Buying and Selling: September 2014 Archives

And I mean that literally. Do it all yourself with no begging for free property advice, free help, free negotiations help, free real estate location services, free answers to "how do I deal with this problem?" and not least of these, nobody to blame but yourself and nobody to sue when something goes wrong because you didn't understand something important.

One of the things I do to generate business is talk about bargain properties I've found that current clients aren't interested in, for whatever reason. Maybe it's a bit too much of a fixer. Maybe the location just doesn't work for them. Maybe it just looked so interesting I checked it out despite not having a current client it may be right for. It's not like a listing agent or owner with any kind of clue is going to object to having somebody else think their property is worth a closer look!

This is one e-mail exchange I went through recently. It's not at all uncommon.

Please tell me the address of this property in La Mesa so I could drive by and I will use you as a buyers agent.

This was my reply

Good to hear from you and I look forward to meeting with you!

Here's what we do: We get together, and we both sign a standard CAR non-exclusive agency agreement, which says precisely what you just typed. If you don't buy the property, no obligation is incurred. Neither of us has anything to lose by signing such an agreement. In fact, the only way I gain is by finding properties for you that really are better values than anything else - enough so that you want to buy them.

You don't like the property, you have no obligation whatsoever. This way, neither one of us is risking anything, and if you don't like my work, you can terminate the relationship at any time.

The reply is illuminating. This is the entirety:

I sign nothing but my paycheck

Note that he still has not so much as told me his full name. No phone number either. And when I note that being able to find and recognize this sort of property might be a valuable skill, and doesn't he think that someone who 1) recognizes a valuable commodity that no one else has, 2) points it out to you and 3) enables you to get an all around better bargain deserves some compensation, this was the reply:

Just what I need another low life realtor. You guys are a dime a dozen. YOu mean years of ripping people off for every nickle that you can squeeze out of them. Get a real job I have one. Don't bother responding your trash.

Aside from his desperate need to repeat eighth grade or invest in a better word processor, the charitable interpretation of this reveals an all too common mindset: that of unconscious incompetence. Less charitable but happens constantly: This person is trying to make use of my ability to find and recognize bargains without paying the price for that expertise: Using me as a buyer's agent. And make no mistake - in either case, this person is trying to prove that agents are worthless by getting me to provide one of the major reasons you need an agent, free of charge. Suppose I asked you to work for a week without pay, or your employer volunteered you for a week of unpaid work? That's the equivalent situation. And to accuse real estate agents of being lowlifes because they won't do this is different because...?

A good buyer's agent will save you more than they ever cost by a factor of at least 3, and that's not including all the hidden savings from keeping you out of properties that will not appreciate, that will suck your wallet dry, or that have other issues deadly to your financial future. It took me a while to decide to share it, but here's my own story of buying without an agent, years before I became one. I didn't make several of the more common and costly errors, and I still would have been demonstrably several times better off with a buyer's agent.

If you don't think finding and recognizing such a property is a skill - and a valuable skill at that - do it yourself. The fact is that if you could, you wouldn't be asking me to do it for you. The times when I search places other than the publicly available MLS to find real bargains are vanishingly rare. I can find bargains there because 1) I know the market and can recognize what is and isn't value 2) I know what to look for, 3) I know what to avoid, 4) I am very good at spotting problems, and 5) When I don't spot any big problems, I've got a reasonable basis to believe that this really is a bargain. If this describes you, you might not need me. Mind you, any number of people who don't need a full service agent still prefer to use one due to time and liability concerns, but if you know everything a conscientious agent does about property and negotiating and the law and the market you are looking in, why haven't you got a license of your own? That you haven't taken the test is a "fooling yourself" answer - California's test doesn't cover ten percent of what a good agent or loan officer needs to know, and is one of the harder ones. The fact is that it is much easier to get licensed than to actually know what you're doing, so if you're not licensed, how could you possibly know what you're doing? In logic, this is called necessary but not valid. In other words, you don't know what you're doing. if you were on a game show, you'd be being told, "Thank you for playing," as they ushered you off camera in favor of the new contestant. (Many of my articles are aimed at helping you defeat the necessary but not sufficient condition of a licensee who doesn't know what they are doing, or won't do it despite knowing).

How offering a skill for sale makes me - or anyone else - a lowlife is beyond me. If you don't need the skill, don't buy it. But if you need the skill, you are expected to pay the price. This is called commerce, and the fact that you may think it is a worthless skill does not make it so, especially as you try to trick the person into performing it for free based upon a false promise. This person, and many others, has tried to get me and other agents to perform it for free under false pretenses. Does this sound like a worthless skill when it is so apparently valuable that people try to scam you out of it? Actually, I'm not certain there is such a thing as a worthless skill, but there are skills that aren't worth anything to me. I don't need anyone to make candles by hand, and am definitely not willing to pay anything for it. This doesn't mean there aren't quite sane people willing to pay a high premium for hand-made candles, but you don't find me among them, trying to get hand-made candles for free. If you really don't think what agents do is valuable, don't try and scam them into doing it for free. Do it yourself.

I do have some small element of understanding for some of these people. The NAR and various state realtor organizations have positioned the profession as a bottleneck or a tollbooth upon a highway. Trying to make people pay the toll because it appears they don't have any choice. Guess what? People have a choice. There is no legal requirement whatsoever to use an agent at all in any state I'm aware of. I can't make you pay me and I certainly won't even try to force you, but neither will I work for free. I have to feed my family somehow, and if I can't make money being an agent, I'll go do something else - but I certainly won't work as an agent for free in my spare time! I will give you reasons why I'm worth a lot more than I make in terms of the client's bottom line, and I will certainly put myself forward as being a particularly good example of an agent and loan officer. Not only is it objectively true in my case, that's how businesses succeed. But if you don't want to pay for my expertise, that's fine. I'll keep looking for those who are willing. But don't accuse me or anyone else of being a lowlife because we won't work for free.

Here are some cold hard facts: if this guy was finding this sort of bargain on his own, he wouldn't be emailing me. He'd be in escrow, if not already moved in to the property of his dreams. If what I was offering wasn't more attractive to him than what he has found on his own, he would never consider emailing me. If he was able to recognize bargains like I can, he wouldn't be looking where I advertised. In short, everything about his response and the fact that he did respond shouts out that he does consider what I do valuable. So which is correct: The cheap ego shot when I won't give him what he wants for free, or his desire for the results of that skill? Is the skill worthless and am I a lowlife, or is the skill valuable, do his actions tell the world that he considers it to be valuable, and is his response when he can't get it for free entirely too much like Aesop's "Fox and the Grapes"?

If you really don't believe you need an agent and that you can do it on your own, you shouldn't be looking for an agent willing to work for free like this. And like any other situation where someone is pretending an answer is different from the real answer, pretending doesn't make the answer any different, political spinmeisters notwithstanding. All pretending otherwise does is give the pretense needless opportunity to damage you and everyone around you. In the case of a real estate transaction for half a million dollars or more, that's quite a bit of damage indeed.

There are those who would have you believe agents don't do anything, or don't do anything valuable enough to warrant what we make. Some of them are themselves sharks that agents protect you from. Some of them have competing products of their own to sell. Some of them just look at the raw number of dollars and don't understand what anyone could do to earn that sort of money or don't understand how much a good agent who wants to stay in business needs to do. You're welcome to believe any of them. But if you do believe them, go do it yourself. Don't try to get agents to work for free - all that says is that you do recognize the value, but are unwilling to pay for value received. And don't get upset when anyone with more than an hour or so in the business recognizes the game you're playing for what it is - a scam intended to defraud them. Finally, if you're tired of playing this game because all it does is cause frustration, stop playing it and start working honestly with one or more agents. The good ones who know what they're doing are more than willing to bet their skills and their time that they will get the job accomplished, with no upfront cost to you.

There are lots of things that any intelligent agent will happily do for free, on speculation of eventually landing a client. I certainly do. But there comes a point where there is real skill and real time and real liability on the line, and if you're not willing to sign up with them at that point, any agent with more than about an hour in the business is going to realize what you're up to.

Caveat Emptor

Original article here

Vampire Properties

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I just went out doing some general market scouting. Looked at ten properties, and at least three were of a sort that I've started calling "vampire properties." Vampire properties are one more reason you want a good buyer's agent, and maybe even the strongest.

Like a mythical vampire, these properties are very charming on the surface, luring in the innocent victims with brand new flooring, new roof tiles, and new paint. All the relatively cheap stuff that inexperienced buyers love. There might even be a new spa in the back yard. They call the listing agent and fall in love with the property. They put in an offer, which is quickly accepted, buy the property and move in.

Then the troubles start. Those brand new roofing tiles get ripped off the rotten substructure the first time a good wind comes up. The new owners notice that the travertine floor tiles are separating, and eventually, when one comes loose, find that there's a widening crack in the foundation that runs the width of the house. That beautiful new tile in the bathroom has to come out because they discover the green board is rotten, and the framing boards as well.

It'd be better if the property was sucking your blood. At least that's covered by health insurance if you've got it. But it's got its fangs permanently embedded in your bank account, instead. None of this stuff is covered by home owner's insurance, new home warranties, or anything else. Your home owner's insurance might replace the roof tiles (pulled off by wind, which is usually a covered peril), but the rotten structure underneath is your problem, caused by the normal wear of time.

In most cases, I find it hard to believe that the previous owners didn't know about this stuff. That's what the brand new facade is about. They figured a quick surface fix - the home owner's equivalent of a cheap paint job over a rusted car body - and they unload the lemon on some unsuspecting chump and walk away. Quickly.

For any of those sort of people reading this, I've got to tell you that the lawyers will find you. But for the buyers in the situation, the lawsuit - which will take years, even assuming that they win and if the judgment is paid and that it's enough after legal fees to cover expenses - is a poor substitute for not getting into the property in the first place. Particularly if, as seems to be the usual case, the buyers stretched to the extreme limit of their budget or beyond in order to afford the property.

It is far preferable, to all parties, to have the issues dealt with before the sale is consummated.

Now most buyer's agents aren't licensed inspectors, and I'm not one of the few. You still want an full-on building inspection. That doesn't mean agents can't spot stuff before you have a purchase contract, come up with a deposit, and spend hundreds for an inspection. All of this is called "buy in," and works off of a phenomenon psychologists call cognitive dissonance. You've said you want it, you work really hard and jump through all of these hoops to get it, and when you find out how bad it really is, you keep going because you are so mentally committed, because you've done all this stuff. If it's something I can spot, wouldn't you rather find out before you all of this happens and before you've spent that money?

The listing agent certainly won't tell you. They'll have you sign a standard disclaimer advising you to get an inspection. Yes, they have to help fill out the disclosures, but if they're not licensed inspectors, they can't be blamed for not knowing, can they? Their responsibility is to get the best possible deal for the sellers. They have very little responsibility to the buyer. You can't blame listing agents for doing their job. You can blame them for lying about things they actually do know, but that's about it Good luck trying to prove that they knew.

It's almost inevitable that the owners of vampire properties price the property like something out of Big Al's Discount Used Car Lot. "Cream puff, baby! One owner, a little old lady who only lived in it on Sundays." They want top dollar and then some. I understand, but I'm not going along and neither are my clients if I can help it. I saw one today where the list price was $40,000 more than it should have been if it wasn't a vampire. The agents should know better, assuming they are not deliberately "buying a listing." Price it to market if you want to move, and that includes a hefty discount for not being the one who has to hassle with fixing it. If you want that money in your pocket yourself, fix the problem yourself. You'll also interest a better grade of potential buyer, not to mention more buyers than just the simpleton who happened to win the lottery.

I'd rather deal with a property where the issues are out in the open. I also found one property today that has a crack across the living room floor, out in the open due the aftermath of an obvious flood, but I can find buyers who know how to deal with that (If the lot is level, it's not such a big deal, and can often be fixed surprisingly cheap). You don't have a listing agent pretending to drool over beautiful flooring that is going to have to be replaced anyway. Furthermore, it indicates that the listing agent, at least, doesn't have their head stuck in the Land of Wishful Thinking, so if I take a client who is interested despite the flaws out to the view the property, we're all pretty much on the same page as to what's going on with the property, and we have the makings of a reasonable negotiation. If the listing agent is in the Land of Wishful Thinking, I'm wasting my time to look and the client's also if I show it to them.

Vampire properties are out there. In markets such as this one, they are both increasingly common and deadly to your financial future. You want somebody whose job it is to look past the beautiful surface to the very real issues beneath. If you buy a vampire, it's worse than a disastrous marriage, because the financial consequences are likely to follow you long after you've shed your abusive partner..

Caveat Emptor

Original here

What's negotiable on a purchase?

The short answer is everything.

There may be standards and traditions in your area, whether they're the same in your area as there are in mine or quite different. That doesn't mean they are not subject to amendment by specific negotiation. Once you get outside legal requirements, anything is subject to negotiation. As long as it's legal and both (or all) parties concerned agree to it, that's the way it's going to be.

This is not to say that some things aren't better left alone. For example, if I was buying a property and the seller didn't want to pay for the policy of title insurance, as is traditional, I'd certainly think long and hard before continuing with the transaction. Furthermore, such behavior would certainly cause the price I'd be willing to pay to drop dramatically. If I'm helping clients, the same applies even more strongly. I'm going to tell them that this may mean the seller may know they're not be able to deliver clear title. Without clear title, I certainly don't want my clients to pay half a million dollars or so for a property they may not really own!

This is also not to say that there may not be consequences as the result. For example, if I or my client is selling the property, and a prospective buyer asks for a $10,000 credit towards closing costs, the lowest offer I'd accept would be at least $10,000 higher, probably $11,000, maybe more. Why? Because commissions and transaction costs are based upon the official sales price, not the sales price less that rebate to the buyer. The bottom line is that it costs the seller more than $10,000 to rebate $10,000 thusly. A $400,000 offer that requires $10,000 in rebates isn't a $400,000 offer. It's a $390,000 offer at best.

In order for it to be a valid contract, the two parties have to agree in every particular. If there is not complete, total, 100 percent written agreement as to what is going to happen, there is no contract. Two parties haggling over whether one light bulb gets replaced do not have a valid contract any more than two parties haggling over whether the price will be $200,000 or $500,000.

Nonetheless, except for those very few things mandated in law, it's all negotiable. Specific negotiation can change anything that's not legally mandated, and most things with defaults specified in law. If you've got a gold bathroom faucet that you want to keep, a normal sales contract says that it stays by implication (it's a furnishing attached to the property and required for the property to function normally). But you can change this by specifying that you have the right to remove it in the contract. Now if they buyer is only buying the home because of that gold faucet, they can walk away or counter offer that it stays. Let's say you eventually agree that it will be replaced by another gold faucet. That's specific negotiation. The replacement will be required to be installed, equal in functionality and free of defects - unless you change this by more specific negotiation.

I've seen negotiation for personal property to remain, furnishings to leave, the disposition of existing tenants, allowing leasebacks to the prior owners, and just about everything else under the sun. If there's something about the standard contract you don't like, or something specific to your situation or this property, specific negotiation is how you deal with the issue. Furthermore, even if you don't want to change anything, the other side might. More properties have further negotiations due to problems or issues raised by inspections than don't. Something is revealed to be not quite right, and the seller either has to make it right or negotiate with the buyer for acceptance in the current state. Providing they still want the transaction to proceed, of course.

This is not to say that as long as the transaction records the seller is golden, by the way. If the buyer can show reasonable evidence that the seller knew of the issue but failed to disclose it, that's a bone for the lawyers to fight over when it's discovered. Some sellers fight a losing battle over issues like this for years - and it ends up costing them far more money in the longer term. The buyer finds out something you should have told them after the transaction, that's a bad situation for a seller to be in. Better to disclose right away and be done with it. When the seller can prove the buyer knew the full extent of the issue and bought anyway, that's much better protection.

So make sure that if there's some issue you want resolved, the purchase contract resolves it completely and unambiguously. That contract details how the transaction is going to happen - how all the possible conflicts are going to be resolved so that there is no dispute. If it's not there, you're at the mercy of the other party. They might see it your way. Then again, they might not. More often than not, they're going to require some compensation in order to do it your way, where if you had just negotiated it in the first place, it quite likely would have been no problem, or insignificant enough to ignore in light of other factors. Incidentally, failing to negotiate complete terms in the first place is one of the big mistakes people acting without a real estate agent on their side make, and it quite often costs them a lot more than any commission they would have paid.

Caveat Emptor

Original here

RESPA (Real Estate Settlement Procedures Act) prohibits an agent from requiring you to have other services performed by outside companies, or by a particular associated company either. RESPA also prohibits an agent from accepting payment (kickbacks) from third party service providers. Nonetheless, these are major problems in the real estate world.

It is an unfortunate fact that many agents care far more about the little bit of extra they get from third party service providers than they do about their fiduciary responsibility to the client who helps put potentially many thousands of dollars in their pocket.

For instance, never take a real estate agent's unsupported word about a loan officer. It happens on a routine basis that I talk to people in other parts of California where I'm not set up to be their real estate agent (kind of hard for me to show someone a property in Redding when I'm in San Diego), but thanks to the modern age, I am perfectly capable and set up to be their loan officer. Approximately one real estate agent in three completely refuses to cooperate with me as a loan officer, despite the fact that I'm getting their client a better loan than the loan officer this person wants them to use. I can have written authority for the information, and they won't give it to me. Okay, so I go through the escrow company - no big deal in most cases.

I can understand and sympathize with this attitude, if what they were worried about was my ability to do the loan at all. After all, if the loan isn't ready at the end of the escrow period, this transaction they've spent so much effort on falls apart.

So I tell them this: Have your friend do the back up loan, if you're so certain I'm full of it. If they were worried about a client's best interest, they'd sign off on that in a heartbeat. If I deliver, your client is better off. If I don't, they are no worse. Either way, the client is very happy and has gotten a better loan and their interests have been served.

There is only one motivation that I can think of for what happens consistently: the agent keeps carping at my client to cancel the loan with me. Let's consider what this means.

No matter how unlikely the agent thinks it is that I'll deliver exactly that loan, with cancellation, the probability I can deliver it goes to zero. So I can now guarantee that this client to whom he has a fiduciary responsibility doesn't get the lower rate loan I was working on. Greatest possible benefit to client: zero. Downside: higher payments, higher costs, worse loan, zero leverage on other loan officer to deliver the loan he said he would.

Furthermore, no matter how good a loan officer, there's always a chance something goes astray, and for whatever reason the loan doesn't get approved. He's now exposing his client to the possibility that his friend, the loan officer, won't have a loan ready to go. If this happens, client loses house, deposit and other time and money invested. Possible benefit to client: Not paying for a second appraisal (when I originally wrote this it was only a $100 retyping fee for the appraisal saved, but Home Valuation Code of Conduct was not written for the benefit of the consumer, but rather that of appraisal management companies and their contributions to the political coffers of one certain politician). Possible downsides to client: no house, lose deposit, fees for appraiser, inspectors, etcetera wasted. Furthermore, the agent loses his prospective commission - several thousand dollars.

So what could cause an agent to want his client to cancel my loan? The only thing I can think of that explains the whole shenanigan is that this agent is in line for a payoff. Can I prove it? Absolutely not. Have I tried to think of alternative explanations that make sense? Many times, with no success. Maybe I'm missing something here (if so, email it to me), but I sure can't see any other possible benefit to the client or the agent.

Here's another thing. Title and escrow companies. There are a variety of services escrow companies are supposed to provide the transaction - but title companies are actually the ones set up to provide many of these services. So the title company charges a sub escrow fee, messenger fees, etcetera for performing those services. But, they will waive those fees (not charge them) IF the escrow company in the transaction happens to be one they own.

Hey, I think, a pretty nifty way I can save my clients several hundred dollars! Makes me more valuable to them! And since kickbacks from title and escrow are illegal as well as unethical (according to RESPA and the Code of Conduct as well as good business practice, respectively) I certainly can't see a benefit to me for urging them to choose otherwise.

(And I am truly sorry to anyone reading this who works at an independent escrow company. As far as I can determine, you're just as competent as the title company escrows, and no more intrinsically expensive. But it's really hard for your company to compete when choosing your competition saves my client money that's usually about equal to the base escrow cost. Plus the fact is that it's a violation of my fiduciary duty if I don't tell them this)

You wouldn't believe the resistance I get from agents who obviously want their client to choose one particular escrow company, and one particular title company that aren't affiliated. The sellers do have the right to choose title and escrow companies, or at least to negotiate them. But that's the seller's right, not the seller's agents. And a failure to inform them of obvious ways to save money by choosing an escrow company that will save your clients this money is a violation of fiduciary duty.

I just finished fighting one not too long ago where the seller supposedly wanted to choose an escrow company whose name just happened to be the same as the name of the real estate office that the seller's agent worked for (I.e. X Real Estate and X Escrow company). Now it may be possible that they are unaffiliated with that real estate office, and it may be possible that they are set up to handle all of the duties that cause the title company to charge those extra fees. So my client's counter-offer included the following phrase:

"Since the seller has chosen title and escrow companies unaffiliated with each other, seller is to be solely responsible for all sub escrow, messenger, and additional fees assessed by the title company above the cost of the title policy."

It even gives them an out - if the escrow company is set up to handle these services that are supposedly their responsibility, and does so that the title company doesn't charge for them, it makes no difference to either client.

The other agent didn't want to present the counter to his client. He specifically asked me to drop that wording. I knew exactly what this meant, particularly in the case of the escrow company that just happened to share the name of his real estate brokerage. No evidence admissible in court, of course. But I had to threaten to have my broker call his broker with the clear intimation that my next call would be to Department of Real Estate in order just to get him to present the offer to his client. Do you think it's possible he failed to inform his client about this trivial way to save money? How likely do you think it that there was some kind of payment going on off the books? All of this is illegal.

There are two companies that provide the vast majority of all home warranties, at least in this area. I can't even name another home warranty company off the top of my head. Each of them is affiliated with a particular title company. The policies are the same, as far as I can tell. Somebody wants to know the differences, I tell them to consult an insurance expert (The expert I consulted concurred with my opinion). But one of these insurance carriers is more expensive. If I'm representing the buyer, I don't care - his coverage is going to be pretty much the same. If I'm representing the seller, I'll tell them to please consult a licensed casualty insurance agent, but B is less expensive as far as I can tell. Why then, do I keep seeing sellers who are volunteering A? I can't believe a fully informed client is volunteering to spend more money for the buyer's benefit in order to buy coverage that looks to be the same.

The long and the short of this post is that just because it's illegal under the law doesn't mean it doesn't happen. Just because that agent has a fiduciary responsibility to you under the law doesn't mean they take it seriously.

What can you do?

Well, choose an escrow company that's affiliated with your title company, or an escrow company that's affiliated with a title company, and choose that title company too. On refinances as well, do not allow your loan provider to choose title and escrow who are unaffiliated with one another (to be honest, I haven't helped buy or sell property outside of California, so have no idea how this works in an attorney state). Look for something like "X Land Title" and "X Escrow." This will save you hundreds of dollars. They'll try to sell you on benefits like "Having escrow right here is very convenient," or "I know this escrow officer won't mess up the transaction." There are poor escrow officers, to be certain, but there are lots of good ones. Make it clear to your agent that you are unwilling to pay subescrow fees. If they want to choose escrow and title such that subescrow is going to happen, make the agent agree to pay them.

Ask not just your real estate agent, but also your insurance agent about home warranty policies. Or look in the Yellow pages under Home Warranty Coverage and call around if you're selling a property. Do this before you have an offer.

And above all, don't just go with your agent's recommendation on a service provider. It's unethical, illegal, and just plain bad business practice, but that doesn't stop a certain number from having their hand out behind your back. And it's just as likely to be the highly accredited agents at Big Name Brokerages with loads of brand awareness who are doing this. More likely, actually, as the reasons people go to that type of practitioner is to pretend they don't have to worry about details.

Caveat Emptor

Original here

How To Buy Bargain Real Estate

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There are two main sources of bargain properties. The obvious one that everyone knows about is properties fresh on the market where the owner doesn't realize what they've got. This is the largest single reason why potential buyers obsess over days on market: They think they're going to find something nobody else has, yet. Unfortunately for this mindset, everyone else has precisely the same idea. Everyone else wants to look at that fresh on the market property, hungry for the bargain nobody else has discovered yet. As a result, this sort of property is where you get bidding wars as everyone else jumps on the same bandwagon, making the owner and the listing agent both very happy.

The "It's so beautiful!" property is not where you get a bargain, especially when it's fresh on the market. Actually, it's only a potential bargain when they're overpriced and the owner won't listen to reason that they get to the point where they aren't fresh on the market. People go to great lengths to make properties beautiful precisely because they will then command premium prices, especially when they're fresh on the market. This is another one of those trade-offs: You can buy a beautiful turn-key property, or you can get a bargain. Choose one or the other - you cannot have both. Choose wisely, by what is important to you. There is no sin or mistake in choosing to spend more money for a property where the work has been done. You are essentially saying that it's worth the extra money to you, and that's fine. This mistake is choosing the fixer when it's worth the money to you to have the turn-key, or in choosing the turn-key when would rather have the money (or can't afford it!)

The second, superior source of bargain properties is usually properties that have been on the market a while. They're not beautiful, so Mrs. Average Buyer does not swoon with delight at the thought of that kitchen and that bathroom. It specifically doesn't grab prospective buyers by the throat and say, "Buy me or you'll never be happy again!" If it did that, it wouldn't have gotten to this stage; it would have been bought when it was fresh on the market.

It may be old, it may be filthy, it may be cluttered, or all three. But the basic construction is still solid. This is not a Vampire Property, it just hasn't been updated in a while. There are no cracks in the foundation, no rot in the wood, no leaks in the pipes. There's nothing really wrong with it; it's just not beautiful right now. As a result, buyers will pass it by. They're too busy looking at the surfaces, looking for brand new granite counters and travertine floors that they don't notice that's what is there is quite serviceable and usually pretty easy to update.

Buyers don't swarm these properties simply because they don't know what to look for. They see fifty year old now. They're looking at what the property looks like now, not what it will look like after some very simple renovations that cost a lot less than the difference in cost between this property and the brand new rehab that's just been put on the market down the block. Some people think they know what they're looking for in a bargain, but most of them are wrong. This is one of the many places a good Buyer's Agent comes into the process. I've been around this particular block a few times, and I do know what I'm looking for and what it looks like. Lots of buyers will tell you they're looking for a bargain, but when the time comes to make an offer on one they just won't move off the dime. They're still hoping to find something for the same price with the work already (and freshly!) done. That's not going to happen. The reason the owners did that work was to be able to get more money for the property. You can pay the extra money (and the interest on it if you're getting a loan!), or you can go shopping for properties where the work is waiting for you. The folks who just remodeled in order to sell are likely to be disappointed anyway, but until they face reality, you're wasting your time.

Don't get emotionally attached to any property, especially if you don't own it yet. I tell people that if they're going to get emotionally attached, the best time is as I'm handing them the keys when the transaction has closed. Until the transaction is done, be willing to walk if it's called for. You're making an investment of several hundred thousand dollars. If that investment is going to be a problem or the owners don't want to let it go on reasonable terms, leave it to be their problem. They're trying to sell it; that's a representation they don't want it any more. If they make life too difficult for people who want to buy, that property is still their problem unless and until that transaction closes. I'd rather find my clients something else that's not going to be that kind of problem. Go through the purchase process with the mindset of, "I think I'd like to live here." Make the offer, reach the contract, apply for the loan, do the investigations, and go through subsequent negotiations and everything else with the idea that you think you'd like to live there - and be prepared for something to change your mind. many sellers, listing agents and loan officers all take advantage of people who aren't prepared to change their minds - and not a few buyer's agents as well.

The ideal bargain property is the same one it's worthwhile to remodel: Old, unfashionable surfaces with poor lighting. Most folks won't even consider such properties, which is another reason why they go for attractive prices. Nor do a lot of sellers want to deal with the updates - putting cash out of their wallet for someone else's enjoyment. I'd say inherited property is probably the quintessential example of this. The heirs just want money; they don't want to come up with the cash that enables them to get a better price. This makes it a high supply, low demand situation. You're not going to be the envy of all your friends at the housewarming party the weekend after it closes, but you are going to have a mortgage that leaves you a lot more room to afford other things, and a couple years down the line people will be asking how you got such a steal.

Caveat Emptor

Original article here

(click for Part 1 of Save For A Down Payment or Buy Now?, which deals with the basic question of how well saving for a down payment increases affordability)

As an alternative strategy, suppose that instead of waiting to buy that $400,000 house because you can't afford the payments now, you buy a $250,000 condo now - and then sell it for your down payment later. In other words, you buy what you can afford right now instead of waiting and saving until you can have the home of your dreams. Then at some later time you sell the condo for the down payment on the home you really want.

Let's look at the trade-offs for the condo. I'm going to assume that the condo's equity is the sum total of the saving you are doing, and I'm going to manipulate rents until I get $833 per month cash flow difference (your $10,000 per year savings from Part I). This yields a monthly rent of $977.46. You can't rent $250,000 condos around here for $1000 per month, but we'll stick with the situation I figured even though the argument in favor of buying the condo is far stronger. Let's also assume it costs 7% of the value to sell the property, make allowances for property taxes, HOA fees, etcetera. It'd be a bear if I didn't already have the spreadsheet done, but here are the results:



Year
0
1
2
3
4
5
6
7
8
9
10
Value
$250,000.00
$262,500.00
$275,625.00
$289,406.25
$303,876.56
$319,070.39
$335,023.91
$351,775.11
$369,363.86
$387,832.05
$407,223.66
Monthly Rent
$977.46
$1,016.56
$1,057.22
$1,099.51
$1,143.49
$1,189.23
$1,236.80
$1,286.27
$1,337.72
$1,391.23
$1,446.88
Equity
0.00
15,431.56
31,674.53
48,772.18
66,770.15
85,716.58
105,662.21
126,660.56
148,768.08
172,044.30
196,552.03
Net Benefit
-17,500.00
-13,443.41
-9,518.73
-5,769.20
-2,244.10
1,000.56
3,901.27
6,386.11
8,373.86
9,772.91
10,480.08

Now, I have to admit this seems marginal. You've only got an extra $10,000 in your pocket after 10 years. So you sell the condo and buy your house, and plugging these numbers into the affordability spreadsheet improves the affordability of the house you really want by 8% in only 8 years. Nonetheless, this is 2.5 times the affordability increase afforded by investing the money.

Now let's consider the situation as it really exists. That $250,000 condo rents for about $1300, which makes a big difference to what you save. It's like taking the previous situation, and adding $322 per month to your investments as well. Here's the numbers for the condo, adding the investment, and coming up with a total.



Year
0
1
2
3
4
5
6
7
8
9
10
Value
$250,000.00
$262,500.00
$275,625.00
$289,406.25
$303,876.56
$319,070.39
$335,023.91
$351,775.11
$369,363.86
$387,832.05
$407,223.66
Rent
$1,300.00
$1,352.00
$1,406.08
$1,462.32
$1,520.82
$1,581.65
$1,644.91
$1,710.71
$1,779.14
$1,850.31
$1,924.32
Equity
0.00
15,431.56
31,674.53
48,772.18
66,770.15
85,716.58
105,662.21
126,660.56
148,768.08
172,044.30
196,552.03
Savings
$0
$4046.11
$8515.91
$13453.74
$18908.64
$24934.73
$31591.84
$38946.03
$47070.31
$56045.30
$65,960.08
eq+sav
$0.00
$19,477.67
$40,190.44
$62,225.92
$85,678.79
$110,651.31
$137,254.05
$165,606.59
$195,838.39
$228,089.60
$262,512.11

Now let's paste these last numbers into the affordability sheet and see what we get:



Year
0
1
2
3
4
5
6
7
8
9
10
available
$0.00
$19,477.67
$40,190.44
$62,225.92
$85,678.79
$110,651.31
$137,254.05
$165,606.59
$195,838.39
$228,089.60
$262,512.11
price of house
$500,000.00
$525,000.00
$551,250.00
$578,812.50
$607,753.13
$638,140.78
$670,047.82
$703,550.21
$738,727.72
$775,664.11
$814,447.31
payments
$3,631.97
$3,670.64
$3,709.34
$3,747.86
$3,786.00
$3,823.49
$3,864.42
$3,928.79
$3,993.62
$4,058.65
$4,123.58
affordability
1.00
1.02
1.04
1.06
1.08
1.10
1.12
1.14
1.15
1.17
1.18

So we see that this strategy has increased the affordability of the house you really want by 12% over only 6 years, holding background assumptions constant. This is twice again the affordability increase rate from the last example (2%/year as opposed to 1), and so almost five times the affordability increase rate of just saving for a down payment. Furthermore, those payments on your condo are mandatory, and the increases in value happen of their own accord, whereas most saving programs run by individuals falter a bit over time, nor is there any such thing as a 10% return per year tax free. In short, I'm comparing a real world real estate investment with a hopelessly idealized other investment, and buying the less expensive property in the real world beats the idealized other investment. Saving for a down payment makes comparatively little sense unless you are not yet in a position to buy anything, either due to stability, insufficient income to buy anything, or because your situation does not permit financing for the down payment you have.

Taken all together, this forms a powerful argument for not waiting until you can afford your dream house, but buying what you can afford as soon as you are in a position to do so with the intention of trading up later. Delaying means you cut the later years off of the results, not the earlier. The benefits to real estate don't start until you put your foot on the ladder. If I had known this when I was in my twenties, I'd be millions of dollars better off today. So plan ahead, and start working towards your goals now. You can never go back in time with what your figure out later, or with the effort you expend later.

Caveat Emptor

Original here

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About this Archive

This page is a archive of entries in the Buying and Selling category from September 2014.

Buying and Selling: August 2013 is the previous archive.

Buying and Selling: October 2014 is the next archive.

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