Buying and Selling: October 2006 Archives


I am buying a house. I signed the contract but the seller said contingent to sell until she buys new house?

Is that normal?


People do it. It's smarter to avoid the stress and complications of dealing with both at once, but there's nothing wrong with a contingency sale, so long as you agreed to it in the contract. Note that once you have a fully negotiated contract, you can't just add a contingency to it. It has to be agreed to before there's a valid purchase contract, and if it isn't agreed to before then, the question becomes, "What concessions is the other side going to demand for this?" There will always be concessions, but by waiting to negotiate them after the contract is complete, you lay yourself open to a suit for specific performance. You agreed to that contract. Just because you forgot something important (or if you intentionally omitted it), does not mean you can just tack it on as an extra consideration, any more than the other side can unilaterally change the purchase price by $10,000.

Contingency does add a lot of complexity and not an inconsiderable amount of cost and uncertainty to the process, however. The buyer shouldn't lock their loan until they know when you can fund it, and if they don't know yet, this means the loan sits and sits, perhaps increasing in rate and cost. If you lock it, it definitely increases in rate and cost. This is the one exception to locking a loan rate right away. There's also the issue of whether your seller will qualify for the loan on the new residence, or the purchasers of your buyer's soon to be former residence can qualify for their loan. Not to mention the anxiety of whether you will qualify for your loan in time for the transaction to close so they can get their home, and I can go on.

There are better alternatives for this situation, and if your agent didn't give you a couple of ideas during the negotiating process, well, let's just say there are better ways to handle it, especially right now when you cannot afford to irritate or lose any buyers.

A contingency sale is most often for the convenience of the seller. Whereas this is just fine in a seller's market where as soon as you put the sign in the yard you get three offers, a buyer's market is something else again. By being unwilling to accommodate a particular buyer, you may not get another offer. I understand very well not wanting to move twice, but the person who is willing to work a little harder or go through some extra inconvenience usually gets it returned in the form of cash when the transaction is over. How much is dependent upon the competition of the moment. It can make your property a lot more attractive, and mean a significant difference on the sale price, if you're willing to cooperate with the prospective buyer on not making them wait while you find a new property to buy. In a market like today's, where buyers have all the power, it can make the difference between selling for a good price and not selling at all. Any time you find yourself unwilling to do something a buyer wants, you run the risk that you won't get another, or won't get another as good.

Some buyers want contingent sales as well. Just as being willing to work with a buyer without a contingency can make you money, a willingness to grant a buyer their contingency can also make money. You can ask for a larger deposit, a higher sales price, or for the right to continue to market the property - so you've got this offer, or a better one if that comes along, as they are not likely to be able to perform when you drop that Notice to Perform on them because you now have a better offer. If they could have performed, they would have already performed. If they really need that contingency, they've got to deal with the same market you're dealing with!

When there is a strong buyer's market, if you are willing to do what it takes, you are competing more strongly for the available buyers. Similarly, if you as a buyer have fewer needs that you ask the seller to cooperate with, chances are excellent that you will get a better price. Remember that there is a reason why he who has the gold makes the rules - because he's going to be shelling a good amount of it out in order to get his way on other things.

Caveat Emptor

UPDATED here

This is a nationwide program for first time home buyers that helps them qualify for the loan by saving them even more money on their tax bill. With that said, however, the state of California accounts for more than 50 percent of all MCC Certificates.



Each individual area has its own administrator. Within the County of San Diego, for instance, there are three individual programs, although one company administers two of them. You must submit your paperwork to the correct authority, under the correct program. Each program has its own allocation of money, and if you submit to the wrong program, the application will not be approved, wasting your money.



Now, before I go through all the rigamarole of the program, what does it do for you? Simply put, it boosts the value of the mortgage interest deduction.



Here's how it works. During the escrow period, the time between the purchase contract being agreed to and the consummation of the transaction, you apply for a Mortgage Credit Certificate (MCC) through the originating lender. This means the people who take the loan application. This program is emphatically open to loan brokers. If the broker participates, it does not matter whether the funding lender participates, because it is not required that the funding lender participate, only that the originating lender participate. There is a nonrefundable upfront fee involved. This fee is paid to the authority administering the program. Some brokers may front this money on your behalf, but they will expect to be paid back several times over upon funding. Remember: There is no such thing as a free lunch. Your lender submits the application and the fee, and receives an approval from the authority on your behalf. This approval is good for up to 120 days, and in most cases, it may be transferred to another property conditions if this escrow falls apart.



What does it actually do for you? It converts part of your mortgage interest tax deduction into a direct tax credit. 20% of your mortgage interest, to be precise. This applies to both first and second mortgages on which interest is being paid and payments are being made. It does not apply, however, to first time buyer assistance loans on which there are no payments, or only nominal payments.



Let's do some math! Let's say you're buying a property for $400,000, using 100% financing. Of that, $320,000 is a first mortgage at 6%, and $80,000 is a second mortgage at 10%. Let us examine the situation you should be familiar with, the normal mortgage interest deduction, first. This is the situation without MCC:







loan

amount

rate

interest

first

$320,000

6%

$19,200

second

$80,000

10%

$8000

total

$400,000

blended 6.8%

$27,200





You also have property taxes of $5000 per year (California rule of thumb. Yours may vary), which are deductible. Total: $32,200. The amount over this is deducted from your income before computing tax. The net benefit to you is based upon what exceeds the standard deduction you'd get anyway. For married couples, this will be $10,300 in 2006. $21,900, at a 28% tax bracket, sees a net benefit of $6132. This shaves a $511 per month off of your federal tax bill.



Now let's look at the situation with MCC:







loan

amount

rate

interest

20%credit

80%deduction

first

$320,000

6%

$19,200

$3840

$15,360

second

$80,000

10%

$8000

$1600

$6400

total

$400,000

6.8 blended

$27,200

$5440

$21,760





So you get a $21760 deduction and a direct tax credit of $5440. Your deductions total $26,760 with property taxes, using the same numbers from the first scenario. Les $10,300, your real deduction is $16,460, times 28% tax bracket is $4608.80. That's the reduction you see on your taxes due to the deduction. You'll also see a tax reduction due to the credit of another $5440, for a total of $10,048.80 tax benefit, or $837.40 per month. That's over sixty percent more you save off of your federal taxes. What's more, is because the credit is a known number, not subject to alteration as to your deduction status or other tax situation, it can be used to help you qualify for the loan. That $5440 credit works out to $453.33 per month that can be used to help you qualify for the loan. I just took the training for this program, and I know I'll have some interesting arguments with nonparticipating lender underwriters, but I'm going to have the documentation on my side. They say, "Show me on paper," and I show them on paper. United States Government paper. IRS Tax code citations. Anybody want to bet how that turns out? One more thing before I change the subject: This only applies to federal income taxes, not state. For state income taxes, if any, the situation with and without MCC is identical.



Participation in this program is not universal. There are fees to be paid, and some cities can't or won't. Many entire states do not participate. In other cities, there is no qualifying housing. For instance, within the county of San Diego, the City of La Mesa is not currently participating, although they have stated an intent to return to the program. The Cities of Del Mar and Solana Beach also do not participate, due to the complete lack of qualifying housing within those two cities.



There are basically three qualifications, in addition to submitting your request to the correct regional program and buying a property in a participating area. First, you cannot make more than the appropriate income limits. In San Diego County, this is currently $82,800 per year for a household of one or two persons, $96,600 for a household of 3 or more persons. Qualifying income adjusts annually. Second, this is valid for owner occupied dwellings only. You must occupy the home, or intend to occupy it as soon as the purchase is finalized, and then you must actually occupy it. Therefore, only single family occupancy properties are eligible; no duplexes, apartment buildings, or other properties with more than one living unit. Condominiums are fine, as are manufactured homes on owned land, as these are both single family dwellings. If you move out, you will lose the benefits of this MCC. As a side note, any tenants displaced by this program are entitled to compensation from the program, so if the current owner is renting to someone other than the prospective buyers, expect the application to be refused. It must be vacant, owner occupied, or rented by the prospective purchasers. Third, and finally, the property must be within the maximum limits for size of the purchase. In San Diego County, these limits are currently $503,700 for a resale property, $490,000 for a newly built property being sold by a developer. In some "targeted" census tracts, specifically designated due to their low income, the qualifying limits for the purchase are higher: Currently $615,700 for resale, $598,900 for brand new properties. About these census tracts, more very soon.



Now, what is a first time buyer for purposes of this program? A buyer qualifies if they have not owned their primary residence for three years or more. This is proven via federal income tax returns. You may own another property off far away somewhere else, too far away from your job to commute, at least according to the interpretations I heard.



There is a way for people who are not first time home buyers under this definition to take advantage of this program. Remember those "targeted" census tracts I talked about two paragraphs ago? If you buy in one of those "targeted" census tracts, it does not matter if you're a first time home buyer or not. As long as you meet the other criteria, most particularly including owner occupancy, you are eligible. These targeted tracts change with every decennial census. We're in the middle of such a period now, so no changes are anticipated soon, but they do change from time to time.



Now, there are some financing limitations on this program. It is aimed at people who really can afford the loans they are getting, and so these loans must be done full documentation. Stated income loans or NINA/No Ratio loans are not eligible. In other words, you must prove you make enough money to justify the loan. Furthermore, the emphasis is on being able to afford the loan. Negative amortization loans are not allowed with this program, nor are ARMs or hybrid ARMs with an initial fixed period of less than three years. Interest only loans are allowed, but they must be both fixed rate and interest only for at least five years. Finally, because the money comes from the same place as the CalHFA and Cal-Vet loan, it cannot be done in conjunction with those loans. I think it's a better program for the vast majority of buyers anyway. For instance, the MCC can be layered with a local purchase assistance program, which those cannot.



There are two major flies in the ointment. The first is refinancing. The MCC dies when you refinance, unless you get it reissued. This involves another fee, and getting an RMCC (for Reissued Mortgage Credit Certificate), and doing so within a deadline. There are no income restrictions once you have the MCC on getting an RMCC, but if your property has ballooned in value 200% and you do a "cash-out" refinance, the RMCC will apply only to that portion of your loan that relates to your original loan amount.



The second fly is the possibility of paying recapture taxes. This program was originally established under President Reagan, and people were selling the properties for high profit in short time frames. This caused it to be de-funded, as it was painted as causing windfalls for folks. But it proved popular enough that they brought it back, albeit with the recapture provisions. If you actually sell, as opposed to merely moving out and renting, within nine years of purchase, there's a formula for whether you'll have to pay taxes on the gain or not. But the maximum possible tax is half the gain, and the money they get helps them keep the program going. It has to do with how much your income was versus the guideline you qualified under, plus a yearly five percent adjustment for inflation and people earning more later in life. This is based upon the maximum qualifying income guideline, not what you actually made when you qualifies. Furthermore, it is waived in cases of death or divorce. In general, avoid selling in years you get a major windfall. It is to be noted that the competing programs have this recapture feature as well.



When you weigh the advantages of the MCC against those of the competing programs, as well as against doing without such a thing, the value of this program to the middle income home buyer becomes clear. Indeed, this national program is probably the broadest brush, easiest to obtain home buyer assistance program there is. Funding is not unlimited, so there can be points where it may waste your money to apply, as there is no money available in your area right now. Furthermore, a lot of lenders seem to sign up to lure first time home buyers in, and then direct them to loans that are not eligible for MCC; this is a major part of what motivated me to undertake the training myself. Furthermore, it's not free. But if you fulfill the requirements, the payoff is enormously better, at a cheaper price, than anything else of which I am aware.



Caveat Emptor

UPDATED here


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, and it loses 20% of value, you may have lost more than the entirety of your equity.

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 you're going to do. 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. 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

UPDATED 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/dillemma:

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 partiicular 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.

Now whether you refinace or sell, it's going to take a grand total of about three months to get your bills showing as paid - once month to get the refinance done, two 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.

Now, 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 we're coming up on 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 downpayment 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. 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 home you want to raise your family in. If you have a decent credit score (580 or above, with 640 making things easier and 680 better yet), 100 percent financing is no big deal deal. 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.

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. But let's consider what happens next.

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 be 6.125% right now on the first, maybe a little under 10 percent on the second. $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 coming up on 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 stuff that needs to be considered.

Caveat Emptor

UPDATED here


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 have 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, 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.

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 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. 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 restriction s 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 if the price of land 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 addition 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

UPDATED 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.



Now single family detached homes that are priced appropriately are selling, and for appropriate prices, even at 37 sellers per buyer. Condominiums aren't moving unless they are brand new with lots of glitter, but appropriately priced detached homes are 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 is competing. 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 needs and nobody else wants to do. With the buyers market we have now, it's the sellers who have to compete, and most of them are 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. But in a buyer's market, it's not enough to have your property "out there." In a seller's market, the prices will often catch up to unrealistic asking prices, given time. In a buyer's market, prices are not increasing, and in this strong of a buyer's market, they are going down. In other words, the longer it takes, the worse you look. 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, because the scumbag with the office down the street will show them something a more attractive that they really cannot afford, but with a negative amortization loan, done stated income, they can make it look like they can afford the payments, and a buyer who hasn'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. And the other way to stand out is to be priced the same, but more attractive. 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? I assure you it's happening all over San Diego County right now. Some 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 yet, so small bits of competition can look very attractive.



Even lenders are still in denial for their 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. 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, I just checked again and the beautiful comparable is in escrow now. 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. 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 two years ago when the market was peaking doesn't mean someone else will pay you that much for it now 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, and they might even get a little bit of a bidding feud on it, despite the strong buyer's market. 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 because she was a great bargainer in seller's markets, maybe because she knows someone, maybe some other unknown factor. She's not dealing well with this market. I don't know if she doesn't know market conditions or just acts like she doesn't. If nobody puts an offer in good enough to get past the blanket rejection, it doesn't make much difference, does it?



This the times when good listing agents really earn their money, as the gentleman listing the $470,000 comparable is. It may not be the great publicity of getting the highest price ever in the neighborhood, but getting it sold quick and for something like asking price in this 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'm doing 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.) 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 is going to sell quickly, and sell for a good price. That agent has already earned every penny he will get paid, and it isn't even in escrow yet.



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 now. Buyers have all the power, and they know it, because buyer's specialists like me have told them if nothing else. Inventory is over nine months worth of sales at the current pace, more properties are coming on the market and the worst time of year for sales is approaching. 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. 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.



Now, I've seen agents telling people that because interest rates have stabilized or even moved down, that will revive the market. This is complete and utter nonsense. 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?



Now, looking forward. What's going to break the logjam and get the market moving? Well, absent sudden 25% inflation or something else equally unlikely, the current market has the effect of adding to inventory while those who can afford not to sell drop off. We've had over a year of this now, and a lot of would be sellers have discovered that they don't have to sell. They can stay in the home, or they can rent it out or let some family members use it. The ones left are looking an awful lot like a listing interview I helped another agent with today. Negative Amortization loan, darned near a $4500 real monthly cash flow requirement, equity all gone, and they comparable rentals are all around $1800 per month. There is no way on earth these people are coming away with any money, and the longer it goes the worse it will get, but he said another agent told him they could get an amount that's at least $60,000 over market, just by comparable listing prices, never mind what they're actually going to get an offer for. No, he didn't sign up with us, quite predictably. He's been told what he wants to believe, and this other agent is going to put him another $10,000 or $20,000 in the hole, and nobody would be happier than me if that other agent had a liability for what they're going to do to this client.



So with more people that have stronger reasons to sell, very large inventory with more coming onto the market, and buyers quite aware that they have a level of power they haven't seen in over a decade, what's going to have to happen in order to change this? Basically, that inventory is going to have to clear. It can go one of three ways: the owner finds an acceptable alternative (increasingly unlikely), the owner decides to get serious about competing for a buyer's business, or the lender takes it over. 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. Quite frankly, if I were a major lender, I'd take the entire thing as a write off if someone offered me a dollar any time in the last week, and I think some lender's listing agents are going to have rude awakenings before this is all over. I'm strongly considering sending my agent's resume out to some lenders. 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 has sunken in to prospective buyers that the market got overextended. 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, if you have a sustainable situation. There aren't a lot of sellers with sustainable situations out there right now.



Now, one word about rapacious buyers before I go. I know I've said you've got the power. But if you or your agent has done your homework, when you settle upon a property that you're going to make an offer on, that usually means it's more attractive to you for the money than anything else. There is a strong temptation, given the current market, to low-ball just a little too hard. Don't do it. Everything I've said about unrealistic sellers ending up with no transaction applies to you also, albeit less strongly. There is a point below which every seller out there will tell you to take a hike, no matter how desperate they are. If they owe $350,000 altogether on a $450,000 property, sure, they could it to you and be out from under at $350,000, but the vast majority of folks will see that you want every last penny of the equity they thought they had, and they're going to tell you to do something rude, vulgar, and otherwise unprintable in a family friendly format. They will lose the house outright, and take major long term hits to their credit, before they do that. In this case, you end up with what the unrealistic seller gets: Nothing. Exactly how much should you bid? Ah, that's part of the Art of Buyer's Agent-Fu. In other words, it varies, and it takes more information - sometimes a lot more information - before I can give a good answer in a specific situation. The answer is never guaranteed, which is why it's an art, not a science. But I can guarantee you'll find out about the downsides of poisoning the well in this fashion if you step over that ill-defined line.





Caveat Emptor.

UPDATED 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 for 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 it's 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. 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, you know, 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.

UPDATED here

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This page is a archive of entries in the Buying and Selling category from October 2006.

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