Buying and Selling: August 2007 Archives

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do I make a big down payment on a home or should make a lump sum payment after the mortgage

It's very hard to construct a scenario where using it as "purchase money" doesn't come out ahead. Not to say it can't be done, but it's highly unusual.



Here's the basic rule: You're allowed tax deductibility of the acquisition indebtedness, amortized, plus up to a $100,000 Home Equity Loan. For many years, the universal practice has been to deduct all of the interest on a "cash out" loan even though it's not permitted by a strict reading of the rules. That is now changing, and the IRS has served notice that they are going to be scrutinizing mortgage indebtedness to compare it to acquisition indebtedness, and disallowing anything over what they figure is the amortized amount of purchase indebtedness. For example, if you originally bought your property for $120,000 in 1991, and your original loans totaled $108,000, sixteen years later you might persuade the IRS that your deductible balance is about $85,000, as ten percent loans were common then. But if your property is now worth $500,000 and you've "cashed out" to $400,000, the IRS is likely to prove supremely skeptical of that deduction.



The other reason not to use your down payment money for a down payment is to save it for repairs and upgrades. There's only so many places that the money might possibly come from, and your own pocket heads the list. Cash back from the seller not disclosed to the lender is fraud, and if you do disclose cash back to the lender, you've defeated the only rational purpose for it, because they will treat the purchase price as being the official price less the cash back. You're not legally getting any extra net cash from the seller. Period. If you put the money down and then try to refinance it out, the refinance becomes a "cash out" refinance - the least favorable of the three types of real estate loan. Unless the rates have gone down or your equity situation has improved, you'll get better rates on a purchase money loan, not to mention not spending the second set of closing costs for the refinance because you only did the purchase money loan. So if you need the money for repairs or to make the property livable, you're probably going to want to keep it in your checking account rather than using it as a down payment.



On the other hand, the search question postulates that you'll use the money to pay down what you owe, whether immediately at purchase or later on. After you put the money down, you'll have an improved equity situation, which means that you are likely to get a better price on the loan - a better rate-cost trade-off if you put the money down. Not guaranteed, but it is highly likely. If it's the difference between 100% financing and 99% financing, most lenders treat 99% financing the same as 100%. But if it's the difference between 100% financing and 95% financing, you're likely to get a better loan, or more likely a better set of two loans. Which means you either spent less in costs, got a better rate, or some trade-off of the two. Less money spent equals more money in your pocket, or more money for the down payment, which translates as more equity. Better rate means lowered cost of interest. The fact that it's on less money also means lowered minimum payments, although you shouldn't be shopping loans based upon payment. More importantly, you don't pay interest on money you don't owe. If your balance is $10,000 lower on a 6% loan, that's $600 less interest per year - $50 real savings per month.



If for some reason you want to pay extra, and you're holding on to the money so your minimum payment will be higher, don't. Most loans allow you to pay at least a certain amount extra, and if you're one of those unfortunates with a "first dollar" prepayment penalty, I have to ask, "Why?" There are sometimes reasons to accept a so called "80 percent" pre-payment penalty. There's never a reason to accept a "first dollar" penalty. Not to mention that your lump sum will get hit with the penalty anyway, where if you used it as a down payment, it wouldn't.



Finally, I should note that there are arguments against paying off your mortgage faster. Paying extra on your mortgage does sabotage the gain you get from leverage. You could typically take the money and invest elsewhere at a higher rate of return. Psychologically, however, there's a peace of mind to be had from not owing money, or not owing so much money. The only sane way to define wealth is by how long you could live a lifestyle comfortable to you if you stopped working right now, and if you don't owe as much money, that time frame that determines your real wealth is obviously longer.



The point is this: There are arguments to be made on both sides, and the circumstances can be altered by the specifics of your situation. My default conclusion remains that if your mind is made up that you're using a certain amount of money to reduce debt on the property, either from necessity or because you want to, then you might as well use it in the form of purchase money down payment.



Caveat Emptor



Article UPDATED here

A few days ago, I had an agent get angry at me about an offer below a range asking price. I had submitted the offer with extensive justification as to why it was an appropriate offer. Basically, this clown had overpriced the property, and thought that because he had put a range on it, people were somehow not supposed to make offers outside the range.



Just because you put range pricing on a property, does not, by itself, mean anything. As I've said before, you can ask for any price you want for your property. It doesn't mean the asking price is realistic. It means that you own the property and have the ability to put a price on the property that you want. This doesn't do you any good if the price is above what similar properties are selling for. Having been told it's for sale, buyers have the same options the seller does - they can offer any price they would be happy paying. The seller doesn't have to accept. In fact, the seller probably won't accept. If the buyer offers less than the property is really worth, than the seller is correct to reject the offer. On the other hand, if the buyer is offering what the property is really worth and the seller doesn't accept the offer, they are hurting only themselves.



Right now, most sellers and their agents are shooting themselves in both feet by overpricing the property. Right now there are some special circumstances in effect - the lending panic, the be precise. It's mostly psychological, as there are any number of very solvent lenders willing and able to fund loans, but hysterical reporting grabs attention (which is why they do it). The net effect is that many buyers who would otherwise be in the market are still sitting on the sidelines, and so the ratio of sellers to buyers locally has ballooned to 47 to 1. Imagine yourself in a situation where the ratio of men to women is 47 to 1. The social dynamics are going to favor the women. Even if she's a fat slovenly harridan at the tail end of middle age, she's going to have her pick of men. The men, for their part, are going to have be both good looking and well off to attract even the woman in the previous sentence, and keep working hard to keep the woman around. If you're not willing to do what it takes, and keep doing what it takes, you might as well not bother. Now imagine that people who want to sell are the men, and people who are willing to buy are the women. If you're not willing to out-compete the other 46 sellers, why is your property on the market? If you need to sell, then you need to do what is necessary to out-compete those other sellers. Make it pretty. Make it cheap. And you still better be willing to work when an offer comes calling. If you're not, get the property off the market until the climate changes. I don't think it's going to be long.



Range pricing a property at a value you're not willing to accept is a waste of everybody's time. There was a property on the market variable priced over $125,000 range, and my client made a very strong offer about $15,000 over the minimum. Lots of cash, good deposit, short escrow, no contingencies, etcetera. Under the circumstances, a very good offer considering what the property was really worth. Yet despite all the information we put in front of them, this seller kept countering at the same number, which was more than my client was willing to pay for that property. Net result: the whole process was a waste from the time we started driving to the property. Yes, they got a lot of activity, but since they weren't willing to sell for the price that generated the activity - or anything like that price - the property didn't sell. Since if the property doesn't sell, every penny you put into trying to sell is wasted, as is every second of your time, plus all of the carrying costs that you may incur. So the listing agent told me they'd had a dozen showings in a week - but if they're looking at the property because it's variable priced $75,000 below any offer the seller is willing to consider, well, self-stimulation may feel good but it doesn't produce anything. This entire situation is a failing on behalf of the listing agent, who is theoretically earning money because of their knowledge of the market and should know precisely how likely it is that buyers will agree to pay more than the comparable properties are selling for, which is to say, Not. Particularly in this market, which is still very weighted towards buyers, and will continue to be until Spring 2008, even after the lending panic subsides. Indeed, if you need to sell, you're almost certainly going to have to settle for less than comparable properties are asking. If you don't need to sell, get your property off the market, now. The sooner excess inventory clears, the sooner the turn towards sellers is going to happen. Not to mention your days on market keep climbing, and there's nothing beneficial about having a failed listing in a property's immediate past. The longer it sits unsold now, the harder it's going to be to sell for a good price later.



Properly used, variable or range pricing can increase the sales price of a property. But the catch is that it must still be priced correctly. Range pricing is not an excuse for a lazy or incompetent listing agent to build owner expectations above market level. The rule of thumb is that the bottom of the range should never be lower than a good "all cash, no contingencies" offer, and the top of the range should never be more than market plus a reasonable premium for dealing with the uncertainties of financing and contingencies. Both figures should be modified downwards if the seller is asking for something extra in the way of consideration from the buyer - for example, leasebacks of more than a week or two, seller contingencies, etcetera.



Matter of fact, the way the market is right now in most of the country, I'm inclining against range pricing. If it's priced correctly, that range is information I can use as a buyer's agent. Why would I want to hand the other side information I could put to use were I on the other side, especially when they already have the whip hand in negotiations? Range pricing is something that's primarily useful for sellers when the sellers have the power, and right now, it's the buyers that have the power. If it's not useful for the seller, why in the world would you want to put range pricing on a property? With blortloads of highly upgraded properties for sale right now, I have absolutely no hesitation in telling my buyer clients to offer what we think the property is worth to them under the circumstances, and let the sellers decide if they want to do what's necessary to get the property sold. If they don't want to play, somebody else will. Either way, the buyers are happy. This seller can either decide they'll be happy with an appropriate amount of money, or the property can sit unsold. Which is pretty much the situation as it always is.



Range pricing is not a panacea. Range pricing is not something lazy or fearful agents can use to "buy" a listing with impunity, confident it'll work out in the end (it won't). Range pricing is not an excuse not to price your property to market, or not to negotiate hard with all of the facts at your disposal (if you don't have enough favorable facts at your disposal as to what comparable properties are selling for, your negotiating position is not strong). Range pricing is a way to offer clues to buyers and get them to the table with an appropriate offer when sellers have significantly more negotiating power than buyers. Since in most of the country right now, sellers have no power, range pricing is something to use sparingly. There's nothing that says buyers have to offer you what you want. Not now, not ever. The only leverage sellers have over buyers is the fact that if this buyer won't offer something that is appropriate, somebody else will, and that's very weak leverage when there's 47 properties on the market for every buyer.



Caveat Emptor

Article UPDATED here

It has become very trendy to ask for pre-approvals on loans, because so many escrows are falling through. Unfortunately, as I hhttp://www.searchlightcrusade.net/2007/04/loan_preapproval_means_nothing.html"target="_blank">Loan Pre-Approval Means Nothing, and prequalification means even less. Both are literally wasted paper. As far as actually meaning anything you can hold someone to, they're useless. Worse than used toilet paper, which was actually put to some useful purpose once upon a time.



I never trust either a pre-qualification or pre-approval unless I did it. As I've said before, there is no accepted standard for either. Furthermore, I doubt there ever will be. Agents aren't asking for these pieces of waste paper because they're concerned about their listing clients. They're asking for them to cover their own backside so they don't get sued when the transaction falls apart.



Now there's no way on this earth that you can promise that owner that the transaction isn't going to fall apart. Accepting any offer always has some attached risk. If the buyer can't actually get the loan funded, the seller is out of luck as far as getting that purchase price for the property, and you'll have to go back to square one.



This isn't to say that the seller is out the whole amount. The buyer risked whatever good faith deposit, which should be at least enough to pay the costs of carrying the property for a month or two. This isn't to say that the seller is necessarily entitled to the deposit or that escrow will automatically remit it to them. There's rules about that. But the contract is very carefully written to limit the amount of time before the seller is entitled to the buyer's deposit. If you're concerned that the buyer may flake, or not be able to qualify, the correct thing to do is negotiate more of a deposit and more favorable terms for it to come to the seller in the purchase contract. If listing agents were really trying to protect their seller clients from failed transactions, they'd be focusing in on larger deposits and trying to get them paid to the seller while the property is still in escrow. That's real protection for the seller. Of course, many buyers will walk away from such terms, meaning that it goes from a possibility of that listing agent getting paid to no possibility of that listing agent getting paid.



Buyers understand the deposit in cash terms. They scraped and saved this money in real time, dollar by dollar. It's real to them, and they don't want to risk it. You've got a better chance of getting $10,000 more on the price with most buyers than of getting a $1000 higher deposit, or more favorable terms for forfeiture. Of course, a lot of buyers choose to go unrepresented or use the listing agent to represent them. Both are silly, when you understand what's really going on. But demanding a high deposit, or harsh terms of forfeiture, is a good way of scaring off potential buyers. Savvy agents understand that an increased deposit is a way to get a better price for their buyers. If you require a high deposit and harsh terms of forfeiture, you are discouraging certain buyers, shrinking the pool of potential purchasers, thereby lowering the likely eventual price.



Of course, being able to negotiate a good contract is a major part of what an agent's getting paid for. In some circumstances, high deposit will be appropriate. For instance, if the buyers are getting a really good price. If I'm getting a property $100,000 cheaper than comparables around it, I shouldn't mind putting up a bigger deposit, or agreeing to more stringent terms for forfeiture. On the other hand, if I'm paying top dollar for the property, I'm going to be a lot more guarded. Mind you, I don't make offers without evidence that my clients can qualify for the necessary loan, but I'm going to want that seller to assume more of the risk of the transaction falling through. If they're getting a good price, they should be willing to. If they're not so willing, they're basically saying that the transaction isn't worth the increased risk. Remarks about having your cake and eating it apply to this situation. I'm certainly willing to persuade my clients to offer a better deposit to get a lower overall price. But I'm also perfectly willing to tell an overaggressive seller to go jump in the lake if they want harsh terms for the deposit without my client getting something tangible in return. The reverse of each applies when I'm listing a property. If the buyer is offering - or willing to offer - a large deposit or terms that are generous to my client, I may counsel acceptance of such an offer where I wouldn't of an identical offer with a smaller deposit or less generous terms for its forfeiture. It tells me that the buyer is willing to risk something real if they can't qualify after tying up the property.



There is another alternative, if you are or have a loan officer that you trust. Get their credit information. After all, a buyer is in a position where the sellers are in fact considering extending credit. Income, FICO, credit score, other debts. Ask your loan person if they could do a loan for this buyer. Of course, if your loan officer is a bozo, or if the buyer's is, all bets are off under this option. Under RESPA, you can't make them so much as put in an application with any loan provider not of their choosing.



If the sellers are not concerned enough about the buyers' ability to qualify to be willing to accept a lowered sales price for better terms on the deposit, I'd say it's not very important to them. If they're not willing to keep looking for another buyer, they want to do business with this one, and they must be getting something worth their risk out of the prospective transaction.



I recently had an agent tell me that requiring a pre-approval was part of their due diligence. Nonsense. I'll go so far as to say it's preposterous. The deposit is real. Information on creditworthiness is real, if subject to more interpretation. Pre-Approvals and Pre-Qualifications are a waste of space in the file, approximately equivalent in worth to an attestation that there is indeed a screen door in this submarine. There is no rational reason to choose one buyer over another, or accept one offer and refuse another, that has its roots in the pre-qualification or pre-approval. There's nothing there that you can hold anyone responsible or accountable for if the buyer does not actually get the loan funded, and if there's nothing there you can hold anyone accountable for, it's not anything real. Which makes it purely a CYA on the part of agents. Some of them may think it means something real, but it doesn't. Those agents need to be educated.



I'll admit I hate being asked for pre-approvals, even though I should probably love it as the sign of an agent that doesn't know what they're doing. But all too many times in the current market, a listing agent that doesn't know what they're doing is a sign of not being in touch with the current market, that I'm spinning my wheels in any negotiations, because the listing agent has no idea what properties like this one are actually selling for. It feels like you're trying to get useful work done on a computer that's frozen up and gone to blue screen of death. Not useful, and not helpful to either my client or theirs. You do have the option of behaving like a recalcitrant mule. Nobody can make you stop, but it's not likely to be beneficial to your bottom line.



Caveat Emptor

Article UPDATED here

The buyer's market is rapidly aging. Properties that are priced correctly are moving, and moving well. On properties with potential for profit, they're moving fast, and sometimes getting multiple offers. Of the last twelve properties clients of mine were seriously interested in, four went "Pending" before they put an offer in, and three more were situations where the listing agent claimed there were multiple offers, and in retrospect, I believe that contention. Bargain property is moving.



This isn't just personal experience. I do get a fair amount of exposure to the experiences of other agents. Four other full time agents in my office, and dozens of others through property scouting. Another agent in the office had a Notice of Default hit her listing. We told her she'd get an offer if the client reduced the price to where we told her. She didn't get one offer. She got four offers within forty-eight hours, and we were able to play them against each other to get almost the previous asking price. I wouldn't say that's a statistical argument that can be extended to the entire San Diego market, but with as much direct evidence as I've accumulated, I'd say it goes beyond merely anecdotal evidence. The market is getting ready to turn.



This isn't to say it's a great time to be a seller. It isn't. Many sellers - and listing agents - seem to have their heads stuck in the days of two years ago, where a highly upgraded property meant a major boost in selling price. No longer. The buyers out there now are highly sensitized to both price and condition, and they are looking for the best overall bargain. Not just beautiful, highly upgraded properties, but at a competitive price also. With the seller to buyer ratio having ballooned to 42 to 1 as of the start of August, they are getting both.



Here's what I'm telling my buyer clients: There's nothing out there right now that's worth getting emotionally attached to before the sale is consummated. If you like the property, make an offer of an amount you would be happy to pay for that property. If the seller will sell for a price you're happy with, great. If not, I'll find you something just as good where they will. If this seller won't deal, the next one will. A large proportion of sellers don't have any choice. They have to sell, most of them because they really couldn't afford the property in the first place. Security guards making $33,000 per year should not be getting $800,000 loans, to name one situation I walked into not too long ago.



What I've told prospective listings is "If you have any choice, don't". I've got signed instructions to keep my one listing as a "pocket listing" until next Spring. In other words, if I can bring him a buyer, great, but don't market the property via MLS or other mass media. But he doesn't have any particular need to sell. If he did have a need to sell, I'd tell him to make it as pretty as possible as cheap as possible, price it as low as he can stand, and be willing to negotiate his price so low it hurts - and maybe a little bit more. If he doesn't need to sell so bad that he's willing to do that - and he's doesn't - then he doesn't need to sell and should wait for a better market for sellers. The only way to attract a buyer is to out-compete the other 20,000 sellers out there for one of the about 500 serious buyers' business. Location and physical size are fixed. Condition and price are not. The buyers out there are highly sensitized to everything. Instead of a beautiful gourmet kitchen boosting the sales price by $25,000, what this market means instead is that an otherwise identical property is more attractive at the same price than one that hasn't got it. You are unlikely to get enough extra money to notice. What you are likely to get is the property sold, while the otherwise identical property sits on the market for the same price.



Indeed, the property in less than desirable condition is going to sell at a substantial discount, if it sells at all. There's starting to be substantial opportunity for flippers once again, albeit with the mirror image of the way things were going two years ago. Instead of buying at the market price and selling the upgraded property at a premium, now they're buying at a large discount and selling the upgraded property at about market price. It may be intelligent, but the average buyers out there aren't interested, and they're not willing to deal with the ten people who'd rather be foreclosed upon than take the only offer they're going to get to get to the one who will take the offer. I hate short sales and I admit it. Most of the profitable opportunities for buyers out there right now are nonetheless ugly properties in a short sale situation. Not just for flippers and investors, either. A family that wants a place to live that they're willing to fix up can do extra-ordinarily well for itself right now. It's better to buy at a discount now, when you are in complete control, than to hope for a premium when you eventually sell. This is also the historically normal way of the market.



The San Diego market has been on the bleeding edge of the national trends through this whole boom and bust cycle. The "good news" that came out of that was that all of the exotic programs that are usually dead were still available to the less ethical loan officers, at a point in the cycle where they're usually historical toast. The bad news was that while the rest of the country was still going gangbusters, we were basically banging our heads on concrete walls in trying to get short sales approved by lenders. Well, the lenders now have their heads in the right place to approve short sales, just when there's signs of a rebound in the local market.



Indeed, the slopes and inflections in trend lines had me believing we might see a small bit of recovery this year, and we actually have, if only at the most competitive edge of the market. Now, with the peak spring and summer season largely past us, I think we're going to see the buyer's market mostly continue until spring of next year. This means another several months where those buyers who are willing to come off the sidelines at a time of year when most buyers aren't are going to be able to drive hard bargains. Sellers can either choose to out-compete other sellers for the buyers that are out there, or have the property sit unsold until the market turns. Even in trendy, highly desirable communities, buyers currently have the power. As a seller, you can accept this or your property can sit unsold. The longer it sits unsold, the less bargaining power you have.



Here's the statistical run-down on the most recent six months: 13,272 properties sold, 3335 in escrow - versus 19,265 canceled, withdrawn, and expired. Assuming seventy percent of those in escrow eventually close, that's about a 43.5 percent probability of any sale at all - in the best time for sellers there is. On the other hand, the comparable figure last year at this time was 39.8% - and last year I didn't discount pending sales by thirty percent - I just took them as presumptive sales.



Furthermore, we're now in the period where most of the unsustainable loans that were written have already bitten the people they are going to bite. We're coming up on two years since the music stopped and everyone ran for the sidelines locally, which means that most of the two year fixed rate loans have already adjusted, and many, if not most, of the negative amortization loans have already hit recast. Furthermore, unless they've been living in a cave, and they haven't - they bought a home - almost everybody who has an upcoming adjustment they can't afford has figured it out. Their homes are already on the market. The difference between selling now, before the Trustee Sale, and later, after the Trustee has deeded it to the lender, are not large as far as the buyers are concerned. The only difference is that after the Trustee Sale, the lender knows how much money they're losing every day.



My point is this: There's only so much desperation out there, and we've already seen the largest influx of it into the sellers' listings here locally. San Diego is a resilient market, one of the most resilient in the country. People want to live here. People are willing to pay higher prices to live here. The ones making more income than national average - a large percentage with technology and biotech and defense and other highly paid industries here - can afford to pay those prices. That's the demand side. On the supply side, there just isn't a lot of dirt left. Unless we change our laws and attitudes about what constitutes a buildable lot and the acceptability of high density housing, there just isn't a lot of room for our population to grow further. We're hemmed in by immovable obstacles on about 330 degrees of the circle (The Pacific Ocean, Mexico, Camp Pendleton, and Cleveland National Forest). Since this is the United States, and we don't tell our citizens where they can live, the way we discourage people from living here is that the price will keep going up until enough people decide voluntarily that they're not willing to pay it. Thus far, we haven't lost as many people to out-migration this cycle as we did last cycle. Back in 1991 and 1992, U-Haul was essentially allowing people to move here for free, there was such a demand for their inventory on one way trips out. They haven't gone nearly so far of late.



I'm also seeing a lot more pent-up demand this cycle than we had last cycle. Instead of moving out, people are waiting for the market to hit bottom. Well, the local market isn't going down as far as most people think it is. As I've said, at the most competitive edge of the current market, sellers are seeing not only fast action but lots of interest. People are willing to pay those prices. People are very willing to pay those prices. Even with the psychological fear of further market decreases, those who are willing to buy are not only willing but also able to pay current prices. So much so that they're practically racing to be first in line when they find something that is a worthwhile bargain. What do you think is going to happen as soon as the average buyer, who's been holding off for two years, gets it into their head that the market may have hit bottom? Without the psychological fear that's keeping them on the sidelines now, expect to see a large influx of serious buyers, drastically curbing the ability of buyers to drive harder bargains. In short, a seller's market. It's a positive feedback effect. The more people come off the sidelines, the more strongly the market will turn, and the more people will want to come off the sidelines.



As I said yesterday in my loan market article, the gonzo 100% stated income low credit score programs are gone, and they're not coming back any time soon. This means you're not going to see the same kind of frenzy as drove the market three or four years ago. Personally, I doubt that sellers - or listing agents - are ever going to have that kind of power again. The loans that enabled that stuff are no longer being offered. People are going to have to have at least two of three things: Good credit score, a significant down payment, and ability to prove they make enough to afford the loan. Failing that, they're going to pay very high interest rates, high enough to keep them out of properties that they could otherwise qualify for. That's going to keep a damper on market increases, at least until the lenders develop collective amnesia again.



At this point, where most of the buyers who are going to buy this year are already out there in the market, I don't think the market is actually going to turn until next Spring. Meanwhile, those buyers who are willing to come off the sidelines now, before the market has actually turned, are going to be much happier than those who wait until the market has already turned. The time of very best bargains locally is already past, but since I don't know anyone with a time machine, we have to consider what we've got looking forward.



Caveat Emptor

I wouldn't have believed this one if I hadn't been there when it happened.



Another agent has a listing where the property went into default. We just happened to find out about it; the seller tried to keep it a secret because they were embarrassed. Silly, but it happens. Suddenly, the sharks started swarming, of course.



One agent brought an offer in. Among other things, that offer called the property, "a dog." It's not a dog. It's not a place where I'd expect to find a billionaire living, but if someone gave it to me, I'd have no problems either living there as it sits, or renting it out.



Never insult a property you're interested in. It's smart to explain the facts of the situation that are in your favor, but calling the property "a dog" conveys no information, is completely subjective, and is usually construed by the owner as a direct personal attack. If you want them to agree to sell you the property - which should be the reason you made an offer - it's a great way to sabotage that goal. If it's got holes in the wall or cracks in the foundation, by all means remind them. But don't get personal.



Then this clown not only sabotaged his argument, but violated his fiduciary duty, by bringing in a competing offer.



This just blows my mind. Not only is the property now obviously not a dog, since you have multiple people clamoring to buy it. How many buyers can one agent work with at a time, anyway? My absolute limit is six. If two of them want the same property, there must be something pretty darned attractive about it.



This also increases the leverage the seller has, raises the sales price for the one that gets the property, and means that one of them doesn't get the property. How can this not be in violation of fiduciary duty?



No matter how good the bargain, as a buyer's agent, I never ever initiate showing a property to someone else until the first buyer has told me they're not interested. I can't stop them from seeing the property, but I can avoid personal responsibility for encouraging someone else to make a competing offer. Especially now - it's not like there's any shortage of bargains out there. Sure, the incidence of multiple offers has risen dramatically, and properties that are priced competitively are moving (both of these are signs of a buyer's market that's about to turn, by the way). Nonetheless, there's a lot of good stuff out there if you know what's really important and how to look. A buyer's agent should know both. That knowledge is a significant fraction of what we're selling. I found four great bargains, even considering the market, one morning two weeks ago, which was the last time I got out just on a general search, not associated with any particular client. All I had to do was get off my backside and out of my office and look. I don't accept clients if I haven't got the time to look for them.



This clown was thinking about getting paid, not the client's interest. Furthermore, unless he told them, which I will bet he didn't, those two sets of clients have no way of knowing that the agent has hosed both of them. It is one heck of a bargain as it sits. Either one of them should be ecstatically happy with it and a good bet to come back on their next transaction - provided they don't know how the agent hosed them.



Now in the case of this particular property, both the MLS and the foreclosure list are public knowledge. It's not like there's any deep dark secret about it. Perhaps this agent is even selling foreclosure lists as a way to procure business, and both clients independently spotted the property and asked about it. He still owes it to the client who put in the first offer to do what he can not to sabotage them. This is the one exception I can think of to Agents Refusing to Make an Offer on Real Estate. As a buyer's agent, I have a firm policy of one outstanding offer per property (As a listing agent, I love multiple offers and do everything I can to encourage them). It's a minor encouragement for fence sitters to pull the trigger now, when I tell them that if another of my clients makes an offer, I will decline to submit an offer from someone else until that one is off the table. This protects both clients by keeping them out of a bidding war I would have facilitated. I'll find the second client something else. In this market, there's nothing so good it's worth getting into a bidding war over.



Caveat Emptor

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Good Evening!
My name is DELETED and my wife and I recently signed papers to purchase a property from DELETED in DELETED, CA. After our options, their lot premium, and the elevation charge, the house is listed at 425,000. We have 90,000 in incentive money to spend which we would like to lower the overall cost of the home to 335,000. We only receive the incentive money if we get the loan through (their in-house lender). We were interested in a 30yr fixed rate mortgage that is 100% financing and will pay the closing costs out of pocket. I feel like I am being stiffed by their loan guy. Back in late May or early June, he told me that we could get 30 yr 100% financing with HOA, Mello Roos, PMI, PITI out the door for $2889 on some 6.75 percent loan (which still seemed high to me) but just last week he told us that we are now looking at 7.8% with out the door payment of $3250 because 100% loans are harder to finance now. I guess my question is how do I not get stiffed by their loan agent and what proper steps do I take to ensure the best loan and rate for us? I think that 7.8% is ridiculously high for this market! Here is some background info on us:

Credit scores of 750-780 for both of us
21,000 in bank accounts
2 car loans with 3 yrs remaining on each (238 and 210 per month)
Current renters with 80k gross yearly combined salary
1st time homebuyers

Any help regarding this matter would be greatly appreciated! Thank you for your time and consideration. If there is any other information you need us to provide I would be more than happy to provide it.

First off, check with your local authority to see if you qualify for a Mortgage Credit Certificate. It looks likely. Whether or not the developer's lender participates is a question, but it's a question that needs answering.

Now this is definitely a situation where you needed a buyer's agent to deal with a developer. Unfortunately, at this point it's too late to get one involved, and kind of pointless, as you've already signed the contract. The work a buyer's agent does is pretty much moot. You've already signed that developer's contract. I'll bet a nickel they'll be able to keep your deposit if you back out, and likely sue for more. They are now in a win-win situation.

Here locally, I could tell you if it was a good idea to pay that developer's extra charges or just take their basic unit. Elevation premium? What's the view now, and is it likely to stay that way? Lot premium? How many extra square feet are you getting - or is it just a junk fee? You're not local to me, so I do not know.

What I can assess is numbers. Just picking a rate sheet at random (it will have changed by the time you see this), right now I've got an 80% first with zero points and no pre-payment penalty at 6.75%. On $268,000, that's $1738. The 30 due in 15 second would be at 7.75%, with a negligible cost, for a payment of $480. Assuming that your official purchase price is $425,000, add about another $443 for California property taxes and just a guess of $100 for homeowner's insurance, and that's a payment of $2761 plus Mello-Roos and HOA, which I have no way of knowing. Never choose loans by payment, but it cuts your cost of interest more than it cuts your payment.

However, at $425,000, you've got a first of $340,000 and a second of $85,000, giving us payments of $2205 and $609, respectively, and that's what we'd be looking at if you came to me for the loan right now. Add that $543 taxes and insurance, and your payments would be $3357. Not having that $90,000 in your balance makes a huge difference, and not just to the payment, but also to the cost of interest.

Here's another point on which developers hose unsuspecting buyers. Is that property, as it sits, going to be worth $425,000? Is it going to worth $335,000? If I were in your shoes, I'd hire an appraiser right now. here's one easy place to find an appraiser in California. That approximately $400 they'll cost is looking like a really cheap insurance policy, right about now. And you do want an independent opinion. The chances of that developer's appraiser rocking their boat are nil.

Here's one thing to seriously consider: Take their financing offer, even if it includes a pre-payment penalty, which I'm betting it will. Of course, if they offer you the option of buying it off with a higher rate, that's something you're going to want to do in this scenario. Then, providing the property is really going to be worth enough, refinance immediately. That pre-payment penalty isn't going to be $90,000, even with the costs of the new loan included. But you want an independent appraiser's opinion before you jump into this, to find out if it's likely you'll be able to refinance. What you're essentially doing is taking the $90,000 incentive money and then paying a toll of about $13,000 for the pre-payment penalty plus whatever the costs of the new loan are (the ones I outlined would be roughly $3000 if you accepted a 3 year penalty of $500 on the second, or $500 higher if you didn't). Net to you: roughly $73,000 - if the value of the property will cover the refinance, and you'll get better terms if the value is actually $425,000, because the Loan to Value Ratio won't be 100%. It'll be about 83%, which translates to an 80/5. Provided, of course, that the purchase contract says $425,000. If your official purchase price is $335,000, your monthly property taxes will be about $349, but then we're dealing with whether or not the lender will believe your appraisal. A paper lenders quite likely won't. Most of the time, your official sales price will be the full amount, but every once in a while developers like to throw a curve in. On one hand, a lower sales price reduces your property taxes, while on the other it means that you'll have difficulty refinancing for a while.

If you had a good buyer's agent, you'd likely already know the answers to all of these questions, and you likely wouldn't have fallen into a couple of traps, but that's water under the bridge. We have to deal with the situation as it exists, and figure out the best way to deal with the facts looking forward. If an appraiser tells you the value is there, I'd take their loan on a short term basis for the incentive money. If the appraiser tells you the value is not there, it's probably time to see a good lawyer about getting out of that contract. If you lose your deposit, that's usually not as bad as spending more than the property is worth and getting stuck with a rotten loan you can't refinance out of.

Caveat Emptor

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