Real Estate: March 2021 Archives

The inspiration for this article came when I checked my referral logs and found an article where somebody was essentially saying "If you want to be depressed, go read this site and then go rent somewhere for the rest of your life".

I can understand where the sentiment is coming from, particularly if they were of the sort of person who wants to meander around occasionally looking at houses until they find one they like, then sign a couple of papers and move in. Lest it not be obvious to you, these are the elements of disaster. I would never put an offer in without looking at at least ten to fifteen properties in the area, without aggressively shopping the mortgage market, or without taking positive steps to insure that I have at least as much leverage over the service providers as they do over me.

The fact is that for most people, the largest transactions of their life are all going to be real estate related. When the average transaction is in the hundreds of thousands of dollars, and those transactions are so complex as to defy understanding by non-professionals (and some alleged professionals), you have the elements for a system that's going to suffer abuses. Many past abuses have been corrected through the passage of legal impediments, but many others remain, and some are illegal but keep happening anyway (See my article on "What to Beware in Third Party Services).

What I am trying to do here is give you the insider's appreciation for what goes on (although not the professional's specialized knowledge. It may not be "rocket science", but to pretend you can pick up everything a working professional learns and gets exposed to every day by reading a few articles would be false, and of no service to you, the multi-billion dollar "self help" press notwithstanding). With this information, you can debunk the worst of the nonsense that you are told and get a better bargain for yourself no matter who your real estate agents and loan providers and financial planners and whatnot are. I am writing about knowledge that you need to have to understand the system, and I'm not pulling any punches about what goes on, anywhere in the transaction. I'm trying to show you limitations and blind spots in the information you may receive, and show you strategies that put you in a stronger position. Most of the articles I have written thus far pertain to real estate and mortgages, but I've written a few articles pertaining to finance as well (RULE: The best time to buy is when there is metaphorical blood in the streets of the financial world).

If you're the sort of person who prefers to go on in an "ignorance is bliss" state of mind, the education may be disturbing. Indeed, many people seem determined to go about their real estate (and other) transactions in this state of mind. They resist when I attempt to educate them in the realities of the market, figuratively in the same vein as people who put their hands over their ears and say "la-la-la! I am not listening! la-la-la! I am not listening!" It's like they want to get conned, or at least not having to think about it is worth more to them than the money they're being taken for. Since the money they're being taken for can easily go into five figures whether it's a purchase or a refinance, and can be six figures for a purchase or sale, I find this difficult to believe. If you're making that much, you shouldn't need a loan, for one thing, let alone be concerned about minimum down payment. Nor would you be concerned about affordable housing and getting the best deal possible for your money. You would be so wealthy, and your time so valuable, that it would make economic sense to buy the first property that met your needs - and you'd be buying properties in the unique custom home range ($2 million dollars or so around here).

Nobody does loans for free. Nobody does real estate for free (nobody does financial planning for free, legal advice for free, etcetera). "Free" is likely to be the most expensive service of all (This is different from at such a rate that yield spread pays all costs, or the custom that sellers pay the costs of both agents - but the only source for those funds is the money the buyer brings to the table). If something about a loan, a real estate deal, or some aspect of financial planning seems "too good to be true," that should set alarm bells ringing right there. If the payment or interest rate on a prospective loan is nothing like what everyone else is talking about, they are looking to pull a con job on you.

If you're of the school that forewarned is forearmed, what you're reading here should give you the information you need to guard yourself against the deceits in the system. I've done lists of "red flags," warning signs not to do business there, "Questions to ask" that you can print out and take with you, "Salesgoodspeakian to English Translations," debunking of pat phrases used to mislead you and what they really mean. I've given you strategies that, if adhered to, give you more leverage right down the line. I've gone through what real closing costs are, what points are, and warned you of the dangers of shopping for loans or real estate by what they tell you the payment will be. Most importantly, I've shown you how to keep control of your transaction by being aware at the start of the process what the likely bumps are going to be.

Not everyone in the business does everything I've warned you against. There are ethical providers out there; people like myself who will walk away from business or tell clients the pitfalls if something is not in the client's best interest. You can find us if you look, but we can't help you if you close your ears to the things you don't want to hear. Nor are those who practice otherwise necessarily evil, and there is an entire range of practice from best to worst. Real Estate, financial planning, and many other fields are set up such that someone new in the business learns from somebody experienced. In many cases, they've been told "This is the way things are," and they just don't know any better. The person who taught them didn't know any better. It is my aim to ensure that people "know better." The change is not going to come from within the industry - the system is set up for the practitioner's best advantage, and any one agent or loan provider unwilling to toe the industry line is at a competitive disadvantage, and their business is likely to fail. It's kind of the tragedy of the commons: their own individual behavior shows them nothing to gain, and everything to lose, by full truthful disclosure, and where there are people who do it anyway, we are comparatively few. Therefore, the change must come from outside the industry. So by being knowledgeable consumers and helping yourselves, you provide impetus for practitioners to reform their practices for everyone. It may take a long time, and it may never be complete, but if it's never started I can guarantee that things will not get any better.

Caveat Emptor

Original here

One of the things I have to deal with on a continuing basis is people calling me because they like something they saw on one of my websites, but they have no intention of doing business with me.

Most common is would be buyers calling me, "Just tell me the address of that Hot Bargain Property." That's not how it works, as I explain in literally every one of those posts. It isn't luck I find those properties. It's dedication and skill. I spend a lot of time looking, not just in MLS, but in public records and physically going out and looking at them. I've spent a lot of time learning what to look for and how to look for it in all three places. Maybe, if I had personal need of their professional services, I might consider a barter - mine for theirs. But in point of fact, I suspect a large percentage of the calls I get of being lazy agents (A receptionist answering the phone in the background saying the name of a certain major chain is a dead giveaway).

There is a reason these properties are of interest. I'm going out and finding properties that are noteworthy bargains. If it could be done by any random person with MLS access, anybody who could type realtor.com could do it. I can do it, in large part, because I make a habit of doing it and most others won't. It is work. If George digs a ditch, you don't pay Charlie. You pay George. Same principal here. The reason I'm worth more than the discounter, in terms of what I find, how well I negotiate, and everything else, is a function of all of the work I do that helps me find good properties, spot problems, know the micro-markets I work in, understand what is critical and what is not. If you find the property yourself without any help from me, yes I'll discount my services for negotiation and facilitation because you're not getting the largest part of the value I provide, and I'm not risking the largest source of agent lawsuits. Otherwise, I am providing more value to you than the discounter and am therefore worth more pay. And I'm providing it, not that discounter. I'm not going to give out the locations of the special bargains I find to anyone not willing to work with me. Like I said, George digs a ditch for you, you pay George, not Charlie. You want to pay Charlie, get Charlie to dig the ditch. But in this case, he not only can't, he won't try.

Borrowers will call about my Real Loans for Real People. They want to know what lender that's with. Well, I hate to break it to you, but the loan I have is the loan I have. Credit Unions, National Megabank, etecetera may use the phrase "cut out the middleman" to try to get you to avoid brokers, but that's not the way it works. Even if I gave you the name of the lender, very few of them give their captive loan officers rates as low as brokers get from their wholesale division. Why? Because they're not paying my overhead, and my clients aren't captive to them. They regard their clients as captive because comparatively few people shop loans effectively. They go to big name lenders, who have no more programs than other lenders, and comparatively little imagination. They may or may not have the most appropriate loan program for a given client. Usually not. Big lenders mostly compete on the basis of name recognition and consumer comfort. A broker may be a middleman, but we function more like discount outlets. And the specific stuff I get is for my clients. If you want it, you've got to be one of them. If you weren't interested, you wouldn't have called.

What I'm trying to get at is this: Trying to cut out the person who provides the value you're interested in is counter-productive. Even if I told you what lender a particular loan was with, rates change at least every day, and it's unlikely they will offer as good a deal through their dedicated loan officers, even if they are the right fit for your loan. Trying to cut out the person whose market knowledge and work enabled them to recognize a bargain means that even if you know what property it is, you're in a weaker position on negotiations. Net result, you get some money back, but you also paid a higher price than you needed to in order to get it. The latter is almost certainly more than the former - probably several times more. Once again, if you want George to dig a ditch for you, or if you want George's ditch, pay George, not Charlie. You'll come out better, even if George wants a few bucks more than Charlie. If Charlie's ditch was something you wanted, you wouldn't have needed to get George involved. Chances are, even if you buy Charlie's ditch, you're going to want George to fix it, so the money you paid Charlie is wasted. Actually, it's worse than that, because in real estate, once something is screwed up, there are no shortcuts to fixing it. Once a real estate transaction is done, unwinding it or fixing it becomes far more expensive and difficult than doing it right in the first place.

Caveat Emptor

Original Article here

People ask for referrals all the time, and many folks will stumble all over themselves to provide referrals. Some of the people referred really are excellent providers. Others are not so good, but the person providing the referral has an agenda of their own, and you have to be aware of the possibility. Never give anyone your business without shopping it around just because someone referred you to a certain provider.

In many cases, the reason why you are referred to Company X Realty or Company Y Loans has nothing to do with any allegations of them being an efficient, diligent, effective or inexpensive provider of those services. Number one on the list of reasons why people tell you about X Realty or Y Loans is because company X or company Y refers business back to them. This isn't illegal, but when you ask a real estate agent for a referral to a low cost mortgage provider and you get referred to one of the ones that's competing on the basis of consumer name recognition, you should realize that the mortgage providers with national advertising campaigns are not among the low cost providers. For analogous reasons, I usually advise people to stay away from the national realty chains, even if they're not local to me. But I digress. The point is that the person who refers you to this person is effectively getting paid by referring you to them. Not exactly a sterling reason to trust their motivations in making this referral.

Indeed, this is one of the ways that lenders in particular avoid competing on price. Ladies and gentlemen, so long as it is the same type loan on the same terms, a loan is a loan is a loan. The only real difference is the tradeoff between rate and cost, or, in other words, price. But lenders do not want to compete on price, because that means they don't make very much money. In fact, they want to avoid competing on price, and the captive audience from referral business is one prime example of how they do it. Joe Realtor sends Jane Lender business because Jane refers business right back to Joe Realtor, and because the client has been told that Jane Lender gives great loans at a great rate, the client doesn't shop loan providers like they might otherwise have done, leaving Jane a freer hand to charge a higher markup.

These are not the only reasons why referrals happen. For instance, here in San Diego, many real estate agents will refer to one particular loan officer because they know that loan officer won't tell the client any inconvenient truths, such as, "You cannot really afford this house." They refer to this loan officer because that loan officer will just keep their mouth shut about the buyer's ability to actually afford the loan and figure out some way to get it through so that agent gets paid. Never mind that it's an unsustainable loan. This sort of thing happens everywhere, but particularly in markets where there are affordability issues for the average person.

Finally, explicit kickbacks are illegal, and there are limits on how often Joe and Jane can buy each other dinner out or whatever arrangement they have to transfer wealth, but that doesn't mean it doesn't happen sometimes. After all, there aren't any Department of Real Estate employees following Joe and Jane around 24 hours per day, so this kind of stuff gets hidden all the time. I've had more than one blatantly illegal offer of referrals for kickbacks since I've been in the business. Some of these folks are brazen. No, there's no percentage in turning them in, either. This is one of those situations the saying about, "No good deed goes unpunished," was invented for. One guy I knew who did turn someone in years ago told me about the thousands of dollars in legal fees he incurred, plus three years of investigation that shows up on your license inquiries as an unresolved complaint until it's over. No thank you. Sometimes, you have to content yourself with remaining apart from any illegalities, while warning people that this sort of thing does happen.

There's nothing wrong with asking for a referral. But that doesn't mean you should just blindly follow that recommendation. All too often, there's an agenda behind that referral. If the person making the referral pushes it too hard, let alone tries to make that referral a condition of their own work, the correct response is to fire them as well.

Caveat Emptor

Original article here