. Only rarely do the market conditions become such that longer locks than 60 days become necessary on refinances. Otherwise, they are most often used only when the actual purchase contract says that the purchase can't close until further out. There is a tradeoff here, and I may occasionally counsel people to wait if the construction on the house isn't scheduled to be complete for ninety days or longer. This makes for a risk that rates may move in the meantime, but rates generally don't go up in huge jumps, but rather incrementally higher from day to day, and past ninety days you may be risking less by waiting than by locking. There's no reason to pay more for a lock than you have to.

Many things have changed in the mortgage business in the last few years, but this hasn't: Even a legitimate and complete quote is fairy gold until it is actually locked. A bank can withdraw its loan pricing at any time. Sometimes this happens right when I'm in the middle of the locking process, and when this happens, the client gets the new pricing. Period. End of story (some banks will give you 30 minutes to complete locks already in process, but this is subject to limitations). Some lenders and loan providers attempt to hide this - and they call it "Consumer transparency." You may hoot in derision if you so desire. A better name would be something like their "Consumer Ignorance is Bliss" policy. "Don't you go worrying your poor little head about that, ma'am!". Until the lock process is complete, you don't have a right to those rates, and you won't get them if the lender changes the rates first.

Caveat Emptor

Original here

Our home isn't worth what we owe. So say you were just an average person selling and buying a house, meaning you put your house up for sale, get a contract to purchase on it then go put in offer in on a new house. Then you generally get a pre-approval, then the loan from a lender for the new house prior to closing on the old house. You then go to the closing sign the papers for your old house and then afterwards sign the papers for the new house. How would the lender giving you the new loan know that you were short selling the old house when everything happens the same day? It's not going to show up on my credit for at least 30 days and by that time I will already own the new house. Get it? Is this possible?

This is not the first time such a scam has been tried.

The loan application asks you about what property you own now. Falsify it, and you're likely going to spend a few years in Club Fed. Since it's unlikely you'll make mortgage payments there, this will compound the problem (Just try this on the judge: "I couldn't pay because I was in jail for lying about my financial situation, so it's not my fault!")

Furthermore, the current mortgage is going to show up on your credit.

The condition the underwriter is going to put on the new loan approval is going to go something like "Show property has been sold and debt paid in full"

Believe me, they're going to investigate. They're going to want a copy of the purchase contract and a payoff on the loan for it. Since the debt isn't going to be paid in full, they're going to figure out that you've got a short sale going on. It's not going to happen "same day" if there's a short sale. They're going to want to verify that the other lender is not going to pursue a deficiency judgment. If you're still going to owe the other lender money, the payments are going to hit your debt to income ratio (DTI).

All that said, if you come clean about the situation starting with your loan application with the new lender, it's possible you'll still be approved - just not the same day you close on your sale. They're going to want something that says your current lender isn't going to pursue the deficiency, but it is possible. Theoretically speaking. They're also going to want to figure out what you're going to owe the Revenuers, and how you're going to pay it. Then they're going to take that into account in underwriting the new loan.

(NB: With HR 3648, the Mortgage Forgiveness Debt Relief Act of 2007, this may be zero on the federal level but there may still be consequences on the state and local level. Check with your CPA or EA for more information)

But trying to hide the situation is pretty much going to be a guaranteed rejection. Furthermore, whether or not you intended fraud, if you'll look up the legal definition of fraud, what you were asking about falls well within that definition, as you are deliberately attempting to conceal relevant financial information. I wouldn't be surprised to find the FBI paying you a visit. In fact, I'd be surprised if they didn't. Banking fraud having to do with amounts at risk large enough to finance real estate is a serious felony. ALWAYS tell the truth, the whole truth, and nothing but the truth on a loan application. Better to be rejected based upon the truth than accepted based upon fraud.

If you wait until the short sale is consummated to apply for a new loan, there are 13 questions on page 4 of the standard form 1003, the Federal Loan Application. At a minimum, questions a, d, and f (having to do with judgments, lawsuits, and delinquencies) are going to have interesting possibilities, but there is no question that directly asks about a short sale. It does shows up on your credit report for 10 years, as debt not paid in full. Mortgage debt not paid in full, amplifying the failure in the eyes of mortgage lenders. If there's a deficiency judgment, that will show up as well, for ten years from the date of the judgment. I can't recall ever having dealt with someone in this situation; but it's definitely a factor a reasonable person might want to consider in deciding whether to grant you additional credit, right? If your worthless brother-in-law wanted to borrow $1000 despite having stiffed you on other debts in the past, you'd be within reason to consider that fact in your decision as to whether or not to loan the money. Particularly if the purpose of this loan was directly in line with the purpose of prior defaults. The situation is no different with mortgage lenders.

From personal observation, it generally takes two years - as in 24 months, not as in the second New Year's Day afterwards - after a short sale before lenders are willing to seriously consider a mortgage application from you. You're still going to have to explain what went wrong, but if you're responsible with credit, pay your rent on time (which they are going to be very particular about), and your debt to income, loan to value. and cash to close as well as credit score are all within parameters, you've got a pretty decent shot at that point. I'm not going to kid you: saving the money in 24 months for a down payment plus cash to close isn't easy, no easier than it was the first time you bought. But doing so will reward itself.

Caveat Emptor

Original article here

I am currently living with my parents and they wish to deed of gift their house to me but they still have a remaining mortgage on it. Is it possible to do this or do they have to pay off the mortgage first? Thanks

They can gift the house to you without paying off the mortgage. However, the mortgage still has a valid lien on the property, and must be paid or the lender can and will foreclose.

The mortgage will still be in the names of the people who signed the paperwork (your parents) and therefore any credit benefit or dings will also belong to them. You could find yourself in the unenviable position of being unable to refinance, despite having made the payment for however long, because you're not getting credit for making those payments. Read the contract: it is possible that the loan is assumable. Even if it isn't, it's possible the lender will agree to add you to the list of those responsible (This can only help them; they're not letting your parents off unless/until you do a full refinance. Of course, adding you to the loan doesn't earn anyone a commission, so they might tell you that you need to refinance as it gets them paid, or helps them make a quota)

Quitclaiming is both legal and extremely simple, but has potentially severe tax consequences. Please check with an accountant in your area first. I'd also tell you to check with a lawyer, because each state has its own laws about the effects of how property is held. Nor will quitclaiming the property help if the purpose is to shelter assets from legal action, and if this is to enable your parents to qualify for Medicaid, all fifty states have "lookback" periods of at least thirty months (sixty months is most common), where the state will recover the value of any assets disposed of in that time frame.

If you are the party quitclaiming a property on which there is a mortgage, be advised that you are still responsible for payment of that mortgage. The lender has your signature on a contract that says, "I agree to pay" They may or may not have other signatures, but if they do all it means to you is that other people will join in your misery. This happens all the time. Husband and wife divorce, one keeps the property, the other quitclaims but is still on the mortgage. Time goes by, and the ex-spouse who retained the property and the mortgage fails to make all of the payments on time. Bad consequences ensue for the "innocent" ex-spouse. I have seen this feature used maliciously by vengeful ex-spouses. I would advise requiring a spouse who retains the property to refinance solely in their own name, and if they are unable to qualify, requiring the property be sold. The other spouse is also entitled to a share of equity in many states.

If the property ends up being sold through a Short Payoff, the lender is almost certainly going to drag the "innocent" ex-spouse (whose signature is still on the dotted line) back into the situation. Basically like being an Alabama fieldhand prior to the Civil War or a male whose girlfriend decides not to have an abortion (Admittedly she puts up with nine months of pregnancy, but thereafter puts the child up for adoption and walks away - he gets hit with a lien for child support from the county for 18 years). Despite not having lived in or owned the property for years, they're still tied to that property by that piece of paper they signed. The ex-spouse wasn't the owner, so they had no ability to control or influence the sale, but they're still on the mortgage, so the lender can get their money out of them.

Finally, for as long as you remain on the mortgage, it will hit your debt to income ratio. This can mean that you will not be able to qualify for another mortgage. In my experience, it is rare that it does not. You are obligated to make those payments, so it's a part of your credit-worthiness. Especially considered in conjunction with likely alimony and child support in the case of a divorce, you may have difficulty qualifying for another property, even ones that would have been well within your means before.

Caveat Emptor

Original article here

I sold my house in (state) in august 2001 I hired a title attorney whose (local company X) acted as a agent for (national company Y). The facts are that there were errors and omissions which led to negligence in the performance at the closing of the property. The property taxes for the year 2000 were not paid. The title company did not do their duty and gave clear title to the buyer. Now, more than 5 years later Company Y is claiming I owe them these back taxes plus accrued costs. I would kindly appreciate some feedback

Yes, you owe the money.

The title insurance policy you bought insures the person who bought the property. Property taxes are part and parcel of all land ownership. A reasonable person should have paid those taxes. But they didn't get paid.

This doesn't mean that someone didn't screw up. Every title search needs to include a search for unpaid liens that includes property taxes. That's just the facts of the matter.

However, this does not relieve you of your duty to pay those taxes in full and on time. If it was an obscure mechanics lien recorded against your property erroneously for work that was never done, you'd have a great case. If it was for stuff that you paid, and had reason to think you paid in full even though you were short, you might have a case. But not stuff that every reasonable property owner knows has to be paid, and didn't get paid at all.

Let us consider what would have happened if you still owned the property. The county would be sending a law enforcement official around with delinquency notices, which would include interest and penalties for late payment. If those weren't paid, they'd send law enforcement around another time with a tax foreclosure sale notice. You would have to pay those taxes.

It's no different because you sold. Because property taxes are a valid existing lien on the property, albeit one they missed during title search, they paid it to clear the buyer's title, as the policy requires them to do. On the other hand, when an insurance company pays a bill like this, and title insurance is insurance, they acquire the right to collect payment via subrogation. This fancy word just means they paid the damage on behalf of someone, and now they have the right to collect payment, just like auto insurers who pay for the damage to your vehicle and go sue the party at fault, for which that person's liability insurer usually pays. In this case, the person with the liability to pay that property tax bill is you. Now, I'm not an attorney, so I don't know, but there might be a case you can build against the person who did the title search for the interest and penalties that have accrued since the search. Before that, the bill was all yours, and given that it was for 2000, should have been paid before August 2001. On the other hand, that title company might not have had a duty of care to you, despite the fact that you were the one who paid the bill, as the insured was your buyer, not you. Furthermore, the cost of paying the attorney can often go to several times the cost of paying the taxes and penalties. You'd need to talk to an attorney for more information. You might want to call company Y and ask if they'll settle for the bill as of the sale date, because they don't want to pay for an attorney any more than you do, and they did screw up, and if they hadn't, you would have paid the bill back then, right? Company Y can then recover the balance from their agent, company X.

Any lien that exists before the sale, discovered or not, is your responsibility. The only time that I think you are going to get off the hook is if you are dead and your estate probated and distributed before the lien is discovered. Basically, you've got to die to get away with it. Perhaps intervening bankruptcy might do it as well. I don't think so, but I'm not a lawyer. If you had died, the title company would still have paid, as the policy requires to protect the buyer, but would have had no choice but to eat whatever amount they paid, because there would be nobody alive who they would have a valid claim against.

Caveat Emptor

Original here

I've gotten several emails to articles recently having to do with straw buyers, and more search hits. Straw buyer fraud is popular because people want a better loan and many don't see anything wrong with it since "we intend to repay the lender". However, they are intentionally deceiving the system that lenders have evolved that prices loans in accordance with the risk involved in a given borrower and situation. Furthermore, straw buyer activity opens you up to potentially unlimited legal liability. All of those wonderful consumer protections that our government is so happy to enforce go out the window if you commit this or any other kind of FRAUD. Furthermore, straw buyer scams are one of the biggest potential "stings" in schemes perpetrated by scamsters. You can trivially find yourself liable for much more than the property you have a mortgage on is worth.

A "straw buyer" is someone whose credit is used to purchase a property and secure financing, but whom isn't actually going to own the property. Sometimes they cooperate willingly and sometimes they are victims of identity theft, but it's always illegal. It is also, as these two articles illustrate, hazardous to your financial health.

The most common scenario is Person A wants to buy a property, but convinces person B to step in as a "straw buyer" to obtain terms that Person A could not. Alternatively, person A steals person B's identity, and forges all of their information on the purchase and loan papers. In both cases, person B is not the person really purchasing the property, but their name is on the mortgage. In the first case, person B is fully responsible for the loan and everything else that goes on, as well as having committed FRAUD. In the second case, they've got a long hard row to hoe to convince everyone that they weren't involved, because with hundreds of thousands of dollars on the line, it is worth the lender's while to be as hard-nosed as possible. The lender does not particularly care about justice in this case; what they want is the money they loaned out to get repaid.

The closest thing to benign that happens in straw buyers is when one relative, let's call him Junior, convinces another relative, call her Mom, to use her good credit so that Junior can afford the payments on a house he really does want to live in. Please note that this is still fraud - you are deceiving the lender for the purpose of getting a better loan than you would be able to obtain if you told the truth. Good agents and good loan officers want no part of this, because it doesn't matter how benign the intent, the fact of the matter is that it is still fraud. The lender discovers it, or if payments get missed, that agent or loan officer is legally toast. Note that this is different from Mom buying Junior a property for Junior to live in, or helping Junior afford property Junior wants to buy. There is sometimes a thin but always bright line between legal and illegal activity, and starting to deceive people - telling anything less than the whole truth and nothing but the truth - is always a sign you have stepped over the line.

Now, once you get away from this most nearly benign straw buyer scenario, things degenerate quickly and there are many scams and frauds that can be pulled. Many of them involve appraisal fraud. Most common is that someone persuades you to allow them to apply for a loan on your behalf to buy a property for them, which has supposedly appraised for $700,000. You end up responsible for a $700,000 loan on a $400,000 property, and the people who pull this scam walk away with $300,000 (or more) free and clear.

There are also all kinds of scams involved with people that want someone else on the mortgage, but themselves on title. If you quitclaim off of title, this does not absolve you from the mortgage. In general, the only way to absolve yourself from the mortgage is for them to refinance in their own name, and since they are claiming they couldn't do this, that just isn't going to happen. It's one thing for one spouse to qualify for the mortgage on their own but legally quitclaim it themselves and their spouse, husband and wife as joint tenants with rights of survivorship. It is something else entirely to quitclaim it to Joe Blow (or Jane Blow), but allow yourself to remain on the mortgage. If Mr. or Mrs. Blow does not pay the mortgage, guess who is liable? I get hits on this site every day asking, "How do I remove myself from a mortgage?" The answer is that you don't. The lender has your signature on the dotted line that says "I agree to pay..." The only way they are going to let you off is if the people remaining qualify for the loan without you - by which I mean a refinance. Even most loan assumptions (for loans where assumption is possible and approved) are subject to recourse for at least two years, usually longer. This is one reason that for divorcing couples, it needs to be part of the dissolution agreement that the property will be sold or mortgage refinanced before the dissolution is final to protect the spouse that isn't keeping the property (they're often entitled to some cash from the equity, as well).

There are good and strong reasons why straw buyers are illegal, reasons that start at fraud and run through confidence games of all sorts, which are also fraud, albeit with a personal as opposed to corporate victim. The games that can be played on you when you cooperate with a straw buyer request start at major financial disaster, and often include felony jail time.

Caveat Emptor

Original here

No, I'm not turning into a country western singer. Just got a search for "no closing costs no points loan cheapest rates loan". The visit (to this article) lasted less than a full second. The obvious implication was that it wasn't what that person was looking for.

One of the reasons consumers get mercilessly taken advantage of in mortgage and real estate is because they assume they know everything they need to. Unfortunately, the vast majority don't know everything they need to. Most of the time there are gaps in their knowledge that the unscrupulous can sail the Queen Mary through - sideways. Hence the fundamental dishonesty of almost all mortgage advertising.

As I have said before on many occasions, lowest rates do not go with no points or no closing costs loans. Period. One of these things does not go with the others. Rate and total cost of the loan are always a tradeoff. Nobody is going to give you money, of all things, for less than the cost of money.

This is not to say that one loan with no closing costs may not be cheaper than another loan with no closing costs. The point is that there will be lower rates available with some closing costs, progressively more so as you get higher closing costs. Then if you start paying points, there will be still lower rates available. There is a reason why they are paying all of your closing costs - you're choosing a loan with a higher rate than you otherwise could have gotten.

No cost loans can be and often are the smart thing to do (Unfortunately, the Congress of 2009-10 effectively outlawed the loans by outlawing yield spread which was the only funding mechanism for it) . Because they are the only loans where there are no costs to recover, they are the only loan that can possibly put you ahead from day one. Consider the zero cost loan as a baseline, and compute what lower rates will cost you in closing costs. Consider: If the zero cost loan is 6.75 percent and you currently owe $270,000, your new balance should be $270,000. If you can get 6.5 at par with closing costs of $3500, your new balance is $273,500. Your monthly interest in the first instance is $1518.75 to start. Your interest charges in the second case are 1481.46. The lower rate cost you $3500, but saves you 37.29 per month. Divide the cost by the savings, and you break even in the ninety-fourth month - not quite eight years. So in this example, if you think you're likely to refinance or sell within eight years (in other words, practically everyone), you'll be ahead with the zero cost loan.

If the loan has a fixed period of less than the break even time (any loan that goes adjustable in less than 94 months in this example), you also know that the costs are not a good investment. If this loan were only fixed for five or seven years the rates go to precisely the same rate after adjustment, underlying index plus the same margin. If you haven't broken even by then, you never will, even if you decide you want to keep the loan.

So whereas a true zero cost loan is often the best and smartest way to go, it will never be the lowest rate available. You need to choose carefully where on the spectrum you choose, because there's no going back once the loan has funded. All of the up-front costs are sunk, and you don't get your money back just because you don't keep the loan long enough to break even.

Caveat Emptor

Original here

I saw your article on on Searchlight Crusade about exclusive buyers agents and I have a couple follow up questions pertaining to my own situation that I am hoping you could shed some light on.

I don't have any buyers agent (currently). However I have spotted 2 houses in an area that I think I would like to make an offer on. Both of these houses are listed by real estate agents. I am obviously eager to save as much money as I can and think it would be great to try and save on the agent undefined if at all possible (I have bought FSBO before, so I am familiar with the process and I don't see much value add with an agent since I have already found the properties).

However I just don't get it - if I make an offer on the property by working with the sellers agent then the sellers agent gets both commissions? Is there a way to just take the buyers agent commission off the sales price? If there isn't then I guess there is no reason not to go and find a buyers agent to assist me? Seems like a waste of money.

I have found an buyers agent that who said he will give me 50% of the commission if I sign an exclusive buyers agent contract with him however I am worried that my hands are tied if I don't end up purchasing one of these properties I have already identified (ie I could end up paying 1/2 his typical commission if I found a FSBO).

Any insight you could provide would be of great help - I love reading your stuff.

Thanks,

The first thing I need to clear up here is the nature of listing agreements. The standard listing contract form gives the listing agent the full commission for both buying and selling, and if someone other than them represents the buyer, then they agree to pay the buyer's agent a portion of that. If there is no buyer's agent, they keep it. Since you have to make your offer through the listing agent, the listing agent is get that commission, and that is as it should be. Note that I believe it is stupid to act as agent for both parties in the same transaction because seller's interests and buyer's interests are often at impasse, and when you're acting as agent for both sides, there are many potential issues which, if they happen, are lawsuit material one way or the other no matter what the agent does. If I find a buyer for my own listing, I'll find another agent I trust to do a good job, and that way there is no conflict of interest. But greed is a powerful motivator, as you yourself are illustrating. The fact is that if the listing agent wants the full commission, they will probably end up with it, and justifiably so, as they found the owner a buyer, didn't they? That's what the contract says the seller's commission is for. You saw their sign, you saw the house they listed, you made an offer through them, the house got sold through their efforts. According to the terms of the listing contract, they found you, whether you realized it before now or not. The buyer's agent commission is for an agent who has a buyer who sells them that property, as opposed to the one down the street.

Many agents make side agreements to rebate part of their commission in certain circumstances. But that potential rebate contract in this case is with the seller, not you, and is none of your business. Unless the agent has a release to discuss it with you in writing, they are violating confidentiality to do so. The seller may sell to you cheaper because of such a clause, but they are under no obligation to do so.

Now before you dismiss this with, "That's Stupid!" or something worse, because it appears that things are stacked to cost you money, consider that this has evolved over many years as the best and cheapest way to preserve everybody's best interests. Without these forms, there would be a lot more lawsuits filed over commissions, with the side effect that the lawyers get rich, and the money ends up getting paid anyway on top of that. The listing agent commission is partially a hold over from the old single listing days of half a century ago. Over time, the buyer's agent commission evolved as a way to open the system up, so that homes sold faster and those agents and offices without a large, pre-built client base could break into the business. But it's still intentionally structured that way as a way to motivate that listing agent to advertise the property far and wide and especially in all of the most effective venues. It costs money for that sign in the yard. It costs money for MLS access. It costs money for advertisements in the paper. It costs money for all the trappings that enabled someone to go find that agent and list the property in the first place. It costs that agent money just to stay in business whether they have any clients or not. It costs the agent money for the advertising to attract clients in the first place. And chances are, if they hadn't spent that money, you wouldn't have found that property, and the owner wouldn't have sold it. Consider also the liability issue, which is huge and real. Are you volunteering to give up any legal rights for a complaint? Didn't think so. Which means they have to go through all of the disclosures, and they're still liable if they make a mistake. How many people do you know that do major work in their occupation for free, even though they're still going to be liable for potentially hundreds of thousands of dollars if something isn't perfect?

People think agents are making money hand over fist, when the reality is that unless they're putting in the long hours and hard work to make multiple transactions happen every month, they're just barely scraping by. Most of the successful agents I know put in sixty hours or more per week, and if they are putting in less than forty, I'll bet money on no other data that they'll be out of business in a year. This is not a cheap business to be in, or an easy one. I don't blame you for wanting to economize - it is a lot of money. If you don't think about what it's getting you, and what you're getting, and what agents are giving you, and the liability they're assuming, and what they have to spend to stay in business, and you just look at the check the brokerage is getting, it seems like a lot of money.

Put yourself in the shoes of a seller. You have a property, but you want cash. Real estate is not liquid, a property interchangeable with billions of other shares in planet earth that you can call a broker and sell over the phone because there's a ready market for shares in planet earth which are all interchangeable. Instead, each and every property is unique. This means it is bought and sold on the basis of those unique individual characteristics. You want results, you want your property sold for the highest possible price, you don't want it coming back to haunt you if there was something wrong you didn't know about, and it costs money and it takes work to make buyers want to buy your property.

Sometimes the agent gets lucky of the market is hot and it sells quick. Sometimes the agent works hard - and they really do work - for months with no offers despite all of it. There are times where a monkey could have sold a residential property within a week for more than the asking price, and there are times when no matter how good the agent is, you still need luck. This requires an adjustment in thinking if you're going to do well. Average total commission paid is up locally in the last few months, from five to six percent. Particularly in a rough market, if the seller tries to sell it themselves, it will statistically take longer, and they will statistically net less money from the sale, not to mention what they spent on the property in the meantime. Some few get lucky. People win lotteries and casino jackpots, too. Betting that you'll be one of them is a sucker's game. Any number of studies and statistics show this fact, and many brokers make a good living buying FSBOs to then resell for a hefty profit. The last broker I worked for is one example. In one month, we sold four properties he bought from FSBOs, all for a substantial profit, even in a down market. Sellers tried to think like you do, and it cost them over $150,000 net of commissions, and these were all fairly quick sales. Had we tried harder to get maximum value for his money, we could likely have gotten more, but he's not complaining.

Before we go any further, let's look at what a buyer's agent really does. It isn't just pop you into the house and watch you wander around. While you're oohing and aging over the beautiful kitchen and the brand new carpet, I'm looking for foundation cracks. I'm analyzing floor plan. I'm looking at location and real condition of the structure and how good a design the property is and whether I can see issues that are going to cost you money down the road and considering eventual resale value and comparing it to other nearby properties I've seen. I have talked buyers out of superficially attractive properties on each and every one of those points in the last month or so, saving them a lot of money and headache down the road. The listing agent is working for the seller, and it would be a violation of fiduciary duty for them to say anything about any of these negatives.

Now, with that said, let's look at your current situation. I've already covered the fact that the listing agent is entitled to that commission. Now let's put you on the other side of the table from a guy whose responsibility it is to get the best possible price for the property, and his commission depends upon how good a job he does. He does this constantly, for a living. He's set up with information to ensure that he gets the highest price. It's cost effective for him, in a way that it isn't if you aren't doing it constantly. Betting that you're better at his profession than he is would be like him betting he's better at your profession than you are. My money is on "you end up paying more than you have to."

Here's a dead giveaway that an agent's job is trickier than you think it is: That you're even talking about an exclusive buyer's agent contract in this situation. So long as you already have the property in mind, there is comparatively little risk and a lesser amount of work for him in the situation. He's not going to have to drive you around to four million properties over the next twelve months to maybe find one you want. This is a buyer's agent's dream situation - cut straight to the bargaining, without any of the preliminary work that takes so long. If this one falls through, he can either look for more or blow you off, depending upon what he has time for. Offer him a general non-exclusive buyer's agent agreement with a fifty percent rebate if you find the property yourself, as you did in this situation. This motivates him to do his best bargaining and looking out for your interests without sabotaging the transaction. If this one falls apart, he's still got motivation to find you something on your terms, and you're not bound to him unless he introduces you to the property or you use him for negotiations, etcetera. You get a negotiator who knows your market and should know most of the tricks and is working on your behalf, and if this one falls through you have someone who's motivated to find your something with better tools and more relevant skills at his disposal than you have. He gets a commission which, if smaller, is also easier and walked its own self in the door rather than him having to go out and spend time and money to drag it in. Everybody wins. If he won't do it, find someone else in your area who will.

(Before anybody asks, I don't propose client contracts that I wouldn't accept)

Caveat Emptor

Original here

>broker incurred 19 inquires in 1 week dropping my score.

B.S.

I'd go the full Penn and Teller on this one if I wasn't trying to stay family friendly. The law is clear on this one, and practice is fully compliant with the law. I've seen thousands of credit reports, sometimes with dozens of recent mortgage inquiries. It could be 1, 19 or 19,000 inquiries. As long as they are all mortgage inquiries, all inquiries within thirty days count as one one inquiry. And the credit reporters and credit modelers I'm familiar with all comply.

The best and the worst loan officers are brokers, who shop your loan around to multiple lenders. But you don't have to stick with one broker, and you are silly to do so. Shop your loan with half a dozen at least. I used to tell people to apply for at least two loans, but changes in the lending industry make that a waste of time now. In all practicality, the dual application is dead due to regulatory and financial market changes meant to drive clients away from brokers and towards direct lenders and higher cost loans.

Credit Report scores falling with repeated inquiries used to be a real issue. Years ago, there would be a game as each inquiry was a hit to your credit, so prospective mortgage providers would run your credit again and again, until they drove your score under some noteworthy creditworthiness break-point. They could still use their original report, but since anybody who ran your report after that would see a 678 instead of a 686, or a 572 instead of 588, it would be unlikely that they could provide as good a loan.

However, several years ago the National Association of Mortgage Brokers sponsored legislation in Congress to change this. It was hardly altruistic of them, people not having their score hurt by multiple inquiries means that they are more willing to allow brokers a chance to compete. Nonetheless, this was a major benefit for anyone who wants to be able to shop around for a mortgage like they might want to for any major purchase, and mortgages are the second biggest purchases most people make in their lifetime (the biggest being the property the mortgage loan secures!). No matter how selfish the motive, however, they still did you a major favor, as someone who might want to have a mortgage someday even if you don't now. Tell your mortgage broker thank you for that.

There is a limitation to this, and ironically it affects credit reports run at banks and credit unions, although not brokers. Because in order to qualify for this, the inquiry has to be run under a provider code that says, "inquiry for mortgage." Mortgage broker inquiry codes all say "inquiry for mortgage," because that's the only type of credit they deal with. But banks and credit unions give loans for other purposes also, so they have a minimum of two inquiry codes, one that says "mortgage inquiry," and one that says, "general inquiry." If you are talking to a loan officer at a bank, who does car loans and credit cards also, sometimes they use the wrong inquiry code, and it counts as another inquiry. Talk to four banks, potentially four inquiries. Talk to four brokers, unless you space them out by 30 days or more, it's never more than one inquiry.

So anybody who tells you not to let other mortgage providers run your credit because they might drive your score down is either unaware of the law, or simply trying to scare you because they are frightened of having to compete. Incompetent or a liar, one or the other - maybe both. When you get right down to it, they are really telling you that their loans aren't very good. Because so long as they are done within a few days, the fact is that any number of mortgage inquiries all count as precisely one inquiry.

Caveat Emptor

Original here

For a while there, the forty year mortgage had started to make a comeback, and a few lenders started introducing the fifty year mortgage. The reason, straight from the horse's mouth, the lender's representatives, is lowered payments. In an uncertain and unstable market, investors are nervous about interest only financing, and so the lenders are tightening up on the standards of who is able to qualify for that, while looking for another way to compete on the basis of lower payments. Any fig leaf to be getting their premium and avoid competing upon real price. One way that they do this is the Option ARM, or negative amortization loan. However, to anyone who does even a minimal amount of investigation those loans are like cutting your own throat. A lot of people will still sign up for them, but after Business Week did a feature calling them "Nightmare mortgages" more and more people finally started picking up on the tremendous downsides to those loans (and they were finally all but banned, too late to do any good), but if they still want too much house and they've got to be able to qualify for, and make, the payment, they need an alternative. That is the forty and now the fifty year loan.

Now nobody does forty year fixed rate mortgages, let alone fifty. They do two and three year fixed rate loans, called the 2/38 and 3/37. Some lenders will also do a loan that amortizes over forty years, but the remaining balance is due in thirty years. This so-called 40/30 balloon has a lot in common with a thirty year fixed rate loan - including the fact that almost nobody goes more than five years without refinancing, so that the thirty year balloon should be no big deal. All of the preceding forty year loans are sub-prime loans, by the way, with prepayment penalties and higher rates than A paper. A Paper lenders doing the forty year loan are few and far between. People get longer durations from sub-prime lenders; A paper competes for the best borrowers - the ones who can really afford their loans - on rate/cost trade-off and underwriting standards. For those lenders doing the fifty year loan, it is pretty much the same story. The fifty year amortization due in thirty, the 2/48 and the the 3/47.

Now because the lender is risking their money for a longer time, and with less amortization and therefore more risk, most of the lenders - particularly the ones looking to compete on rate that you would prefer to do business with - charge a slightly higher rate for forty year loans than thirty, and a little higher still for a fifty. The difference is not huge, but it is there. Where a 2/28 might be at 7%, the corresponding 2/38 might be at 7.125, and the 2/48 at 7.25 for the same cost. Sometimes they'll say that the difference is as small as a quarter point of cost for the forty year amortization as opposed to the thirty - but that's an eighth of a percent on the rate, at subprime's usual 1 point equals half a percent trade-off.

Now in my opinion, these longer amortization loans are mostly a marketing gimmick to lower the payment - slightly - for those who do not qualify for interest only under lender's guidelines. The forty year amortization started making a comeback early in 2005, most as the 2/38, and the fifty year about March of 2006.

My initial perception was that refusing interest only to these borrowers is a figleaf tossed to nervous mortgage investors, and this has been borne out by subsequent events. It's not like fifty year amortization is really going to make a difference, as opposed to interest only, from the point of view of remaining principal. If a 100% loan gets foreclosed any time in the first five years, or if property values decline further, the difference is basically insignificant. Let's do some math.

Assume a $200,000 loan on a $250,000 purchase in California, just so I can do it in one loan without worrying about PMI.

Now unlike everyone else who has written on longer amortizing loans, I'm not going to obsess about "interest paid over the life of the loan," although if you keep them that observation is true. But that's almost irrelevant. These borrowers are going to refinance in a few years anyway, same as everyone else. That's just the way things are. But let's do look at the difference between interest paid in the first two years, the fixed period for most of these at the end of which people will refinance.

So under these conditions, the 40 year loan only saves $1668.96 in payments over the first two years, and the fifty $2131.92. So if we subtract these numbers off the deficit in the above table, we are left that the forty year loan costs us $1299.30 in net deficit as opposed to the thirty, and the fifty year loan costs us $2434.17 net of all savings. This on top of the fact that it really doesn't make that much difference in the income we need to qualify for the loan (which in my example is limited to cost of housing with no other payments). Just paying off a credit card that takes $100 payments per month will do more to help you qualify.

These numbers get worse, not better, in the bigger loans that the lenders are using them to justify. Let's assume a $400,000 loan on a $500,000 property instead:

Considering that over two years, the forty year payment saves $3339.92 in payments, it's still down by $2599.38 as opposed to the thirty year amortization, and the fifty is down by $4869.83 in just two years - never mind what happens if you have to do it again in two years, and once again, paying off a credit card probably will do more to help someone qualify full documentation.

I don't see anything particularly wrong with forty and fifty year mortgages, although a 30 year is better while making very little difference on the payments, I can see some benefits for those who lie in this income range. But pardon my lack of enthusiasm for something that makes very little difference to whether someone qualifies for the loan, while costing them far more than they save in terms of payments, even over the short term and disregarding the effects if the people do not refinance. Far better to just persuade someone not to buy quite so much house in the first place, even if it means you get less of a commission. But then if most real estate agents sold property on the basis of what people could afford rather than it's beautiful and they want it and therefore it's an easy sale and now let's figure out a way to get them the property even if they can't afford it, the southern California real estate market would not have been in the state it has been in these past several years.

Caveat Emptor

Original here

I've seen a fair number of questions on impound accounts in the last several months. An impound account, also known by the confusing term escrow account because the lender is holding it in escrow, is money that you give the lender in order to pay the property taxes and homeowner's insurance on the property when they are due.

The first thing to note and emphasize is that money going into an impound account is not a cost of doing the loan. It is your money. You own it. It will be used solely to pay your property taxes and your insurance. At the conclusion of the loan, whether you paid it off with cash or refinanced or or sold the property, you get any money left in the account back. The lender is required to send you the check within sixty days of loan payoff.

An impound account is meant to address any lender's two largest worries in regards to a loan: Uninsured destruction of the property or losing the property to an unpaid property tax lien.

The problem with an uninsured destruction should be obvious. The structure is destroyed or heavily damaged and no money exists to rebuild. The borrower doesn't have it and the bank isn't going to throw good money after bad. Here in California, the average property is worth maybe $500,000 or so, but without the home sitting on it, the property may only be worth fifty to a hundred thousand. Within ten miles of my office sit hundreds, probably thousands, of new homes that sold for $700,00 and up even though they sit on a lot that's less than 5000 square feet (0.115 Acres). Many condominiums are over $400,000. Given the location, a 5000 square foot lot may be $200,000, but it's not $500,000, and the lender will take a loss even on the $200,000 because they're not in the business of real estate. They loan $500,000, it burns down without insurance, they lose $350,000. People also lose their jobs over this.

Property tax liens are a major issue as well. They automatically take priority over everything else, and the rules about what the condemning governmental entity has to do are much looser than they are for the bank. They will usually do quite a bit over the minimum, but they will sell the property most of the time, no matter how minimal the best bid. Minimum auction amounts and many other things mandated for when lenders sell the property go out the window when it's the government. Many times this situation can require the lender to step in and pay the property taxes, intending to turn around and sell the property themselves merely to take a smaller loss.

A lender wants you to pay property taxes and homeowner's insurance, and they want to know you've paid them. They encourage this via the method of impound accounts. The theory is simple. Every month you pay the lender, in addition to your actual loan payment, an amount equal to your pro-rated property taxes and homeowner's insurance, and they will take this money and pay those bills when they are due.

No lender is perfect about these, and some are less so than others. A large percentage of the biggest and worst messes I have ever dealt with came about as the result of the lender somehow messing up the inpound account. Others have arisen because even though the lender acted within the law, the client got angry about something. Sometimes it's for a good reason, sometimes it's not.

Because lenders want you to have them, however, they are ubiquitous, and every lender I know of charges extra on your loan if you do not want to do an impound account, unless you live in a state which prohibits the practice. Usually this amount is about one quarter of a discount point. On a $500,000 loan, this amounts to a charge of over $1250 just to not have any impounds.

On the other hand, in places where property values are high, you can have to come up with $5000 or more at loan time just to adequately fund an impound account. Here's a computation of how much you need to fund it works. The lender will divide the annual property taxes and homeowner's insurance by twelve. This will be the monthly payment. The lender is legally able to hold up to two months over the amount required to make the payments, and they want this reserve. So they will look at the projected payments for the next year and figure out how many months they need up front to always have two months worth in reserve. I'm writing this on February 3, and California taxes were due on the first even though they are not past due until April 10th. But the lender uses February first to calculate even though they won't actually make the payment until early April (they earn interest on the money, whether or not they pay any. Some states require that interest be paid, but it is typically something small and worthless like two percent).

February first is usually when the lenders here in California figure will be the low point of the account for the whole year. But if you closed on a loan in February, you wouldn't make your first payment on that loan until April first, and of course, they cannot count on you making your February payment right on the first. So they are going to figure that you will make payments on the first of every month April through January, ten months, before they have to pay your property taxes. Since they have to pay twelve months, and they get to keep two in reserve, that's fourteen months of payments they want to have on February first. Fourteen minus ten is four months that you will have to come up with in advance, or have rolled into the cost of your loan. On a $500k property, that's about $2000 for property taxes even in a basic tax zone, and if your insurance is $1200 per year, you'll have to come up with another $400 for that. $2400 into the impound account.

It gets better. Because the property taxes are due within two months of your purchase, you're going to have to come up with your pro-rated share right up front as well as paying for an entire year of insurance. Since California requires six months property taxes at a time, that adds almost another five months taxes and twelve months insurance up front. Total cost of this in the example given: $3700. Actually, this is due whether you have an impound account or not. Total you need just for property taxes and homeowner's insurance: $5900.

It can be worse. Suppose you were closing on a refinance in October. You originally bought in February. You are only going to make two payments (December and January) before the insurance is due, so your impound total for the insurance alone $1000 for insurance. You are going to have to come up with $3000 to pay the first half of your property taxes, plus because you only have two payments before the second half is due, another $3000, or six months payments for that. Total due, $7000.

There are really only two methods for coming up with the money for an impound account: Bring in the cash from somewhere else, or have the lender loan it to you, adding it to your loan balance. Except in rare circumstances where you are refinancing the same property with the same lender (and usually not even then), existing impound accounts cannot be used to "seed" the new account. This is because it's your money, held in trust. The rules for these accounts are rigid, and I'm not certain I understand well the rules about whether a bank even has the option of rolling one impound account into another.

This typically means that you have to come up with a good chunk of change out of your pocket for a short period, or add the additional amount into your loan, where you'll be paying for it as long as you have a loan on the property. Every situation is different, but most often I prefer to either come up with the money myself or not have an impound account. The extra charges may be sunk as opposed to refundable, but I'm not paying interest for thirty years on thousands of dollars.

Furthermore, if you are adding the money to create the new impound account to your loan balance, since it's going in before the computation of points, it can add another $50 to $100 to your costs of the loan per point you're paying. Minor in and of itself, but adding insult to injury if the loan has points involved. More to the point is that adding impound creation it to your loan balance means there may be a couple years before your balance gets as low as it was before the refinance, just from this. Indeed, the fact that it raises your loan balance is the worst thing about the impound account issue. On the other hand, unless you have a "first dollar" prepayment penalty, what you can do is turn around and put the check for the previous impound account when it arrives into paying down the new loan. It typically won't bring you even, and it won't reduce your contractual payments on the new loan (although that is usually a good thing), but it will ameliorate the damage to your loan balance.

Initial loan closing is not your only opportunity to start an impound account if you want one. If you don't have one to start with, the lenders will be very happy to let you start one later. I've literally never heard of a lender saying anything but "YES!" (usually with a pump of the fist) to a request for an impound account. Why? Because now they know that your taxes and insurance will be paid, and get to use your money, and after you paid a fee for no impounds. Oh, happy banker!

If you want to cancel an impound account, expecially within a year of whenever the loan was funded, you can expect to pay the "no impounds" fee, possibly prorated, but usually just the whole thing. Roll thousands of dollars into your loan balance where you'll be paying interest on it and then pay a lender's charge for no impounds? Ouch!

Can you force the bank not to do any of this? Not really. They don't have to lend you money. Yes, they are in the business of lending money, but if they don't loan it to you, they'll find other uses for it. Somebody else is always willing to accept the bank's terms. You try to violate guidelines that lenders have established in order to lend you the money, and you'll be told, "Sorry but you don't qualify." The golden rule of loans is that those with the money make the rules.

Furthermore, those lenders who didn't require this would be at a competitive disadvantage as regards rates, because their loan portfolio would be a significantly riskier one, and they would have to increase their rates to compensate for this. You could qualify for a better rate or lower closing costs somewhere else. Better to not argue. Assuming that I already have an impound account, all the extra I lose is a maximum of sixty days interest. Two months interest on $5000, even at ten percent, is $83. That's a lot cheaper than any of the alternatives.

Caveat Emptor

Original article here

If you read the papers and the congressional record on the current housing crisis, you might think yield spread is the central culprit for the entire meltdown. You would be wrong.

Yield spread is a beneficial tool, offered voluntarily by lenders, that is an alternative to consumers paying all of the costs of a mortgage themselves.

No matter who does your loan, broker or direct lender, they need to get paid for doing it. If they cannot make money at it, they won't be in the business of doing loans. There are high cost loans and low cost loans, and any number of ways of paying those costs, but there is no such thing as a free loan, and anybody who pretends otherwise is either a naive child or lying through their teeth. There are a very few loan providers out here who will finish loans on which they don't make anything in order to keep their promise about the terms of that loan to clients, but there has never been a loan in the history of the world where the provider planned not to make anything.

Yield spread arises as a by-product of the price that the lender receives on the secondary market. On the day I originally wrote this, for thirty year fixed rate conforming loans, at 5.5%, lenders were making about 20 cents per hundred dollars over the actual dollar value, in addition to the roughly $1.30 per hundred dollars the lowest priced lender I had was charging brokers. For a $300,000 loan, this means they were making roughly $4500 for a loan where the broker did all the work from attracting the customer onwards through the rest of the loan (the rate cost three points in the one direct lender retail branch I saw last week, so they'd be making about $9600 there). None of this covers all the fees for service, aka closing costs, or loan price adjustors. This is purely from the act of putting the money to the deal. At 6.00%, the lenders were making about $1.56 per $100 of loan amount directly, and that's about where wholesale par was, the loans that brokers could do without any explicit charge for the money. The direct branch wanted a point and a half to do that loan. Finally, at 6.5, they were making about $2.31 per hundred dollars directly from the secondary market, and they were agreeing to give brokers about seventy-five cents of that in the form of Yield Spread.

What this boils down to is that wholesale lender is looking to make about 1.5% of the loan amount, no matter what loan the consumer is put into, merely for the act of loaning the money. It is out of the difference between the number the wholesale lenders charge, and what their retail lending branches charge, that brokers make their living. If brokers can get the loan done for less than the retail branch, and still make money, the consumer comes out ahead.

There is no requirement for lenders to offer Yield Spread. They don't do so to enable brokers to hose customers that they would rather have walking into their own retail branches. They do it to compete for the business of people who have discovered that using brokers is actually a way to get the same loan cheaper. They do so because other lenders do so. Because they really want that $1.50 per hundred dollars loaned, they'll willingly give up most of any amount over that to encourage brokers to come to them, rather than the other lender. As I've said, in loans there is no difference in brand names. It's just money. So long as the terms are the same, it really doesn't matter if you're making the check for payments out to "International Megabank, Inc" or "Fifty-Third Bank of Podunk," and that really is the only difference. In fact, using brokers as a way to expand their reach is one of the ways small lenders can become major players quickly, without the expense of opening branches. More than one major household name has done precisely that. By the way, this $1.50 per hundred dollars loaned is very low by historical standards - it was roughly $2.50 twelve months before, and twelve months before that it was more like $4.00. But there's a lot of money chasing not very many borrowers right now. Nor is any of this in any way evil. As a matter of fact, it has enabled much lower interest rates for consumers than the traditional lending model where the lenders held the loans for the duration.

Nor do lenders like paying yield spread. They'd rather have the entire secondary market premium for themselves. They offer it for one reason and one reason only: Because the brokers would otherwise take their clients to a different lender who did offer it. Most brokers operate on a set margin per loan, especially the better ones. The good ones are willing to disclose this margin, the bad ones will do everything they can to hide it. This margin may vary between loans. If borrower A is a slam-dunk A paper borrower, that loan can be done a lot more easily than a sub-prime borrower who needs to qualify based upon bank statements, and will eat up a lot less of my time and therefore, the loan should be done on a thinner margin. Whatever this margin is, it can be paid via origination (a charge for doing the application and getting the loan done), it can be paid via flat dollar charge to the borrower, it can be paid via yield spread, or it can be paid via a combination of these. But it is going to get paid. When I quote a loan, I quote it in terms of terms and total cost to the consumer, including what I make, and if I'm not going to make enough to make it worth my while to leave home, I'd rather not do the loan. Others quote higher, building a bit in that they're prepared to negotiate away if the client asks. Still others just make believe that they're going to deliver the loan on better terms than they will actually deliver it to get you to sign up with them - but the chances of anyone actually pricing the loan so as not to make anything are zero. Consumers looking to tell the difference between better and worse providers should ask Questions you should ask loan providers. That is another change for the worse in the new lender environment, but the way. When I originally wrote this, I could lock every loan upon application and guarantee the price immediately. As I explained a few months ago, that is no longer the case. The lenders have begun charging me (and therefore my future clients) too much for loans that are locked but not delivered. It's hard to blame them, but it's still not a beneficial change for consumers.

Yield spread is nota cost paid by consumers. It doesn't show up anywhere in the list of charges they pay. Were its disclosure not mandated by federal law, the consumer would have absolutely no evidence of its existence except, possibly, the absence of other charges or the fact that they have been paid without the consumer having to shell out a dime. I agree with the disclosure law, by the way. Indeed, I want to expand it to require lenders to disclose the secondary market premium they would be paid assuming they sold the loan. Consumers do pay for yield spread indirectly, of course, with increased interest charges during the life of the loan. But they pay those same charges whether incurred as a result of a broker earning yield spread or a lender being able to make the money on the secondary market. Furthermore, paying those charges will be to the consumer's benefit if the increased charges for interest offset or more than offset the higher fees they would have to pay in order to get a lower rate. There is always a tradeoff between rate and cost in every loan. Most consumers do not keep their loans long enough to justify the higher fees for a lower interest loan. Similarly, if the loan is going to go to from a fixed or set rate to a variable rate loan before the higher costs for a lower rate have been recouped, whatever wasn't recovered before that happens has been wasted, as all the loans of a given type reset to the same rate when they adjust - doesn't matter whether you got a zero cost loan out of Yield Spread, or you paid five points to buy the rate down, and therefore the payment. But the 4.875% 3/1 that closes today will in three years reset to the exact same rate and payment as they 6.25% 3/1. Well, not exactly. Because assuming they did what most borrowers do and roll those costs into the loan, that 4.875% loan will have a higher balance owed than the one that was initially 6.25%, and therefore will have a higher payment when they both reset. So yield spread has done the latter borrower a favor by helping them control overall loan costs.

Let's look at what happens if we count yield spread as part of the costs of the loan. First off, it makes it appear as if loans including yield spread are more expensive than ones without. This gives direct lenders an apparent (not real!) advantage over brokers. Let's consider an actual real world example: A few days before I originally wrote this, a retail lending branch offered one of my prospects a 6.125% loan for one point, while he came back to me and I locked him into for 6.125% for ZERO points, a price which included me making about nine tenths of a point in yield spread. Assuming closing costs are the same (in fact, mine are lower than theirs), here's what the client sees now on a loan with a $300,000 loan payoff. (I'm also going to assume anything other than actual costs, such as prepaid interest, are paid out of pocket)

This reflects reality. The client ends up with a loan balance $3060 lower, and a payment $18.59 lower, through getting exactly the same thirty year fixed rate loan through me as he would have gotten through that lender.

But if I have to count yield spread as a part of the cost of the loan to the consumer despite the fact that he's not paying it, here's what the sheet looks like:

First, note that the actual amounts owed by the consumer after closing the broker originated loan are exactly the same whether yield spread is counted as a cost or not. It makes zero difference to what the consumer actually pays. The loan amount is the same, the interest rate is the same, the payment is the same.

Why does the government want to make it look like the broker loan is more expensive than it really is? In the second example, appears at first glance like the consumer is paying almost as much for the broker loan as for the lender loan. They're not. Keep in mind that this is for exactly the same thirty year fixed rate loan at 6.125% - except that the consumer's loan balance if they go through the broker ends up $3000 lower. That $2726.10 in yield spread is not a cost to the consumer. Indeed, Yield Spread is only a cost to the lender. Note that the consumer's balance and payments in no way reflect yield spread, and my client has been told about it, but really doesn't care. Being a rational consumer, he shopped for the loan on the best terms to him and his family. He doesn't care if I'm making ten cents or ten million dollars. All he cares about is I get him the exact same thing for a cost that is thousands of dollars less. But if Yield Spread is listed as part of the cost on the Good Faith Estimate (or MLDS in California), then it appears as if that lender's loan is a lot more competitive than it really is, i.e. $5950 to $5626, not the reality of $5960 to $2900. Furthermore, this was an uncommonly broad difference, that still looks like the broker is offering a better loan. Far more common is a differential spread of half a point or so. If the price differential were only half a point, the broker's loan would look more expensive, while being in fact less expensive to the consumer who doesn't know yield spread is an accounting phantom as far as they are concerned. The consumer would still be saving money with the broker - about $1500, a full 25% of the actual costs of the loan, but listing yield spread as a cost makes it appear as if the lender's loan is cheaper when it is in fact more expensive.

Furthermore, listing yield spread as a cost has some other effects. Suppose you live in an area where the cost of housing is about $60,000 to $80,000 or less. Under the same bill in congress proposing to count yield spread as a cost to consumers even though it is not, is a provision limiting total costs of loans to six percent. Six percent of $60,000 is $3600. Six percent of $80,000 is $4800. There literally is not a loan that a broker can do under these limits. I can't keep the doors open on $700 per loan, which is all that's left after those $2900 of fixed closing costs at the low end. It's not like I get to spend every dollar the company makes on my family. Even at the higher end, it's probably not worth my while to accept a loan on which I can only make $1900. Effect: Brokers in those areas go out of business, but direct lenders are still in business, lessening competition. They can jack up the rates until the secondary market will pay them enough, and secondary market premiums aren't officially considered part of costs, even in the artificial environment of this new bill. Result: Rates rise, lending margins rise, competition is less. Big Winner: direct lenders, who clean up with all the extra money they make. Big Loser: brokers, who go out of business. Of course, consumers lose, too, as do real estate agents because prices are lower as a direct result of higher rates, but hey, that's okay because the big bankers who bundle million dollar campaign contributions made out!

Let me make something explicitly clear: Low cost real estate loans cannot be done without yield spread. The loan provider has to make enough to stay open. The closing costs are real, and the people performing those functions need to get paid or they won't do them. If they don't do them, the lenders will not approve your loan. There are three ways to pay these costs: yield spread, out of the consumer's checking account, or (on refinances with existing equity) by adding those costs to the loan balance, where they are still paid plus the lender gets interest on them!

Suppose you live in an area, such as I do, where the cost of housing and loans is enough higher for this not to be a danger. One cold hard fact is that there are still people who bought years ago that bankers have a free field with because brokers cannot legally do their loans and still make enough money to keep the doors open. Consider a $200,000 loan, where 6% is $12,000, so the maximum loan cost just isn't a factor. Such a person, realizing that they've owned this property ten years and refinanced five times, decides they want a zero cost loan, because they'll come out better. Well, a broker can still get them a loan that doesn't really cost them anything, but brokers no longer are legally capable of calling it a zero cost loan, because legally, yield spread is a cost. All we can do is call it by some name that sounds like a legalistic way to lie. So now lenders can advertise "zero cost loans," and brokers are breaking the law if they try, despite the fact that they offer the same loan at zero real cost to the consumer with a rate a quarter of a percent less than the lender will. Indeed, for all the low cost options, the lenders now appear to be cheaper than brokers even though they are not. Also found in this same legislation currently in Congress is a provision to make it illegal for brokers to get part of their compensation via yield spread and part via origination. This is the vast majority of my current loan business, because it's the range where the Tradeoff between rate and cost is best for consumers. Say I figure I need eight tenths of a point to make a loan worthwhile for me to do. If the yield spread for the rate the customer chooses is three tenths of a point, I need a half point of origination to make it work. But now I can't do this loan the simple way. I have to charge eight tenths origination, and even though I agree to rebate the three tenths of a point of yield spread to the consumer - in other words, even though it's an accounting phantom never really coming out of the borrower's pocket in the first place, it still legally counts as a cost of the loan. So the new accounting with the requirement of adding double counting the yield spread to the official cost of the loan makes it look like the broker's loan costs 1.1 points, even though the consumer is only paying five tenths net, getting three tenths of a point in their pocket. If the trade off was seven tenths of yield spread to one of origination, it looks like a 1.5 point loan by this new accounting, even though the consumer is only paying one tenth of a point. Result: Consumers are going to have to have an accounting degree to realize that the broker's loan, which looks more expensive, is in fact the cheaper loan.

This is the exact opposite of what the government should be looking to do. But the mortgage banking industry has much bigger pockets than the mortgage broker industry, and they realized quite early on in this whole meltdown that if they painted brokers and yield spread as bad and controlled the narrative and their bought friends in congress controlled congressional testimony, they could make this entire housing meltdown for which they were more responsible than any other group into a public relations opportunity to restore the dominance of residential lending they had forty years ago. Bankers don't like paying yield spread, and they don't like competing with brokers, whose costs are lower because nobody expects brokers to have flawlessly landscaped offices with three inch think carpet, security guards, and armored bank vaults, or to wear $2000 suits. They do so only through what they saw as a tragedy of the commons type mechanism, where they could compete for broker's business at the costs of lessening their own margins, or not get any. Of course, this tragedy for lenders was a boon for consumers, but their responsibilities are to their own bottom line, and if they can legally shackle brokers, not to mention legally keeping their competition among other lenders from competing for broker business, those lenders are all better off.

Who's not better off? Well, basically everyone except major banks. Lessened competition, loan documents that make it appear as if one provider's loans are more expensive than actual while not making equivalent disclosures about other provider's loans, all of this translates into higher loan prices for consumers. It may seem penny ante to object to consumers paying a few hundred dollars extra here, a few thousand dollars extra there, but when you put it together across 100 million units or more, this translates into hundreds of billions of dollars per year, all sliced into fewer pie portions because the lending industry just effectively got a lot smaller, and with brokers diminished the costs of entry just got a lot steeper for any new lenders who want a piece of the action.

Yield spread is a tool, and a highly beneficial one from consumer's point of view. It has been one of the largest contributing factors in the rise of brokers, and through brokers, of making mortgages more affordable to consumers. It is not a cost to the consumer, and should not be treated as such, although it should be disclosed, as it is required to be. It can be misused, as it was in the case of negative amortization loans, but the ultimate indictment there goes back to the lenders who offered the loans and the high yield spreads, with regulators and mortgage brokers solely in supporting roles. Indeed the best way to fix this entire problem for the future would be to fix the disclosure rules to make the process clear to the consumer, as I wrote in How to Avoid A Repeat of the Housing Market Mess - but if Congress starts to fix those, nobody would be able to hose the consumers, and (sarcasm on) we can't have that, can we?

Caveat Emptor

Original article here