Buying and Selling: June 2007 Archives

Before you even make an offer, you should be aware that you're going to spend a significant amount of money well before the transaction is consummated. There are methods of avoiding it, but they're a good way to get yourself in serious trouble by short-circuiting safeguards built into the system.



This doesn't include the deposit. The deposit is not, strictly speaking, money you are spending unless you do something that causes its forfeiture. It's relatively rare for someone who has an on-the-ball agent and who isn't trying to play games to forfeit their deposit. In the normal course of things, it will end up being used for loan costs, transaction costs, and possibly for some down payment money. It's mostly money you're putting up as evidence of your ability to consummate the transaction. The larger your deposit, of course, the more you have potentially at risk, but also the more serious you are showing the seller you are about the transaction. If I'm putting up a $10,000 deposit on a $250,000 condo, that's 4 percent of the purchase price. A buyer who's that serious will likely be able to get an offer with a lower purchase price accepted than someone without much of a deposit. Once upon a time, the default was 2%, but that's comparatively rare these days, as most deposits are smaller.



The first thing you're really spending money on is the inspection. The lowest one I've ever seen was over $250, and they go up from there, with the average being about $350. The basic inspection is your best protection against undisclosed major or expensive faults in the property. I've heard of people using the seller's inspection or the previous buyer's inspection. This is a good way to save a few hundred while being out tens of thousands. The previous inspector could well have been instructed to ignore defects, and because you are not the one paying them, they have no responsibility to you. If you engage them and you pay them, you can sue them if they don't exercise all due diligence. It's okay to have your buyer's agent provide a recommendation or even select them - your agent is also responsible to you. But be careful if you're using a dual agent or going unrepresented. I would also never use an inspector recommended by the seller. They could have chosen their friend with malice aforethought. In any case, if you're not writing the check that pays them, they don't have responsibility to you. If they don't have any responsibility to you, what's their motivation to do a full inspection and report everything? Finally, you do want to pay them at time of inspection. Some inspectors will work through escrow, waiting until escrow closes to get paid, but they charge a lot more - and you're going to pay these higher fees whether or not the transaction actually closes. Better to just write the smaller check up front.



The second major thing you'll actually spend the money on is the appraisal. Like the inspector, an honest appraisal protects you. Around here, they start at about $350, and go up from there. Investment property appraisals are more expensive because there's extra work to be done, and so are higher dollar value properties. Never use someone else's appraisal or appraiser. I've written briefly on appraisal fraud before. The games that the unscrupulous can play are legion. Once again, it's okay to trust a buyer's agent or an independent loan officer you select to find an appraiser, but not a dual agent, and not a loan affiliate of the listing agent. The buyer's agent has an unalloyed responsibility to you, and the loan provider has one to the lender, who also doesn't want the appraisal to be for more than the property is really worth. Once again, if you're not paying the appraiser, they have no responsibility to you, so you want to be the one writing that check. Furthermore, many loan providers are willing to pay that appraiser, but you may take it for a law of nature that you're not going to save money that way - these loan providers will charge enough more to more than cover the cost of the appraisal, and they'll get it from you whether or not the transaction closes.



One of the things a good buyer's agent learns are suspect are seller's appraisals. That seller wants to get the highest price possible, and the appraiser they pay has a responsibility to them. Furthermore, in such circumstances, some appraisers don't have any compunctions as to how high they'll go. Last year, I visited an empty mosquito infested armpit of a property that hadn't been updated in sixty years. Okay, it did front one of our coastal lagoons, but even so my best estimate of the current value was about $640,000 - and somebody had managed to borrow about twice that according to public records. Stuff like that doesn't happen without appraiser complicity. So unless you want to take a risk of trusting someone like that, don't trust a seller's appraisal.



None of this includes specialist inspections that are real smart to get if your initial inspection finds something of concern. Of course, if the initial inspection finds something of concern, the smartest thing may be to walk away from the property. It depends upon too many factors to write about with any coherence, and there are no guaranteed answers. Pretty much every real estate transaction is an exercise in controlled risks for the buyer, which is one more reason you want to have a good agent on your side.



Around here, the seller most often pays for the termite clearance, because that termite inspector is making a general warranty to all concerned that the property is in the condition they say it's in, but that's subject to specific negotiation.



So before you make an offer, be aware that you are committing the costs of inspection and appraisal to this property should that offer be accepted. There are ways to avoid paying them, but it's not smart to do so, as it's likely to cost you a lot more than you could possibly save. Before you make that offer, ask yourself if you're willing to put up this money as insurance against all sorts of common issues that properties really do have. Yes, if something goes wrong with the transaction, it's money down the drain, but better several hundred dollars for the inspection and appraisal than half a million dollars or more for a property that isn't worth what you paid for it.



Caveat Emptor

Article UPDATED here

An email:

I purchased a house in DELETED with two friends. Unbeknownst to us, one of them was in a legal domestic partnership relationship that she withheld from us (we knew about the relationship, just not about the legal part). We each had to sign these Domestic Partnership Addendums to our loan application. She did not indicate she had a domestic partnership relationship through that form. She and her partner split. The partner filed for dissolution in November and in her paperwork has named our property as joint property. Our "friend" has denied that her partner has any legal right to the property.



Apart from this mess, this house partner ...DELETED... has been a terror since we got the house. I have offered to buy her out three times since DELETED. THEN I found out she lied about her Domestic Partner situation.



Can I force her off the deed for fraud (since she clearly lied about the DP situation?) OR, can I force her to either get her partner to sign a Quitclaim Deed (or something like that) and, if she can't, then she has to remove herself from the Deed of Trust?



My feeling is that she intentionally committed fraud and therefore the Deed of Trust is either invalid or her part of it is. AND I dont feel like I should have to "buy" her out since she lied.



Please tell me you have an answer!!!

The best answer I can give is that this looks like a matter for an attorney. There's a lot of complexity to your situation, and my knowledge is limited. That said, I'll be glad to share my understanding of the issues.



You have run straight into an issue that bites folks all of the time. My understanding of the domestic partnership arrangement is that it is legally the equivalent of marriage with the exception of a couple of issues of which real estate title is not one. This makes your situation basically the same one as has been biting victims of gold-digging spouses for as long as their has been marriage and law and ownership.



You talk about the Trust Deed and Domestic Partner Addendums. However, those are between the lender and each of you individually, not between your group of partners. The main questions are, "In what manner do you hold title?" together with, "What sort of a business partnership do you have?"



For most people, the default title arrangement is "Joint Tenants with Rights of Survivorship." What this means is that you're all equal, undivided partners. If one of you gets married or domestically partnered, that new member becomes an equal partner. Nice for them. Not so nice for you.



This is a situation where "tenants in common" would likely serve the interests of business partners better. Tenants in common can hold other shares of ownership besides precisely equal. So if they put up only ten percent of the money, they can own ten percent, whereas if they put up ninety percent of the money, they can be ninety percent partners - or whatever arrangement you all agree to. If they get married or become domestically partnered, the spouse or partner only gets a portion of their share under the tenants in common arrangement.



In the case of a trust, it's whatever the trust agreement says. If you have a partnership agreement amongst yourselves, even better, because it can give explicit recourse for situations like this. Corporate ownership has its advantages as well. There are situations where each of these is appropriate. It all depends upon whats important to each of the partners and appropriate to the situation.



That said, whatever you've got is what you're stuck with. You can't go back to the beginning and change the situation now. You've found out first-hand about why the various forms of ownership came into being. If everyone was always a reasonable responsible adult, there would be no need for the alternative forms of ownership to have evolved. Even if you've got nothing written, though, dueling attorneys is a horrible way to settle the matter. It's likely to be a lot more efficient to sit down with a mediator and see if you can come to an agreement everyone can agree upon. When everyone's paying a couple hundred dollars per hour for an attorney, any advantage they might have gotten gets eroded quickly, and it's not very long before everyone emerges poorer for the experience.



At last resort, you do appear to be effectively the victim of fraud and should be able to use that as some leverage, although my understanding is that the law would mostly treat it as an additional side issue rather than the central fact of the matter. But when attorneys and the courts get involved, there aren't any easy answers, and the whole thing leaves your control when you submit it to the law. The plain fact of the matter is that it might be smart or fair to do a lot of things, yet it's unlikely you're going to be able to force anyone to do anything. Even if your partners from the nether regions are completely insane, you're likely to come out better overall if you can come to some sort of mutual agreement you can all live with, rather than paying attorneys and missing work for court. One more example of why, in real estate, an ounce of prevention is usually worth a lot more than a pound of cure.



Caveat Emptor

Article UPDATED here

During the initial interview with prospects, I like to cover the division of the labor that goes into a purchase that makes the buyers happy.



I have to know what's important to the buyers, how important it is, and what the budget I have to work with is. My goal is to get my clients some combination of better property and a lower price that's at least ten percent better than they would have had otherwise. That's a realistic, achievable goal. But in order to deliver it, I have to know what's most important to them, what's not so important, and what's not important at all. That way I can ignore the property where the owner is so proud of some modification my client doesn't care about that they're not prepared to be reasonable.



Once I know what they want and what their budget is, I can tell them how realistic they are being. A good buyer's agent can hit a goal of making a ten percent difference with pretty much every property purchased. I can't guarantee it, but I'm pretty certain all of my clients would agree I made at least that much difference. In some situations recently, it's been thirty percent. But I can't find three bedroom houses in good shape on the top of Mt. Soledad for $250,000. It's not going to happen, and it's no service to anyone to pretend that it's likely to. If your budget and your desires are mismatched, it is my responsibility to inform you of that fact right at the beginning.



Once we have a meeting of the minds on what is possible and achievable, and what may be necessary to do it, the job that comes next is finding "possibles". I define a "possible" as any property which meets the client's essential requirements and might be obtainable within their budget. Budgets should be expressed to agents in terms of purchase price, not monthly payment, by the way. Expressing it in terms of payment leaves you open to being sold a property with a negative amortization loan. You get a higher priced property for a payment that's within the payment you told them, and by the time you figure out the gotcha!, they've already been paid, and now they're going to want you to do another transaction and get paid again!



Back to the "possibles." The primary responsibility for finding them is mine, but if the client wants to suggest possibles, that's fine with me. Once possibles are identified, I've got to do a little records research and go look at them. It doesn't take long - fifteen minutes inside each one is more than enough to tell me if this one makes the cut, as far as amenities and value and condition go. Because I'm looking constantly, I've got a pretty solid sense of where the market in my usual areas is. In most cases, I've been inside several that were initially built to the same floor plan that have already sold recently. I've got a laundry list of common problems I specifically look for and evaluate how bad they are if they are present. I've also got to see if I can find a reason why it's obtainable within the budget I've agreed to work with. The obvious case is that if the asking price is less than the client's budget, that's pretty good evidence. That's not the only possible evidence by any means, but it's a pretty solid indication. Where the cut is varies. The easier it is to find what my clients want within their budget, the pickier I can afford to be. The one thing I don't want to do is waste my client's time with below average properties there's no reason for them to be considering.



If a possible makes the cut for value, amenities, and especially condition, while being obtainable within my client's budget, it then becomes a "likely". This is when I bring it to my client's attention, we go take a look at it together, and I tell them what I see that's right and wrong with the property. Most of my clients aren't real estate experts. On the other hand, they know what they like and are willing to pay for better than I ever can. If the only way you'll ever get take action is if your agent tells you it's perfect and doesn't have any flaws, please get real. No matter how great it is, there's at least a dark lining to every property. If it's huge and beautiful, maintaining it is going to be expensive or you're going to be losing some of your return to deterioration. Fact of life. There is no such thing as the perfect property unless you've got an unlimited budget. Seeing as not even the richest man in the world has an unlimited budget, one hopes that you get the idea.



Agents should tell you about the pluses and minuses of every property they show you. They shouldn't be shy about making recommendations as to which one they like or has the best apparent value. With that said, however, it's not the agent's job to tell you which one you like. You're the one that needs to be happy at the end of things. No matter how much I like a property, if the client doesn't like it, that property profile goes into the wastebasket. Similarly, if the client likes one that I don't, it's my job to report the facts, not to talk them out of it. I can tell them why they shouldn't like it, but if I explain why they shouldn't like it and they still do, well, it's their money and their life. I'm the consultant, not the boss. I'm the hired expert who knows more about the market than they likely ever will, but they're the one that knows their own mind best. It's darned few who are silly enough to disregard my advice, but they must be able to do so. I'm permitted to try to talk them out of making an offer, but not to prompt an offer, and whatever the clients want to do, they have to be the final authority.



Once they've decided to make an offer, it's my job to figure out how to conduct negotiations such that the clients get the best possible price. To this end, I'm always looking for things that aren't money to offer. For instance, with sellers nervous about committing to move out before close of escrow, a short term leaseback can make an offer more attractive. It amazing the difference that can make to the price the seller may be willing to accept.



Finally, the due diligence period is mostly on my head. Getting the inspections and appraisal done promptly is important. It's great if the client is there for the inspection, but despite lawyers who advise agents not to be there, it really is a responsibility that can't be ducked. I can't see how it can not be negligence to be not be present at the inspection. Make certain the client knows and understands what is going on. If I have to call the inspector back to explain something, I have to call the inspector back. Make certain the client understands the title report. Etcetera.



A good agent provides lots of professional advice and input. More than some clients want, as a matter of fact. But real estate is enormously complex and if there were easy answers, everyone could do it. It's my responsibility to help you understand the issues, and also to make certain that you've got the best possible set of choices to choose between. The decisions themselves, however, must be yours.



Caveat Emptor

Article UPDATED here

Over the last few years, a lot of folks have gotten used to zero real scrutiny of transactions. With values increasing rapidly, it was hard to lose money on real estate, whether you were purchaser or lender. One of the most common abuses has been Straw Buyer Fraud. Well, with local prices having receded roughly 25% and no rapid increases on the horizon right at this instant, a lot of lenders are getting burned on loans, losing money, and going back after those who aided and abetted and made those transactions appear more solid than they were.



Against that backdrop I got this email, with the subject, "I am a straw buyer":

I thought I was helping out a friend and HONESTLY did not think and/or realize I was doing anything wrong.



The friend has been making the payments for 10 months and is due to buy the property back from me at the 1 year anniversary (DELETED).



If he can't buy the property back (which I don't think he can), I want to approach the Lender. I can't afford the payments of DELETED and I don't want the property which is worth DELETED.



What kind of trouble could I be in?



Also there is an agent, a broker and an attorney involved in this scenario as well.

Well, California is an escrow state, so this isn't anywhere I can get involved, and the rules are different in every single state. As I've said before, the best thing to do if you find you may have violated the law is consult a licensed attorney in your area, and if it relates to real estate, make it an attorney who's a real estate specialist.



There are some generally applicable principles, but keep in mind that I'm not an attorney, so if there's any conflict between this and what your attorney says, believe your attorney.



The situation is this: You signed a Note, and in most cases, a Trust Deed or the equivalent. The Note says you owe the money. The Trust Deed pledges the property as security for that money.



Now in many states, California among them, purchase money loans are not subject to recourse generally. Unfortunately, you have committed fraud, which is one of the exceptions and therefore subject to full recourse in every state I'm aware of. Furthermore, loan fraud itself is usually a matter that causes the federal government to get involved, as most lenders are federally chartered. So you have a criminal fraud case, most likely at the federal level, quite likely conspiracy added to that charge, and on the civil side, you are going to be at least one target of a civil suit if the lender loses any money. You can also expect to hold a share of liability for the lender's attorney fees. That's the bad news.



The good news is there's quite likely evidence that you were led down the primrose path by those alleged professionals who should have kept you from breaking the law. This won't get you released from your basic responsibility for what you did, but if the feds and the lender bother with you, you're not likely to be their primary focus, and on the civil side, you're not likely to be the deep pockets they are really interested in. While neither the feds nor the lender is going to want to let you off the hook, you shouldn't be their primary target if you can show that you were advised to do this. Ignorance of the law is no excuse, but when comparing the level and degree of culpability, I'd expect that a non-professional led afoul of the law by allegedly professional advice you should have been able to trust is a fraction the culpability of those professionals who willfully advised you to commit an illegal action.



Now before you breathe a sigh of relief, let's consider the following: What if those alleged professionals aren't there any more? What if they're already out of business, broke, and in jail? Now you're the only target left. Ouch. Now you know how the last of Custer's men felt.



Here's another not so comforting thought: What if that property isn't really worth what was paid for it? From what I understand, a large proportion of felons like to combine their scams. For instance, adding appraisal fraud usually doesn't add appreciably to the risk, while adding greatly to the reward. They pay an appraiser to come up with an inflated value, get someone to pay it, and voila! Extra profit! The games that can be played are legion. Usually, the sucker or mark is just so pleased to be getting "such a great property" that they don't really examine what's going on. Sometimes, they're so happy to be qualifying for anything at all that they won't examine the situation at all, for fear that they will won't qualify and it will all somehow melt away. It's been said before, but you're never so vulnerable as when you're trying to get away with something. If something seems to good to be true, it probably is, especially where hundreds of thousands of dollars are involved. Look the metaphorical gift horse in the mouth. If it's real, it will stand up to the examination. If it's not, you might just avoid paying three times what the property is worth, not to mention criminal prosecution.



Read those contracts. Really read them. Pay attention to paragraphs that say stuff like, "It is a felony to misrepresent information on this application." Trust me: With hundreds of thousands of dollars on the line, they mean it.



If anybody claims to be helping you break the law or circumvent safeguards, run away! If they're willing to break one law, or one of their ethical responsibilities, ask yourself what reason there is to believe they won't break others? To be precise, their duties to you? If you're trusting them for advice, it seems likely they know the system a lot better than you ever will. There is a reason for every single law and procedure in real estate. The vast majority of the time, it's to protect consumers. If an alleged professional is willing to admit to doing one thing illegal or unethical, what evidence do you have that you're not going to end up one of the victims?



If there are legal ways around legal requirements and procedures that have been put in place, it almost always involves full disclosure to all parties. There some stuff that's none of the business of some parties, but that's because they have no reason to be interested. For instance, the listing agent in a recent transaction asked me for some financial history on the buyers that they had no need to know - they were just trolling for data which might lead to future clients, i.e. trying to get my clients future business. For that sort of stuff, it's good to tell them something vulgar and report them to the state. But if you know or have been led to believe that the other side of the transaction is being deceived or intentionally kept in the dark, you should be hearing more warning sirens than a ten alarm fire during an air raid. Do all the agents know everything they need to? Does Escrow know? Does Title know? Does the other side of the buyer/seller transaction know? Most importantly, does the lender know? Are you sure? Did you tell them? If not, what evidence do you have that they know?



Nobody should ever rush you into signing anything. Take your time. If you're not certain you understand it, don't sign, no matter who's hopping with impatience. Even me, although I don't recall ever committing that particular sin. Taking your time and consulting disinterested parties may cost you some money, although your agent or loan officer is doing their job if they inform you of what consequences there may be. Not doing so can cost you a lot more money, plus your freedom for years and your credit rating for the rest of your life. Worst comes to absolute worst and you lose the transaction and your deposit, that's better than getting convicted of fraud and owing half a million dollars that the property isn't worth.



Caveat Emptor

Article UPDATED here

What can a seller do to get the deposit when the buyer backed out after the time limit and just won't sign off on the money? My real estate agent is not helping at all. The real estate office was representing both the seller and buyer and I believe they don't want to upset the buyer and that is why they aren't pushing her to do the right thing. Thanks for any help,.

They're not representing your interests in a fiduciary manner as demanded by the listing contract.

Real Estate is not sugar and spice and everything nice. Sometimes doing your job as an agent means that you have to do something unpleasant by taking your client's side. If your agent isn't willing to be a complete jerk on your behalf if they have to, they're not worth a talking to, much less signing a contract with.

This is another reason why Dual Agency is a bad idea from the consumer's point of view. Most of the reasons are from the buyer's side, but here's a concrete example why you do not want to permit your listing agent to also represent the buyer. Since about thirty percent of all purchase contracts fall out of escrow for some reason or another, ask yourself how you'd feel about your listing agent trying to preserve the buyer's deposit even though you, the seller, may be entitled to it. You gave them thirty or sixty days exclusive shot at that property, paid the mortgage and all the other bills for that time period, and could not sell it to anyone else while they were wasting all of that time and money of yours. This is a very common phenomenon when one agent tries to represent the interests of both sides. But your interests call for the buyer to forfeit the deposit, and if they want to continue to represent you, they need to act in your best interests. They haven't done that.

This isn't to say they have to start with scorched earth. A simple request to sign the cancellation and release of deposit is very reasonable - and precisely what they agreed to when they wanted to represent both sides, if the transaction fell apart. When there's no other agent, there isn't anyone else to do the job. They're it, because they tagged themselves by requesting dual agency.

Agents, however, are not lawyers, arbitrators, legal mediators, or judges. They have zero authority to force their other client to sign the cancellation and release of deposit. Some people won't do the reasonable and intelligent thing, whether it's because they're hoping to get away with it, or because they don't think it's the reasonable and intelligent thing, or for some other reason. But a failure to ask, and a failure to do their utmost in persuading the other side is a failure of their contracted fiduciary duty to you.

This means that you quite likely have a valid reason to cancel your listing. Consult with your attorney, but from the information presented, they have clearly failed to represent your best interests in accordance with that listing contract. As far as calls upon agent loyalty go, listing contracts conquer everything but the law, or at least they should. That's why I give each and every one of my buyer clients an explicit written release of any obligation if they should choose buy a property I'm listing. They can always find another buyer's agent to represent them, but the sellers are contractually committed to staying with me for the contracted period. I also tend not to show my few listings to my contracted buyer clients, for reasons I've gone into elsewhere.

One hopes you see why I make such a big deal about putting in the work to find a good agent. Here you are with months and multiple thousands of dollars gone, and you have absolutely nothing to show for it because your agent is a self-serving bozo. You don't need to fret about finding absolutely the best agent there is, but you do need to find one who knows what they're doing and will do what is necessary to represent your interests. I wrote a two part article How to Effectively Shop For A Listing Agent (Part I) and How to Effectively Shop For A Listing Agent (Part II) on this very subject. Chances are, there is more than one good agent in your area, but the good ones are usually outnumbered by the bozos, so just using your relative or friend is like playing Financial Russian Roulette with four of six chambers loaded. Nor is "top producer" any kind of sobriquet I'd want for my listing agent, because they're talking about overall volume of sales, and that's not likely to be present in the agent who can actually get top dollar for your property. All of the agency mechanics that favor mass production of sales work against them getting the best price possible for any particular property. To be fair, this works in the other direction as well, but it's not your problem. You want someone who's going to get the best possible price for your property, not someone who mass produces transactions. If they've chosen the other path, you don't need to feel guilty about passing them up in favor of the boutique agency that busts their backside to satisfy you. That high producing chain is making plenty of money off the suckers who don't know any better.

Caveat Emptor

UPDATED article here

What I still am unclear on is the pool and how (in my opinion) it's crazy to finance $40,000 into a mortgage when you *plan* on refinancing in a few years. By *plan* I mean you take out a mortgage that you know isn't what you want but you took it because the builder forced you into it with "incentives" or they just plain wouldn't build a house for you if you don't use their lender and the builders lender is looking out for the builder, not you. I guess you can't *know* that the pool won't add value . . . especially in a new area where there are no comps . . . but am I crazy here?

Another situation I don't get is with all the "upgrades" they try to get you to buy with a new house. Blinds, paint, water softener, ro water filter, counter tops, cabinet upgrades. I wonder if you would be better off just getting the cheapest options and then upgrading later when you can afford to pay cash. I can guess that's the case but people figure life is too short to live in a a despicable house that has a kitchen with laminate counter tops instead of granite!! (I have laminate and somehow my wife and I manage.)

And that leads me to the pricing on new homes and how the builder sets the price and somehow the lender will lend you money on a house that may or may not be worth what you end up paying (granite counter tops may add value to the house but probably not $10,000). The more I learn the more I realize how much I still have to learn.

Builder upgrades are an almost entirely different set of rules and calculations than after-market upgrades. There are reasons for this that mostly reduce to "The lender can do a lot of things if they really want to, but most lenders don't have a reason to want to." For all of this, keep in mind that my normal stomping grounds just don't have a whole lot of new developments any more, so I don't deal with developer issues a lot, and it's very possible for the rules to change while I'm not doing any developer deals. I'm working with one set of clients right now who might end up buying in a new development, but it's been over a year since my last set of clients who bought just one (although if there's any developers reading this, I do have one investment firm client who wants to buy out the last of any new development that isn't moving quick enough).

The normal after-market upgrade, if you want a normal mortgage loan for it, has to be justified in terms of the property's current numbers. In other words, if you want to take $50,000 cash out to put in a pool, you must already have $50,000 equity available to you. You have to qualify for that loan debt to income ratio and loan to value ratio exactly as if you were going to take that money and buy lottery tickets with it. In other words, without the value of the proposed pool or other improvement added to your property, but solely based upon the situation as it sits now.

With builder upgrades, however, there's a little more latitude built in - especially where the builder controls the lender outright. Sure, the property is really only worth maybe five thousand more with that fifty thousand dollar pool installed, but because the basic number equates to money in their pocket directly, as well as money that they're going to earn interest on, they have a motivation to be more forgiving than in the case of the lender who is not getting $50,000 placed into their left hand while they loan it out - at interest - with their right. In many cases, even if they don't control the lender directly because they're not that big yet, they've made an agreement to indemnify the lender for any losses they take as a result of lending that money. The builder is secure in the knowledge that they'll make a lot more from the increased number of upgrades than they'll lose from the small proportion of defaulters. However, this should explain to consumers why sometimes builder's preferred lenders can do things nobody else can - because they're getting paid to do it. Furthermore, because they can do something nobody else will, they can charge a premium, either in rate, points, or both, over general market rates. Because the consumer wants the home with these upgrades, and because this is the only way anyone will lend on it, there's money to be made! Usually, there's plenty of money to go around - the consumers are, in aggregate, paying for it. Surcharges and premiums on the secondary mortgage market can go anywhere from two and a half percent up to six percent, perhaps more. On a hundred $500,000 homes, four and a half percent is over two million dollars additional clear profit. Even if three of those homes default, losing roughly fifty thousand in each case, they've still cleared more than two million extra profit for having done this.

(This is not to say that many after-market contractors don't have their own finance department cranking out trust deed financing even if the equity may not be there to pay it right now. But this way they get the job, which means they make the money for that job, and most of these contractor loans carry rates well above regular current market, so they can make more on the job as well as on the loan. How remarkably analogous!)

As for whether it's smarter to upgrade with the builder or wait and pay cash, there's an argument for each side. On one hand, the argument for waiting is that you are a lot less likely to owe more than the property is worth if you need to sell. Furthermore, you're not paying interest on depreciating fixtures, a classic double whammy anyone who's even bought a car on credit can relate to. Because you're not asking for anything special or difficult in the way of financing, you can at least theoretically go anywhere for your financing. Builders in California cannot legally require you to use their lender, which is not to say it doesn't happen - sometimes very blatantly in violation of the law - but that's the theory, anyway, that you should be able to shop the market. Finally, the cost of most upgrades is rarely recovered in increased sales price when the current owner sells. Spending a dollar, and paying interest on it, to make back twenty cents in eventual increased sales price strikes me as shooting yourself in the foot. It is to be admitted, however, if it was worth a dollar to you to have the upgrade, the twenty cents is icing on the cake.

Against this, however, is the cold hard reality of labor costs. If you build granite counter-tops in the first place, the only increase in costs is the comparatively small increase for more expensive materials. If you wait until after it's done, you've got to tear all the old work you've already paid for out, then pay the labor costs to put the new counter-tops in, as well as new materials, the cost of haul away, etcetera - not to mention the restaurant meals you'll be eating while it gets done. At anywhere from $15 per hour up, plus benefits plus markup, that labor isn't cheap, and it's usually at least a couple of workers for several days.

Builders know all of this, and that it's very attractive to roll the upgrades into the cost like this. When they build a property "on spec" (meaning it hasn't sold before the framing is done at the very latest), they typically build in all of the upgrades they can, and if you went to them to take a completed property off their hands, but wanted something not upgraded, it's likely they will be unable to accommodate you (This is a negotiating opportunity on the rare occasions it happens!). They don't tend to build very many "on spec" around here, or anywhere else if they can avoid it without worse consequences, but that's what they do when they do it.

There's also one more argument in favor of builder upgrades: You won't get your extra money out of them, but in slow markets like right now, it's more likely the property will sell if you do need to sell it. There are always suckers out there who will zero in on the upgraded property because "it's soooo beautiful!" even though there are better bargains nearby. Real estate fixers and flippers worldwide make their fortunes on the backs of these people, but they're legal adults deciding this stuff is worth their hard-earned money. Who am I to say it isn't?

Builders set their prices on the same motto as Poul Anderson's Polesotechnic League: "All the traffic will bear!" (I highly recommend his Van Rijn and Falkayn stories, by the way.) Profit isn't evil, it's what motivates developers to build places for people to live. But there's nothing that says you have to cater to it by forking over excessive numbers of your hard earned dollars, either.

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Most Resilient U.S. Real Estate Markets

Market corrections follow three basic recovery patterns. A V-shaped recovery where a market experiences a sharp, fast decline but comes out strong once it hits bottom; a U-shaped recovery, where prices decline gradually and recover slowly; and an L-shaped curve, a hard, fast fall with paltry price bounceback following the market trough.



The differences between a V-shaped market and a U-shaped one has to do with barriers to growth. High vacancy rates and high investor share can hurt a market, but if the local economy remains strong and housing stock affordable it's only a matter of how long it takes to absorb the excess inventory.

San Diego is portrayed as a V shaped market, albeit one whose recovery is dependent upon external factors. However, the fact that there just isn't anywhere new to build is going to be a major factor, as is the desirability of living in San Diego.



Those who wait for confirmation of market bottom are likely to completely miss out on the best bargains. It wasn't until prices had been decreasing for almost a year that official statistics admitted it. October 2005 is generally seen as having been the top, but the statistics confirming this didn't emerge until July or August of 2006.



This isn't any double-talk. I ran an article just a few days ago telling people that it's a rotten time to sell. Inventory is high, and there aren't a lot of buyers who have come off the sidelines yet. But this precise combination of factors is what makes right now one of the best times possible to buy. But it's not going to last forever. The seller to buyer ratio is nearly twenty percent lower than it was last year at this time (32 versus 39). It's getting harder to find the very best bargains. Stuff that's beautiful is selling, but properties that aren't reach out and grab you beautiful are sitting on the market. Great if you can afford to fix it. Not so hot if you can't. On the other hand, if you're willing to be the one to deal with a few minor cosmetic issues, this is a great time to end up with a great bargain. Particularly if you've got a few thousand in your pocket to redecorate once you've bought, now is a great time to be finding those properties where $10,000 in easy stuff like carpets and paint can add $100,000 in value. Whether you then want to live in it for ever and ever or simply take your profits and run, that's not at all a bad situation to be in.



San Diego is a resilient market, and I'm seeing a huge number of people who want to buy but are "waiting for the market to hit bottom." When you've got a situation like that, as soon as those people see some indication that things have turned, they're likely to come swarming, thereby boosting demand and depleting inventory (i.e. supply) over a very short period of time. I haven't been among those thinking San Diego is likely to see any kind of a double digit gain any time soon, but the longer it takes to start getting people off the sidelines, the more demand will build, and the stronger the turn will be. I still don't think we're likely to see double digit gains in the next couple of years, but I'm starting to see evidence that I could be wrong about that. I predicted losing thirty percent of peak value, and we're at about 25% off peak right now. The number of bad loans could make the housing bear run a little bit further, but there's also a large amount of pent up demand, in the form of people who are eager, willing, and able to buy a home, but are only "waiting for the right time". Based upon purely anecdotal evidence, I think we're at the point where the latter significantly outnumber the former. If you're one of those on the sidelines waiting for the right time, I'd be very careful not to be late onto the field.



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Have a "looking for cheap" attitude, especially on services meant to protect you.

It's great to have a "looking for value" attitude. If I cost more than someone else, it is in your best interest to ask why, and ask me to justify what I make in terms of value provided to you. I don't resent people that are looking for value. If I can't show them something they agree is more valuable to them, then I can't blame them for going with the person who offers the same exact thing cheaper, and truthfully, I'm probably not the agent they should use. There's plenty of room for all levels of service in the industry.

But to have the attitude that "cheaper is better" presupposes that there is only one possible level of service, and therefore, anyone who provides it any cheaper must therefore be a better value. This is preposterous. I just finished a transaction where my brokerage made about $7000 grand total for the purchase of a condominium and the associated loan. Somebody else might have rebated close to half of the buyer's agency commission - but somebody else didn't get my client a condo for $75,000 less than a model match in the same complex that sold six weeks previous - over a 25% difference in price. Furthermore, that's the grand total. That's not what I get to put in my personal bank account. That's got to pay office rent and electricity and all the costs of staying in business for the brokerage. Once I get my share, I've got to pay taxes and mileage and licensing and continuing education and all the costs I have as an individual of staying in business.

You may get the idea that what's left over isn't as much as most people assume it is. Now you know why discounters cannot afford to provide the same level of service a full service agent can. There are full service agents out there providing discounter service for full pay, but there are no agents providing full service benefits for discounter pay. Even if they were doing twenty transactions per month per agent, they simply aren't making enough to stay in business by doing it that way.

Now, because you're working with an agent who doesn't have the time to do the same due diligence (and may not have the expertise), you're either going to deal with it yourself or hope that the other side of the transaction isn't intending to do anything unethical. Even if they're not intending to do anything, that doesn't mean that nothing will have happened on its own. Sometimes, it really is nobody's fault. I'm working on one now where the septic tank failed the inspection and the inspector said it needs to be replaced. The seller is out roughly $20,000 in order to be able to sell the property. It was fine a few months ago, but isn't now. Nobody's going to buy the property if they can't flush their toilets, so this needs to get taken care of. If I hadn't done my full due diligence, my clients would have had a nasty surprise.

It's not just agents. Appraisers and inspectors are two allied professions where spending just not quite enough can mean they missed what you were paying them to find. Or the appraiser charges you $50 less, but takes three weeks to get it done, during which time you're out four tenths of a point in lock extension fees. On a smallish $200,000 loan, that's $800.

This also applies to loans. It's trivial - and legal - to low ball people who want to know what sort of loan they're likely to get. Are they willing to guarantee their quote? Or are they just getting into the spirit of a game of what amounts to liar's poker where the only way to call the bluff is wait until the end of the process, thirty days out? In such a situation, there's no real reason not to say you've got, "Ten nines," but nobody really has ten nines - I just looked and serial numbers are only eight digits long. But if there's no proof until thirty days out, what happens when they deliver a loan that's pair of ones? I'll tell you: Most people are still going to sign those loan documents. I've gone over how much lenders can legally low-ball quotes in the past. If they can't deliver their quote, they can't deliver it, and it gets you no benefit. I get people hitting the site every day asking questions that indicate to me that their lender presented them with an entirely different loan than they initially told them about to get them to sign up. Consequences to the lender: Zero. Consequence to the borrower: Now you have a choice between signing the documents for this loan, or doing without. Chances are that you're going to sign their papers anyway, which means that lender will be rewarded for lying to get you signed up, and the attitude of "looking for cheap" is what did it to you. I've dealt with any number of people who metaphorically plugged their ears and refused to listen to the downsides of the negative amortization loan. It doesn't change the fact that there are downsides, or how bad they are. It just means you don't know about them. But they sure do have that low payment (for a little while, at least!)

In real estate, breaking the law is only the second best way to create problems for yourself. Since in the current environment, you can count on law breaking being discovered, that should tell you how bad looking for cheap is.

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