Buying and Selling: May 2015 Archives

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, 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. This article is a reprint and rates are lower now, but when I originally wrote this I just picked a rate sheet at random which had 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 this would cut 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 the day I originally wrote this. 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'd be 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

Original article here

I've been answering this question for a long time. Whose interests do we need to be concerned about, in a "If they are harmed, we've got a problem" sort of way? Who has a primary stake in a real estate transaction, and who does not? Whose interests must be served by said transaction? Whose interests are critical, and whose are not? I never really went into an explicit answer. But some nasty emails and deleted comments of late have made an explicit answer important.

For as long as I've been thinking about the question, I've been answering it the same way. Depending upon the transaction, there are two or three parties with a primary stake: The buyer, the seller, and the lender if there is one.

The buyers interests are the most important and the most critical. They are giving up a very large sum of money in order to purchase real estate. Money is liquid; real estate is not. You can do anything with money; real estate, not so much. Therefore, there must be a compelling arguments made why it is in that buyer's interest to part with that much cash in order to buy that property. I've made a fair number of said compelling arguments, but you always have to be able to make it. Every time. If they're getting a loan, you also have to build an argument why it is worth them taking out a loan, which forces them to pay out a given amount of money every month for the next thirty years in most cases. Money that the buyer hasn't earned yet, and in most cases couldn't pay back right now if they had to. You've got to build a compelling argument for why that buyer giving that seller however many thousands of dollars in order to buy that property is in that buyer's best interest. If you're a real estate agent and you can't do this from the ground up, you're in the wrong business.

The seller's interests are also critical. There's got to be a compelling argument made as to why it's a good idea for that seller to agree to sell their property for that price. If not, they shouldn't be selling it. Real estate may be illiquid, but nobody is creating any more of it. Not the Dutch, not the UAE, not anybody, not really. So why, to paraphrase the immortal words of Roald Dahl, would someone willingly exchange something of which nobody is making more of for something which they're printing more of every day? Again, if you're an agent and you can't do this, you're in the wrong line of work.

The seller's interests and the buyer's interests are different, of course. Without those differences, nobody would ever trade anything to anyone else ever again, and that includes trading for money, or sales as it is usually called. But you've got to be able to make compelling arguments for both sides, and you've got to be right, as real estate transactions are not readily reversible in the general case. There may be occasional exceptions, but you can't go back afterwards and say, "Let's call the whole thing off!".

The lender, if there is one, also has a compelling primary interest in a real estate transaction. They are putting up many thousands of dollars of money they have already earned or gotten in some fashion in order so that the seller gets cash from the buyer rather than having to wait thirty years for the last bit to trickle in. In most cases, the lack of a lender will prevent the transaction from happening at all because that seller needs cash in order to pay off their own lender, or cash for the property in order to accomplish their reasons for selling it, not monthly payments trickling it over the next thirty years. Therefore, without the lender, the seller's interests could not be met, and therefore the buyer's interests would not be met. But the lender doesn't have a direct interest in the property investment, only that it can be sold to pay off the debt if the borrower defaults. What they do have an interest in is whether the buyer can pay them back, and, failing that, if they can get their money out of selling the property if the buyer does not.

The seller is usually paying almost everyone who works on the transaction, the buyer's money is the reason why the seller is able to pay everyone, and the lender's money is what is used so the seller can pay everyone right now (including themselves). These three parties have legitimate, primary interests in the transaction. If their needs and criteria are not being met, they can call the entire transaction off. As strange as it may be to see a real estate agent writing this, these three parties should call the transaction off if their interests are not being met.

Everyone else is working for a paycheck: Agents, loan officers, escrow, title, appraiser, inspector, notary, ad nauseam. We make our money by being able to help one of the above three "people" consummate the transaction. Our interests lie in that paycheck, not in the transaction. We are worthy of our pay to the extent we help one or more of the primaries serve their interests, or serve those interests better. If we can't do that, we shouldn't be part of the transaction. We only make money by serving the interests of the primary stakeholders, and if we're not doing that, we shouldn't make money.

If you cannot agree with this, you and I have nothing further to talk about. I make my money by putting my clients into a situation that's better than it would have been without me. If that's not the way you make money in real estate or any other business you might be in, then you are trying to be a tollbooth, and the dynamics of the market are going to do their best to route around you. In other words, if you cannot show a value to those you serve that is at least as great as the money you make from providing those services, the market evolution is going to put you out of business as soon as it can. This knowledge goes back at least to Frédéric Bastiat, but it's nothing that despots the world over haven't known for millennia, who have been getting increasingly sophisticated about not getting put out of business as the markets have gotten more sophisticated about what adds value and what does not. I have absolutely no sympathy for any argument that concludes you must pay someone because the law says you must. To the extent it relies upon "because I said so!", the law is an ass.

That doesn't mean there aren't legitimate economic reasons to choose to use a real estate agent, a lender, a notary or whomever. There are quite powerful ones, in fact. But to the extent the law forces you to use one, the law is a tyrant, engaging in rent-seeking behavior. Healthy economic organisms interpret rent seeking behavior as damage, and seek to route around it. Eventually, they will succeed. It may take a while, but they will succeed.

So now you know why I am always looking at "What is the consumer's interest?" and "How can the consumer benefit?" and "Does this benefit the consumer?" It isn't altruism. It's enlightened self-interest. By providing value for the consumer, even if in the context of specialized knowledge or judgment that consumer may not have, I am showing an economic reason why it is in that consumer's best interest to put money in my pocket. If $1 in my pocket means more than $1 in theirs (and it does), consumers will freely choose to line up at my door for the privilege of paying me. Some consumers may not agree, and that's fine. There's plenty who agree do to keep someone who is so oriented hopping for as long as I am willing and able to work. That's the best income insurance there is or ever will be.

But if you are not so oriented - and I am looking here at any alleged professionals who think in terms of their own benefit, rather than the benefit of consumers - then it's only a matter of time before the market figures out a way to route itself around you. I and others like me are going to be working forever. Those who take the tack that "you pay me because you have to!" are going to find yourselves in declining industries, and no amount of regulation (e.g. this) is going to do anything other than delay the tide until someone figures out how. And acting self-righteously as if you have some kind of "right" to that money as you lobby the government for them to force people to do it your way will only make you more and more contemptible, more and more an object of ridicule.

Caveat Emptor (and especially Caveat Vendor)

Original article here

A search I just noticed asked the question "Who gets the deposit if escrow falls through?"

The theory of the deposit is that here is an amount of cash that the buyer is putting up as evidence of their ability and intention to consummate the transaction.

This is a good question. I've only dealt with real estate sales in California, so I'm going to deal with it from a California perspective. California is a widespread model for real estate practices (as New York is for insurance), but I can't speak to the specifics which states are and aren't following this model and to what degree.

Most of what happens in real estate sales contracts has a default way of handling it, but is subject to specific negotiation. In other words, there's a standard way of doing it, but you can change that by negotiation with the other party. California Association of Realtors (CAR) has a specific set of forms that are encouraged, in order to make these questions somewhat more clear cut.

The standard here in California is that the purchase is contingent for seventeen calendar days, after which the buyer's deposit will belong to the seller whether escrow closes or not. From the time the contract is accepted by both sides, the buyer has seventeen days to finish all inspections, and to obtain a commitment for acceptable financing. If they call it off within those seventeen days, they get the deposit back. If the purchase falls through later than the seventeen days, the seller is usually entitled to the deposit, within limits. The seller can't just arbitrarily cancel the transaction on the eighteenth day and keep the deposit. The time specified in the purchase contract has to have expired, there must be evidence of bad faith dealing on the buyer's behalf - something.

Let me make very clear that the seller is indeed giving the buyer something when the purchase contract is signed. To be precise, the exclusive right to purchase that property for a certain amount of time. There are expenses of selling that they must pay and that they don't get back if the buyer can't carry through, not to mention expenses related to preparing to move, at least potentially having the house sit vacant, etcetera. They cannot conclude a purchase contract with anyone else while the current buyer's contract is going on. If I'm selling, I insist upon retaining the deposit if the buyer can't carry though. If I were to be unable to consummate a purchase, I certainly understand that the seller will retain the deposit in most circumstances.

The escrow company won't just give the deposit to the seller. They are paid to be a neutral third party, to stand in the middle and make sure that everybody gets what everybody agreed upon, but it is not their place to settle a dispute. For that, you're going to have to go through whatever dispute resolution process is appropriate. This can be mediation, arbitration, the courts, or possibly something else. You can spend a lot of money fighting what the contract says, but in the end you can also expect to have to live up to it, and likely to pay the other party's costs as well as your own, so better not to fight something the contract says you should have done. The escrow company will often also charge a cancellation fee from out of the deposit, by the way. They do an awful lot of work, and if the transaction gets canceled for whatever reason, they do not otherwise get paid.

The number one reason for failed escrow is loan providers leading borrowers down the primrose path. "I can do that," and no, they can't. Unfortunately, I've never seen anyone able to recover damages from a failed loan provider. I used to advise people to get back up loans, but due to changes in the loan market, nobody can offer those any longer. For sellers, look for a qualification letter that you can take to any loan provider to find out if this buyer is qualified.

You can change the standard contract by specific negotiation. If you're a seller who wants to get the deposit no matter what on day 30, you can ask for that as a condition of the initial sales contract. In a hot market, this is easy to ask for and get, but in a buyer's market, you are likely to lose the buyer. If you're a buyer who doesn't want to lose the deposit no matter what, you can ask to put that into the contract you propose, but most sellers, even in a buyer's market, are going to tell you to take a hike somewhere else. No big deal if it was "Hey, let's make a bid on this and see how desperate they are!" A real problem if you fell in love with the property and just have to have it. Over-playing your hand in negotiations is as disastrous as under-playing, and I've seen people so intent on being Mr. Tough Negotiator that they diddled themselves out of an excellent transaction. In any case, being too sticky on the deposit is a good way not to get as good of a price as you otherwise might have. For a seller, you have this property and you want cash. You need somebody to agree to pay it - the cash is not going to materialize out of thin air. For a buyer, the whole idea is that this property is attractive to you for some reason, or you would not be making an offer. You are asking the seller to trust thousands of dollars to your ability to swing the deal as much as you are trusting their ability to deliver a clear title to a property without hidden defects.

Whether you are a buyer or a seller, once that contract is signed, you want to get cracking on whatever your obligations under it are. Get it Done. The alternative is that you're likely to forfeit whatever rights to the deposit you may have had if you had been prompt. Just because Things Take Time in Real Estate Transactions is no excuse for you to waste time. Wasting time is expensive for everyone, and one of the strongest signs of a sour transaction I know. Buyers and borrowers pay increased loan and other costs, sellers lose money from delay. This is equally true in refinancing, by the way. The loan you are quoted today does not exist tomorrow unless you act on it today. In summer 2003, when rates hit fifty year lows, many people were in no hurry, and rates shot up a full percent and a half over a couple weeks. Today, rates have been even lower for years, but they've been slowly climbing these last several months, and you can see signs that they're going to rise further even if the economy dies completely. They insisted upon thinking, in the face of evidence and testimony to the contrary, that the rates would always be there, and they lost out. This happens constantly on smaller scales, and recently happened again on a bigger one. If rates go down after locking, a good broker may be able to get you better rates. If they go up, you've got the lock. If rates go up and you didn't lock, you get the higher rates. Period.

But the deposit is definitely something that the buyer can owe the seller if the transaction falls through, and that's as it should be.

Caveat Emptor

Original here

(This article was originally written in August 2006. The market and loan rate figures have changed, but the basic information is the same)

Okay, you might expect a Real Estate Agent to have a post with that title, but I'm going to surprise the doubters by hauling out a spreadsheet and proving it with numbers.

When I originally wrote this, if you had moderately decent credit you could have qualified for 100 percent financing. The more you had for a down payment, the better your interest rates and the lower your payments, but even so, you could have gotten it. Now, not so much unless you have VA loan eligibility, but FHA loans allow 96.5% financing, which most folks should be able to swing by borrowing against a 401k if nothing else.

The first thing to remember is that you have to live somewhere. When you buy, you place your cost of housing forevermore under your own control. Inflation means nothing to the housing costs of someone who's already bought. Rising rents means nothing - unless you've bought an investment property to rent out, also. We are currently facing a period wherein rents are likely to rise precipitously. Why? Low vacancy rates, and many landlords facing adjustable rate mortgages that are going to adjust upwards at some point. It doesn't matter that your landlord has been nice up to now. They were banking on selling for a profit and right now, they can't. When the monthly outlay goes up, they're going to raise the rent. They will get it, too. If you won't pay it, someone else will.

Once you have bought, you step off of that one way escalator of rising rents. Rents increase at a yearly rate about comparable to inflation in most cases, and rents never drop. I have never heard of a rent decrease except in areas that were so far gone they might as well have been war zones. You only borrowed $X when you bought, and unless you take cash out (which is under your control) you should never owe more money next year than the previous one.

So buying stops your situation from getting worse. What about making your situation better? First off, I need to observe that with rising rents, your situation will always get worse until you do buy. But buying really does make your situation better. Not immediately; there's always a hit for buying, and it always costs money to sell. But within a couple of years the average person will be above any reasonable return they can earn any other way, and the reason is leverage.

Fact one: you always need a place to live, and the options are to rent or to buy. Renting typically requires less cash flow, but returns nothing. Once you have bought, all that lovely appreciation belongs to you and nobody else but. Let's look at an actual scenario for San Diego, one of the highest priced places to buy.

When I originally wrote this, I had looked at one particular property that day with an asking price of $450,000. We're going to leave aside the issue that with the market as it was, $410,000 would be a really terrific offer, and use that $450,000 asking price. The most comparable rental in the area was $1700 per month. For people with dead average national median credit scores, I had 6.125% on a thirty year fixed rate loan for the first 80% of the loan, and 8.75% on the second mortgage. Yes, I'm assuming a 100% loan. Total loan costs, one point and approximately $3400 in closing costs. With sellers outnumbering buyers 36 to 1 at that point, it was an idiotic seller who wasn't willing to pay your closing costs. Your payments on the two mortgages are $2187 and $708, respectively. Call it $2896 with rounding. I assumed you're married, which means you got a $10200 standard deduction on your federal taxes for 2006. Furthermore, property taxes are about $470 per month, and homeowner's insurance costs about $110 per month at the high end for an HO-3 policy, the best there is. Total cost of housing: $3476 per month. Over twice your cost of renting, yes. But $400 of that goes straight into your own pocket, in the form of principal you're paying off from month one. Furthermore, $2960 per month is a tax deduction, from which you'll get a benefit of $(2960*12)-10,200 (standard deduction), or slightly more than $25,500 per year, from which someone in the 28% tax bracket will see a tax reduction of about $7145, returning another $595 per month to your pocket. $3476-$400-$595=$2481 net costs per month to own that property. Less the $1700 rent, works out to $781 extra you're spending. Furthermore, if you turn right around and sell it, you're going to be out about 7% of that sale price. Assuming it's the same $450,000, that's $31,500 you're down.

However, property values don't stop rising just because the renters of the world would like them to. Let's assume you're going to make a slightly below average for this area 5% per year in absolute terms - not inflation adjusted. Most of California has been averaging seven percent per year for the long term, over cycles and cycles of pricing. The CMA for the first property I bought, at the peak of the last cycle fifteen years ago says $320,000, an 8.8 percent per year average increase. So 5% is definitely on the low side. Let's assume you have a twin who continues to rent, and invests that $781 per month, tax free, while you take it and buy a property. Actually, let's go ahead and give your twin the full net cash differential of $1143 per month.

One year later, he's got about $14,400, while your property is worth $472,500. You've got about $27,000 in equity. On paper, you're ahead of him, but remember that real estate isn't liquid and there are always selling expenses. You're really still down by about $20,000 as opposed to your twin. Darn! Just when you had a really good brag going. But wait! Now your twin's rent is raised to $1768 - right in line with 4% inflation. But your mortgage costs are fixed.

Run it out another year. Your twin has about $29,700 in that account. Looking pretty good, right? Well, you've now got a value of a little over $496,000 and you have about $56,000 in equity. You're not really ahead yet, but deducting the 7% costs of selling net you about $461,400. You've made over $11,000, net, not counting the equity you paid down! But your twin has almost $30,000. Why is renting for suckers, you ask?

Go out one more year. Your twin's rent has gone to $1838 per month, but even so his investment account still has a tad over $46,000 in it. Looks like he's pulling away! Or is he? Your property value has gone to almost $521,000, and you only owe $434,000. You're up almost $87,000, and even allowing the standard 7% for costs of selling, you're would now have over $50,000 in your pocket, several thousand dollars more than your twin.

Every year from then on, you pull further ahead. After ten years, when his monthly rent is over $2500 per month, you've got $350,000 in equity, and even after the costs of selling, are over $100,000 ahead of your dimwitted twin.

Lest you think that if your twin started with $45,000 due to a ten percent down payment it would make a difference, the answer is not really. It cuts the lead, but not the essential facts. I could cut the rate on the second mortgage a bit, but let's leave it at 8.75% for the purposes of this exercise. True, after three years you're still lagging your twin in this scenario, as that investment account is $95,000, but only by a few hundred bucks. Your equity is $130,000, of which $94,300 would be left after the expenses of selling. After ten years, he's $80,000 behind you, net of the cost of selling.

Suppose you start with a full 20% down payment? You're still $55,000 net ahead of the game after ten years. Your twin started with $90,000 earning ten percent, but not only do you not have that expensive second mortgage, you've got $450,000 earning 5%, and it's all yours and then some. This is the concept of leverage. That loan turns out to have been a good thing, as it enabled you to leverage your down payment into a much larger appreciating asset. So you only earned half the return - it was on five times the principal! It translated into a much bigger number. By the way, your twin only has the edge on you in cash flow by about $120 per month at this point, and he's going to be negative next month.

Now the real estate market doesn't earn nice smooth returns like this. Neither does the stock market, or anything except maybe bank CDs or the money market, at a fraction of the return illustrated here. Furthermore, it reliably and unavoidably takes about three years to come out ahead on a real estate investment. There are always the twenty percent per year markets, but those don't happen very often and never predictably. What I'm talking about are is making money in the slightly below average market years also. Note that you'll still make twenty percent in the years the market does. Sometimes you get lucky. But "time in" is so much more important than timing that they don't even play in the same league.

You don't have to be a genius, you don't have to have perfect credit, and you don't have to make a mint. You do have to pick properties that you can afford to make the payments on, and you do have to make the decision to accept a couple of tough years for cash flow. There just is no avoiding this hard fact. There are loans that promise otherwise, but they have bitten everyone I've ever met who tried them. Once you have made the decision to accept those lean times, however, the good times seem to flow from them for the rest of your life. The sooner you make the choice to accept them, the better off you will be.

Caveat Emptor

Original here

In the interests of fairness, I've also written a companion article, When You Should Not Buy Real Estate

It really helps my perspective in a lot of ways to be both a Realtor and a loan officer. Just the other day, I had a loan only client where they were already under contract to buy a property when they contacted me. The basics of the situation was that the property was in a very urban area, built up about the time of World War I, that has seen considerable renewal in the last decade or so. I work there as an agent sometimes, but don't keep constantly informed on all the market activity in the area, so when I do get a buyer or seller client in that area, it does take me a bit of effort to get back up to speed on that micro-market.

Silly me, I trusted that the buyer's agent had done their job, and when I got the loan application, I sent the appraiser out. Yes, a stupid mistake, I know. The buyer's agent was raving about what a fantastic deal it was the whole time the appraiser was working. Then the appraiser e-mails me and said, "Value isn't there. Do you want to proceed?"

Well, beat me like a red-headed step child. I ran the comps, and there just wasn't any doubt. The property was at least 25% over-priced, at least as compared to what the appraisal will support. Keep in mind that lenders will only lend based upon the lower of purchase price or appraisal. This is good basic accounting practice going all the way back to Luca Pacioli, and those who would change this do not understand the underpinnings of our financial system nor do they understand loan underwriting.

So what do I do? First, I apologize to the client for not having run the comps in the first place. Then I explain the situation to him. Having the value fail to come in isn't the end of the world. He has a loan contingency in effect, so he has options.

First, he can just walk away. The loan can't be done on the terms of the purchase contract, giving him grounds to exit the contract without penalty. No harm, no foul. This is a good option to consider, especially if option 3 fails where it is usually the only viable remaining option that does not actively work against client interest.

Second, he can come up with the difference in cash or the equivalent, increasing his down payment so that all the lender has at stake is the same percentage of the appraisal amount. If it was an eighty percent loan on (for example) $200,000 (or $160,000), coming up with more cash can make it a eighty percent loan on $160,000 ($128,000), or higher percentage value loan on the same amount. This usually isn't a good option, but if the property really is worth that much to you, it might possibly be worth considering if you can. Most residential buyers don't have this much extra cash lying around, but if you really would get something out of the deal that really is worth the money you are paying, it is an option worth considering.

The third and usually the best option is to renegotiate the deal. The seller can't make the buyer stay in the contract if there's a loan contingency in effect. In fact, if the appraisal is done correctly, there just isn't a lot of wiggle room for the sellers. Another appraiser is going to come up with a very similar value. Therefore, the seller is not going to get more money out of the deal. They can decide they want to do what is necessary for this deal, or they can flail about for months hoping for another buyer who doesn't need a loan. If the appraisal is done correctly, it is in the seller's interest to renegotiate. Some won't, sitting in Denial, but it's not the constructive alternative. If the appraisal is only going to come in for $160,000, pretending it's a $200,000 property doesn't help the seller any more than over-pricing the property in any other context. Remember, lower of purchase price or appraised value. If the appraisal is only for $160,000, the loan can't be based on a value higher than $160,000. Whether the listing agent bought the listing or whether there really are aspects of the property unquantifiable in the appraisal, the fact of the matter is that most potential buyers need a loan and are therefore going to be stuck with that appraised value, and can't pay more than it indicates. Even the ones who can usually don't want to.

There really aren't any other options that do not actively work against the interest of the buyer. The seller wants it sold and it is in their interests to get it sold. Most business models of real estate are built around listings and catering to sellers. They do not consider the interests of buyers, which is why the traditional response of most agents has been to play games and commit fraud and conspire against the interests of the buyer rather than do the hard work their job requires. It's also a reason why you want a good buyer's agent if you are a buyer.

This isn't to say that appraisers are infallible, don't make mistakes, don't collude with buyers upon occasion, etcetera. Sellers and their agents need to do their own due diligence to find out if that appraisal is accurate or not. But if it is, sitting there in denial of the facts isn't going to help.

What is not a constructive option is to beat up the appraiser or get another one. Assuming the appraisal is well done, the value is going to be close to what any other honest appraisal will come up with. The sales in the neighborhood are what they are. If there are better and higher comps, by all means ask the appraiser to take them into account. But if there aren't better and higher comps, it is neither in the buyer's interest nor the lender's to over-pay for the property. Buyer's agents and loan officers who pressure an appraiser for higher values than are justified, and appraisers who cooperate, are committing FRAUD. I have nothing but contempt for any of them. Especially the buyer's agents, who are violating fiduciary duty on the most basic level.

The appropriate response, on an buyer's agent part, is to renegotiate or advise a client to walk away if the seller won't renegotiate. That's doing your job, serving your client, etcetera. If I can't find comps that persuade the appraiser to change the appraisal upwards, that appraiser has just saved my client a large amount of money they shouldn't have been spending. The appropriate reaction is gratitude, not anger that my deal is falling apart and I'm not going to get a commission check yet. Unfortunately, this is often not the reaction that appraisers and loan officers get in that situation. The most common reaction is trying to find a more compliant appraiser, one who is willing to stretch the truth, and pressuring the client to fire the loan officer who just proved they will guard the client interest more than the lazy alleged buyer's agent. Exactly how is that fiduciary duty to pursue a path which results in my client over-paying for the property?

If the property really is worth paying that much money, I shouldn't have any problem explaining to my client why it is worth that much money, appraisal or no. Yes, they've got to come up with more cash, but if the property isn't worth the purchase price, I shouldn't be pursuing a course that results in my client paying that price. Agents who do should be fired. Actually, I think they should lose their license, but consumers firing them is an acceptable minimum.

It is only the loan which enables anyone to pretend otherwise. But a dollar my client pays for via a loan is every bit as much real money as a dollar out of their checking account. Neither a client or an agent should treat $1 in purchase price any different in an "all cash" purchase than they should if the property is bought with a 100% loan, and no money out of the client's pocket. For an agent to do otherwise is a sign of the worst kind of crook in the business. If a property is worth $X, it's worth every penny of it whether or not lenders will lend based upon the full purchase price. It may not be a property which this client can purchase, but it is still worth that money. The appropriate response for a buyer's agent is to attempt to renegotiate, and advise walking away if that is unsuccessful. It is not to violate their fiduciary duty as well as committing FRAUD by getting a bogus appraisal. If the buyer's agent is really determined to do their job correctly, they've just got a little bit more to do than they previously thought.

Unfortunately, it's been a really long time since any of the main institutions of real estate were serious about the client interest part of professional standards. Neither the various Associations of Realtors nor anyone else really gives a rat's. What most of them teach is getting a transaction done, and treating the loan and the appraisal as obstacles to that, rather than protections for clients. There is an enormous inertia of lazy thinking in the real estate profession, and it's been hosing clients for decades. But just because you can manipulate the system to persuade a lender to believe that a property is worth lending $X on doesn't mean the property is worth that purchase price, and lenders are starting to defend their interests, something I'm very happy to see.

It isn't pleasant for a buyer's agent to re-open negotiations. It's still my job when this happens, and if the listing agent is any kind of professional, they're going to respect me for it. Nor is getting angry a constructive response from a listing agent. As a listing agent, I can try and find better comps, I can persuade the buyer why the property really is worth that much money despite the appraisal, or I can do what I almost certainly should have done in the first place: Go back to my selling client and explain why the property is over-priced and why they should sell it for less. A listing agent who can't or won't act appropriately in this situation isn't worth the dog feces stuck to the bottom of their shoe, much less a fat commission check. They are sabotaging their client, and should be treated accordingly.

Do you see what the common element is here, and the common problem? It's agents who didn't do their job right, whether they "bought" the listing by indicating an unrealistic price, or said it was a good bargain when it isn't. Not only did they commit one of those two egregious violations of client interest, when it is rubbed in their face, they are compounding that mistake by refusing to own up to it and deal with the consequences. It's difficult to own up to mistakes, but it's also something a professional has to do. Agents who refuse to do so should find themselves unemployed and penniless. It's too bad that by the time a consumer has discovered this issue, they are already damaged by these malfeasant twits. Unfortunately, it's very hard to get rid of these sort of agents and the inducements really aren't there for other agents who do serve their clients best interest to make the complaints that would, in a perfect world, result in the incompetent ones losing their license. All the more reason why consumers need to do due diligence in the first place and ask the agent the hard questions before they sign on the dotted line.

The guy I talked about at the start of the article? Despite the evidence I furnished of the comparable sales, his agent is either sitting in Denial or FRAUD. There isn't a lot of wiggle room here. They dropped the application with me when I took the position that the appraiser was correct. They couldn't dispute the reasoning, so they went in search of someone who will agree with them despite the evidence. The property still shows as being in escrow. The only way that value is going to come in for a value that allows that transaction to close as written is via a fraudulent appraisal that's going to result in the client paying too much for the property. But evidently, this agent has decided that's where his interests lie. So it does happen. It will happen to you if you're not careful about your choice of agent. The good news is that with lenders defending their interests more strongly now, this kind of agent is going to find themselves increasingly out in the cold when it comes to actually getting the transaction done. And about the only good thing about the new appraisal standards is that they have made that kind of "appraisal shopping" more difficult (Not impossible, but a little more difficult).

Caveat Emptor

Original article here

One of the phenomena that I have encountered is fear of the market in buyers. They are concerned if prices are falling, and that they will lose some or all of their investment if they buy.

Well, the first thing to understand is that buyer's markets are not the time for "flippers". You are not going to buy the property and make a profit after the expenses of selling in three or six months. That's a seller's market. In hot seller's markets, most prospective buyers were using the f-word. In buyer's markets, those people who were buying to flip are caught flat-footed by a market that has turned, like deaf kids in a game of musical chairs. The signs were there, but they were just a little too greedy.

Nonetheless, a buyer's market is the best time to buy for everyone else, and here's why: Inventory. Turnover Rate. Market Saturation. Supply and Demand. Instead of being the kings of the world, sellers have now turned into the beggars. Imagine you're in an environment where there are 30 people of the opposite sex for every one of yours. I'm assuming you're interested in the opposite sex, but even if you're not, you should be able to understand the implications. That one woman with 30 men to choose from is going to be able to get just about anything and everything she wants. Even the woman who would be completely ignored in other circumstances is going to have multiple, attractive suitors. Alternatively, the one man with 30 women to choose from is going to end up pretty darned happy about the situation, even if he is short, fat, ugly, middle aged and balding. If you're buying to hold, stop thinking in terms of short term cash, and start thinking in terms of affordability. Your money buys more in a buyer's market. Over the course of ten years - or however long you keep it - the market will change many times. Inflation and many other factors will wax and wane in influence. Stop thinking in terms of cash, start thinking in terms of other commodities. The property you bought for the equivalent of 100,000 pounds of hamburger at market trough is a better bargain than the same property for the equivalent of 150,000 pounds of hamburger at market peak.

To return to the dance metaphor, the sellers in buyer's markets don't really have the option of choosing other sellers, as it doesn't help them. They have real estate, they want cash. Just like how that short fat ugly balding middle aged guy does pretty well for himself when there are 30 women for every guy, so does the buyer who has cash, or can get it via their power to get a loan.

Prices are likely to drop for a while in buyer's markets, but in seller's markets where prices are rising, you don't have a high ratio of sellers to buyers, and the market could turn at any time. If you wait for the market to turn around before you put in a bid, you will be much less sought after, with the consequence that you will spend more in real terms. In buyer's markets, the power of the market puts buyers in control of the transaction. If this seller isn't quite desperate enough to do what you want them to, the one down the street or around the corner is. Like the 30 men to every woman scenario, if this man isn't able or willing to meet the woman's full wish list, she can move on to someone who is.

Buyer's markets don't usually last long. The last one was less than a year, and only about two months that buyers had peak power. If you buy for a little more than market bottom, so what? The only time value of the property is important is when you sell and when you refinance, and I've already told you this is not a flipper's market. But once other potential buyers get the idea that there are bargains to be had, they will come out of the woodwork, and the vast majority of your purchasing power will be gone when the ratio of sellers to buyers drops to four to one. And soon after that, they turn back into seller's markets. When that happens, watch the prices - and the profits - shoot back up.

Miss the window for whatever reason, and you'll pay for it later. Any market is always most lucrative when everybody else wants to do the exact opposite of what you're doing. Pick and choose your properties with care, and you will do very well when the market turns, whether that is next month or next year. In buyer's markets, you have your pick of sellers, and your pick of their properties, and the leisure to consider. When the ratio of sellers to buyers drops, it gets much harder to find these kinds of bargains, and much harder to get in before someone else has locked it in by getting an accepted offer.

Caveat Emptor

Original here

As a good buyer's agent, I love a challenge. When someone comes to me trying to make a budget stretch just a little bit further than it would usually go, that's the kind of client I love to have. My goal is always to make at least a ten percent difference to the price the client pays, the value of the property they get, or some combination of the two. Nonetheless, the ones who can almost but not quite afford what they want without me (or someone equally good) as an agent are the ones I really get off on working with. The single mom of two who I can help get into the three bedroom condo or PUD instead of two, so everybody gets their own room. The huge family (or multiple family) where everybody pitches in together for the house they're all going to live in together. The young newlyweds who are just getting started and may only intend to hold onto the property for a few years, but they're going to start their family there. One hopes you get the idea, and of course, preventing the "mistake" properties that are just going to suck a budget dry and be an ugly problem to sell.

There is nonetheless a thin but sharp divide between someone like that and someone who will only buy the Taj Mahal at a cut rate price. Someone calls me and asks for something that doesn't exist and isn't going to at a price they are willing to pay, I'm going to be completely upfront about telling them that what they're asking for is not realistic, and any agent worth a damn is going to do exactly the same thing. Anyone who can swing it is eager to buy the Taj Mahal at a cut rate price.

I did use the phrase "cut rate Taj Mahal" deliberately. If it's beautiful, people will want it. That's the way people are wired; women especially so, and women are the ones that make the "buy" decision. The only thing that prevents it from selling is if they can get more for their money out of some other property. An attractive property that is not significantly over-priced will sell in any market. Of course, it will sell for significantly more in a hot market than a buyer's market, but that's an entirely different subject. The property is on the market when it is on the market, and whether a seller could have made more by waiting is a subject for a different article. The point is that beautiful properties will sell, there is always demand for them, and if they are priced even close to the right level, you will get people lining up to buy them, competing to buy them. The probability of a cut rate offer being the one that is accepted is about the same as winning the lottery with a single ticket. An ethical listing agent won't let it go for less than it's worth. Heck, a crummy listing agent won't let it go for less either - they are paid on commission!

I just checked the statistics on MLS. When I originally wrote this, the San Diego area was down to 12099 active listings, while 946 had gone Pending in the last seven days, giving us about a 13 week theoretical supply (89 days) in inventory. That's a balanced market, no longer the buyer's market. But a sample of actives in a couple of diverse zip codes yielded that about 20% of the theoretical actives are short sales with an accepted contract that were allowed to remain on the active list. Looking at 80% of the actives number, and assuming that a short sale takes about ten weeks on average, that means the real numbers were about a 57 day supply of inventory - just over 8 weeks. This means we're edging down to a full fledged seller's market, and it wasn't yet Easter.

So what does this mean to buyers? The first thing to consider is that the above numbers are the statistical mean. You're lumping the beautiful property in a great neighborhood with fantastic schools with the cluttered, trashed, falling apart piece of garbage in an area where the schools mostly teach "Hanging out with an ankle bracelet", and then taking the non-existent middle course between the two. Assuming you don't really want the cluttered trashed falling apart ghetto property, this means you're competing for the property at the other end of the spectrum - by which I mean the highly desirable properties that are going quickly and for good prices. The morning I wrote this, I called the listing agents on two such properties that have been on the market less than a week, and got believable responses that both properties have already gotten multiple offers. Those properties are not going to go for a cut rate price, and buyers putting in low-ball offers to see if they work are wasting paper and wasting time. In such an environment, the days when I or anyone else could "steal" an attractive property like that for thirty-five percent under the appraised value are gone, as I must have predicted here in writing on at least three or four occasions - not that there was any great predictive ability involved.

If you're wealthier than Midas and don't mind spending your wealth on housing, this article just isn't relevant. For those looking to buy significantly below the limits of their means (and I do seem to get a fair number of clients in this category, for which I am profoundly thankful, and I can make an even larger difference than usual), large parts can be ignored because they have the alternative of increasing the budget if they don't like their choices at the current dollar limit. For those who want to stretch their budget and make every dollar count, it is critical, and failing to follow something very close to this model is a recipe for disaster. The idea is to make rational, informed choices that you will be happy with later.

The first thing to consider is your budget. In order to buy within a budget, you have to know what that budget is. There are no more "Make Believe" loans - and this is a Good Thing, as I'm certain the vast majority of the millions of people who went through defaulted Make Believe loans would agree. They could have afforded something good enough with a sustainable loan, and instead they chose a Make Believe loan in order to get the Taj Mahal, but now they're losing the Taj Mahal, and can no longer qualify to buy the eminently suitable property they could have had if they had chosen rationally in the first place.

I compute what every single buyer client can afford, whether or not they're planning to do the loan with me. I sit down and discuss the questions that need to be answered: "How much cash do you have for the down payment and closing costs?" and "how much income can you document for (the relevant period)?" and "What is your credit score?" I sit down and go over what those numbers mean in terms of purchase price in the current market, and then both the prospective buyers and I have got to agree upon a maximum purchase price we will consider. If the property cannot be obtained within that purchase price, it is a non-starter. There may be a certain amount of gray area as asking price is not the same as sales price, but the bottom line is that if I cannot persuade someone to sell for a price within the budget my client and I have agreed upon, we're going to put that property out of our minds. Most of the trouble I do get arises because there is a lot less slack in the asking price for beautiful properties new on the market than there is for less physically attractive properties that have been sitting a while. I have a choice as to where to put the dividing line as to what the clients see, and my default is always to allow them to see all the properties within a set mark-up of the agreed upon budgetary maximum, even though that may have attractive properties new to the market where the price is not that negotiable, or not that negotiable yet. Transparency, always transparency - even when it causes me problems.

The next thing to consider is "what does the property absolutely have to have?" The hard part here is cutting this list to the bone, if not all the way down to the marrow. You have got to focus on no more than one or two things at this level. It can be a good school district, it can be a certain number of bedrooms or certain size of lot, it can be a certain section of town, it can be a lot of other things but the critical thing is to get that focus laser-sharp. One thing, or at the very most, two. To paraphrase the immortal Monty Python, three is right out, and for reasons similar to those given in the Book of Armaments. You have got to be clear, and you've got to mean it. If it doesn't have this one thing, it's off the list of possibilities, no matter how beautiful it is. That's pretty easy for most folks. The logical corollary of that, however, is much more difficult: that if it does have that one attribute, the property is a serious possibility no matter how ugly, no matter how trashed, no matter any number of other undesirable factors. If you're not serious about this one point, you're not serious about stretching your budget. I'm not going to say that there's nothing a good buyer's agent can do for you, because it wouldn't be true, but if you cannot abide this corollary you have become your own worst enemy. This is at the heart of why there is money in fixer properties and why you might be able to find a bargain if you don't insist on perfect now. If someone else has already made it beautiful, people are going to line up to buy it at a very competitive price. If you want a budget stretching price, you've got to be willing to some degree to be the one who makes it beautiful.

This applies no matter what else you want. The ultimate expression is that if I run a search and there is one property that meets your budget and your "must have" list. This has never happened to me yet, but there's nothing that says it won't happen tomorrow. At that point, you have Hobson's Choice: that property or none at all. Mind you, "none at all" (i.e. continue renting) is likely to be the superior of those two alternatives in this situation, but it would certainly cut down on my time requirements. Also, there is always the option of "wait and see". Just because nothing on the market today fits the bill doesn't mean that there never will be. It's not for nothing that "patience" is the number one item on my list of Top Twelve Things That Help You Buy a Bargain Property.

Things usually aren't that cut and dried, however. Usually, there are several dozen possibilities, sometimes hundreds. This is because I will either keep badgering people to expand their criteria until there are enough possibilities to give a real selection, or I will tell them point blank that the list of possibles is short and once we have seen what's available, they're going to need to make a choice. It doesn't take very many properties on the alternatives list before there will be at least one worth buying whether they like it or not, and if they choose not to buy anything available within their budget, I have to reconsider whether I'm able to help them. If what you want isn't available at a price you can actually pay, nobody can help you.

Keeping in mind that thin line between my favorite clients in the "challenging but possible" camp and those in the "want a bargain on the Taj Mahal" camp, there are only two choices for an ethical agent who believes he's got someone in the latter category: Have a frank talk with the client in which these folks convince me that they have seen the light of what is realistic, or I must stop working with them. If I continue working with them when they have unrealistic expectations, I'm wasting my time, their time, and the time of every listing agent and seller whose property I want to show, because it's not going to happen, and it's my fault if I don't put a stop to the wishful thinking. I'm wasting money and gas and nice afternoons that we both could be spending doing something else and keeping myself from helping other people where I might make a real difference. My point is this: People looking for something unrealistic are not going to turn into happy owners. I can tell them they're not realistic, or I can put them into a property they are going to be miserable in. In the latter case, they're not going to be happy with me. If I tell them the truth in the first place, they might be able to respect my professionalism and refer someone else I can make into a happy owner. If I put them into a property where they are not a happy owner, then I might get one paycheck, but I'm going to be paying for it forever when those people tell all of their circle of influence how miserable they are and whose fault it is.

I'm not a wealthy broker running a transaction mill. Yes, I'm busy, partly because I'm good and partly because I earn my pay. I spend a lot of time and effort doing the best I can for each and every client, and I don't accept clients if I haven't got the time to do a good job with them right now. You really want an agent who follows this business model, by the way. "Firing a client" has real consequences to me and my family, and I don't do it lightly or often. Nonetheless, I will do it if I need to because the consequences of not doing so are worse.

Starting from a point where there are several dozen properties that potentially fit the bill of being within budget and possessing the absolute "must have" quality. This means the client has a range of options, and usually more properties coming onto the list by the time we've looked at all of them. We don't have to look at all of them, and in fact I don't think I have ever shown every single property on their list to anyone, but we could. In the meantime, if something catches their eye as being something they think they'll be happy with, especially once we've discussed downsides and potential downsides, it's a good idea to make an offer on it right away. In my experience, hoping for something perfect is more likely to net you frustration than a good property you'll be happy with at a good price. Beyond a certain point, the more you try for perfection, the less happy you're likely to end up.

The real point is that there will be a set of trade offs the client can choose between. This one will have more square footage, while that one will be beautiful, but have a homeowner's association that comes with it. This one will have some significant extras but need lots of cosmetic work, while that one doesn't have a lot of the lesser qualities they want but be move in ready. It's the client's money, therefore it's the client's choice. My principle jobs as a buyer's agent are to 1) Differentiate the obviously unacceptable and those with problems that laypeople may not spot from those that are real contenders, 2) Make certain that the client understands the ramifications of their choice before signing away hundreds of thousands of dollars in cash and borrowed money, 3) Negotiate as effectively as I can for a better deal, 4) Be aware of everything about that transaction and 5) be willing to take action, up to and including counseling my clients to walk away if something is wrong enough.

The more you require in a property, the more it will cost. There is a measurement for how desirable a property is, and the unit of measurement is the dollar. If you've only got a certain budget and you're looking to buy in the best neighborhood in town, it's going to cost you more than the same property in the ghetto. The difference is that value of the neighborhood. The same property in the district with the very best school system (or best school) is going to be more valuable than the otherwise identical property down where schools are just a taxpayer subsidized babysitting service where the kids learn undesirable behaviors. People seem to soak this up easily, but they aren't usually as fast on the uptake of "holding the neighborhood constant, you can have a beautiful turnkey property or you can have an extra bathroom, two bedrooms, and four thousand square feet on the lot by being willing to beautify a solid property or you can have a huge lot with a better zoning where the existing building needs to come down completely." All of these, and many others, are potentially valid choices and I can see where making any of these choices could be the most rational choice if your needs and resources match the right profile. It's my job to help you with that, too, but the final choice has to be yours. Nonetheless, there will be tradeoffs involved - you can't have it all. If I were some corporate or NAR flack, I'd be telling you otherwise, but the fact is that you're going to have to choose what's most important to you, and either create the rest yourself or do without. The more you have to spend, the broader your choices and the more you can expect to receive for that money, but even the richest man on the planet has alternative uses for the money that he's giving up to buy this property. Nobody has an unlimited budget.

Putting up with things that others are not willing to is worth some money - often enough for a major shift in the question of whether they're being realistic. I had some clients who were relocating from the primary flight path of a major jet airport. They laughed every time I talked to them about traffic noise as a negative factor, and that was fine. They had told me they didn't care, but they had also told me that this wasn't a forever property for them, which means that when they go to sell it, it's going to be a factor for them. They wanted to consider a property on what was essentially a frontage road to an interstate. I convinced them otherwise for a number of reasons that include that street might as well be a drag strip because mild mannered housewives with their hair up in curlers turn into testosterone fueled racing junkies there - all within feet of where children are playing in their yards. But if the traffic noise had been all there was to the issue, they could have used it to snare a bargain property because they would be willing to put up with something nobody else would. They were also shopping well beneath the limits of their means, so I was also able to put them into something in a better location with a lot more upside for the same money.

The bottom line is that more money buys a better property. Like any other good buyer's agent, I can stretch your available dollars, but there is a limit to how far I can stretch them. I'm aware of that limit, and so are my buyer clients because I will make certain that they are aware. There comes a point where a given set of search criteria flips from "challenging but possible" to "not likely to happen on Planet Earth." If that happens to you, you are wasting your time and everyone else's. Most buyers have to accept compromises in order to get what they need within their budget, and it's only going to get worse as we finish working our way through the problems that caused the meltdown. If you understand this in the first place, you're in a much stronger position when you start looking.

Caveat Emptor

Original article here

A high percentage of buyers out there have no idea of how qualified they really are themselves. They have no clue as to any of the major factors in determining credit-worthiness. To be fair, there are dozens, if not hundreds, of little details that can kill a loan dead. This is one of the significant advantages to dealing with a loan brokerage instead of a direct lender, because if a loan killing detail strikes, a brokerage doesn't have to start all over from square one. Pretty much all the paperwork is still usable, I just have to submit it to a new lender that can do the loan. But so long as a very few things about the buyer's situation are acceptable, I'm confident that a loan can be done.

Nonetheless, with a large minority of clueless loan officers out there, and still others who will keep stringing people along as long as they can, hoping to get an approval that's just not going to happen, sellers are understandably concerned. It costs serious money to carry a property, and an unqualified buyer stringing a seller out for three months before the transaction falls apart usually runs into five figures. That's what sellers are potentially looking at when they sign a purchase contract. RESPA strictly prohibits the practice of steering, while many listing agents have absolutely no clue as to whether the buyer making the offer can possibly qualify for the necessary loan. A significant number of listing agents violate RESPA anyway by requiring the buyers deal with a given loan provider. The way it was explained to me, even asking a buyer to get qualified with a specific provider and no other obligation counts as steering. Even as the buyer's agent, I can't so much as hint that there's any obligation to do the loan or qualification with me - all I can do is offer better terms. Carrots only, never sticks.

The correct way to handle it, of course, is with agreements for deposit forfeiture in certain circumstances. I don't list a lot of properties, and I'm certainly not going to point out something that isn't in my client's best possible interest when I'm agent for a buyer. I'll tell the listing agent that something seems like steering, and is therefore unacceptable, but I'm not about to suggest terms that could result in my client losing their deposit.

Some agents go overboard with deposit forfeiture provisions, and in a buyer's market like we have locally right now, being too aggressive with those is a good way to lose potential buyers. People are stupid enough to sign up for negative amortization loan that wastes thousands of dollars per year for precisely this reason - they understand money in terms of cash and payments. That deposit is cash, cash they usually spent a significant period of their life setting aside out of earnings. They understandably have a problem with potentially losing it. Even affluent and well qualified buyers may not want to accept the risks, which in a market like this is a good way to miss out on the best buyers, if not upon selling the property entirely.

There's no way to know for certain whether a loan is going to fund until it does. Pre-approval means nothing. In fact, lenders can pull funding back until documents are recorded. There is no guarantee that anyone except an underwriter can make that a loan will fund. Nobody can guarantee a loan except a loan underwriter. Period.

On the other hand, there is a compromise solution. You can't find out if the loan officer is a bozo except after the fact, but you can find out if there's no way that loan can be done. The borrower information you need to know is: Approximate Credit Score (FICO), How much they make, What their other monthly payments total, and whether they have any derogatory notations in the last two years, most notably payments 30 days late or more. You already know what the purchase price and down payment are. With this information, a decent brokerage loan officer should be able to tell if a loan is possible. When Stated Income loans were available, if the other side was doing a stated income loan, job title could substitute for actual income information. Within a twenty point band is close enough on the FICO score (e.g. 660 to 680), with differences in higher credit scores mattering less. There really isn't a whole lot of difference, even today, between a 721 and an 800 in terms of whether they'll qualify at all, and only a slight difference on loan pricing. There isn't that much difference between 681 and 719. Below 500, of course, regulated lenders can't do business and we're talking hard money only. But the loan market changes over time. If you're not a loan officer dealing with twenty lenders or more, you're going to have some real issues keeping on top of it yourself. Yes, this is privacy act information, but let's consider this: That property owner is risking an amount that's likely to run into five figures when they sign a purchase contract, because that's how much they're likely to be out if the buyer can't perform. It's reasonable to agree to give them a certain amount of information. For instance, an attestation of the credit report. W2s or 1099s with anything sensitive that the seller doesn't need to know removed. Bank statements, ditto.

I realize that these loan officers want something for their trouble, which is one of the two reasons why steering happens (kickbacks, even more illegal, being the other). Steering is nonetheless illegal. When I first wrote this, an agent whose counter my clients walked away from a few days prior got really defensive about it, but getting defensive doesn't change the fact that you are violating the law by asking the clients to so much as contact any one specific loan provider. The procedure for writing to HUD is very simple, and I'm sending them these easy packages off every time there's a problem with steering. It costs me about a dollar including postage, and I'm ridding the industry in my area of lazy problem agents, one at a time.

If you know these very few pieces of information, you can figure out things like debt to income ratio and loan to value ratio. You can know if a loan is going to be able to be done. If the buyer chooses a bozo of a loan officer, that's their prerogative, however unfortunate it may be for you. It doesn't change the fact that they could have qualified, which is all any loan officer can really tell you anyway. Matter of fact, a large proportion of the loan officers that agents try to steer towards are bozos. I recently had one agent try to steer my client to a loan provider who had blown a trivially easy loan for a previous client, who would likely have cleared $100,000 profit after fixing the property up, but instead ended up losing his deposit. I get angry about things like that. As I wrote earlier, just because the buyer is my client for the purchase doesn't mean I can force them to do the loan with me. If I can't force them to do the loan - or even put in an application - with me, what gives some lazy (expletive) of a listing agent the idea that they can? Especially when they don't owe the buyer fiduciary duty and I do? Only in as hard a seller's market as we had a few years ago is there any prayer of getting your way in that. Buyers with a competent agent now are either going to walk, or use the fact that you violated RESPA as leverage against you. Whichever it is, you've violated your fiduciary duty to your client.

The most important thing about a lender letter that says a given person is qualified is that the person writing it shows their work so that the fact of their qualification can be independently verified by any loan officer the agent may care to show it to.

Caveat Emptor

Original article here

Not too long ago I got an email from an ex-prospect who decided to buy a developer's property without a buyer's agent. They persuaded her that she would get a better deal without them having to pay a buyer's agent commission. They then proceeded to hose her. She wanted to know if there was anything I could do. The only answer I could honestly give was basically, "Sorry! The transaction is already done!" This is the way that developers like it. Once the transaction is complete, the damage is done. You own the property, and you owe the money. The only recourse is through the courts, which takes years as well as lots more money - and that's if you win.

Many folks want a brand new house for one or both of two reasons. First off, there's that new house feeling. Secondly, they don't have to deal with a real estate agent, or so they think.

This is mistaken. The agents who work for developers are very pleasant, very professional sharks. They're not legally allowed to actually lie, but other than that, they have no significant responsibility to the buyers. Their responsibility is to get the most money on the quickest sale, period. If you let slip the wrong thing that leads them to believe you'll be a difficult transaction, you can be torpedoed before you even start. They're not there to tell you the bad things about a property, or that there's a better deal two blocks over. They have a responsibility to get the property sold. Period. The developers hire them from among the very sharpest, most ruthless agents there are.

Indeed, developers usually have higher hurdles for buyer's agents to jump over than any other seller can get away with. Buyer's Agents must accompany the client upon their first visit, and register them in writing. Seems minor, but anyone else who tried this would be dead in the water as far as getting agents to show their property, while developers will do both of these and more. With anyone else, when an offer comes in through an agent, that's enough. During the seller's market, many developers were refusing to pay commissions to any buyer's agents at all. This left potential buyers to pay their buyer's agents themselves or do without. The feeling on the part of developers is that buyer's agents spoil their party and prevent them from doing everything they want to their customers, so since they didn't have to deal with them, they weren't going to. The demand was there to sell the developments out whether they were willing to deal with buyer's agents or not - and if they didn't deal with buyer's agents, they would have things more their own way.

This changes in strong enough buyer's markets. Every last buyer is precious, so developers are grudgingly working with buyer's agents. I went to a development with a client a few days ago, and the developer's agent had no difficulty conveying the same sentiments as that classic San Diego bumper sticker, "Tourists go home - but leave your dollars and daughters." They wanted my clients - but they didn't want me. Some of it traces to the fact that they want the whole sales commission, some of it to the fact that clients with a buyer's agent working on their behalf have a stronger proponent and negotiate better bargains, meaning lower bonuses and less in commission.

Indeed, a buyer's agent is a fairly unique position in sales. A buyer's agent's responsibility is to get you the best bargain possible - lowest price for the best property. Since commission is based upon sales price, this is the only job I'm aware of that gets less money the better they do their job. The idea, of course, is the better they do their job, the more people will want you to do it for them. They may not make as much per transaction, but if a buyer's agent does more transactions than they otherwise would, they come out ahead.

Some agents try to leverage this by rebating a percentage of the commission they would get. After all, it doesn't take a lot of time to fill out an offer. However, it does take a lot of time to shop effectively for a given client. I'm making offers now for a client I've been working with for two months. I've probably spent in excess of a hundred hours physically looking at properties just for them, never mind researching the properties before I left, or all of the things that contribute to general market expertise. They looked at a few on their own - and stopped, because they were seeing better values with fewer issues through me. A good agent knows what else is available on the market - but the agent who sits there with a license and a fax machine has no clue. There's nothing ethically wrong with agents getting paid for sitting by a fax machine. I'm perfectly willing to rebate part of the buyer's agent commission if someone doesn't want me to scout and evaluate properties. If, however, you want someone who's able to recognize what is and is not value, and who is going to be a strong negotiator on your behalf, thereby getting you a better property at a better price, you need someone who gets out of the office and looks at property. Agents can't get that kind of expertise sitting in the office. And if your only qualifications are a real estate license and a fax machine, why are you making more than ten dollars per hour? What benefit does that have for the public? I visited a new development on behalf of some clients last week. They had one left, in which I spotted a foundation crack literally from side to side of the structure. I checked the area again today, because we're still looking, and that property has gone Pending. I'm not a licensed inspector or contractor, but if someone can spot this before the sellers have your deposit, it can really save your bacon. If I were a discounter, that would have been my clients, because they loved the property until I showed them the crack.

People in the financial press like to complain about real estate commissions being too large. But they are not as large as they are by some accident of nature. People didn't just decide to pay five, six, or seven percent of the sales price because someone told them to. Sellers do it because experience has taught them that they end up with more money in their pockets because of their listing agent's expertise. It's not a large jump from there to understanding that if the seller has someone whose expertise for one transaction is worth that kind of money, it's a real good idea to have someone on your side who knows just as much, not only about real estate in general, but your market in particular. Various businesses have been trying to offer real estate brokerage services at discounted rates since at least the mid 1970s from my personal knowledge. Traditional sales models have lost a little bit of market share, but they're still going strong. There are reasons for this. Reasons like how long it really does take to get a property sold, like how much work it really does take to know the market. Reasons like there is no way to evaluate the relative value of the property except by looking at lots and lots of properties. Reasons like the paperwork that has to get done, and the legal liabilities involved if something goes wrong, or the buyer isn't happy, or any of hundreds of other reasons. Not to mention all of the transactions that stop before consummation. Real Estate is the only occupation I'm aware of that anything like the work we routinely do, and doesn't get paid at all if the sale doesn't happen. When discounters work for less pay, the only thing that can give in this whole process is the services they provide.

Developers know all of this very well. They are not charities. They are out to make the largest profit possible. They don't hire discount agents. They hire the best agents they can get, and support them with large advertising budgets, because that gets the properties sold, and for enough more money to more than pay the costs of what they spend. These agents act very friendly, very charming and disarming, and completely ruthless. Developers' strategy of discouraging buyer's agents from being involved is part and parcel of ending up with more money in their own pockets. The only place for the money in their pockets to come from is the pockets of the people who buy from them. If you want to deal with a developer, you want someone on your side who knows enough about real estate and your market to stand up to the experts on the other side.

Caveat Emptor

Original article here

(Note: the available loan options have shrunk since this was first written, and the rates are significantly lower right now, but the main point is calculating what you can and cannot really afford)

Hi Dan, I am a first time home buyer and a big fan of the advice on your blog. I was wondering if you could offer some advice on my current situation. I apologize for sending you this question but I've had many sleepless nights over this and I really respect your opinion.

I've narrowed my search down to two properties, one is a condo in DELETED (where I work) and the other is a new home in DELETED (closer commute for fiance). As a first time buyer I'm looking to stay in this place 5-7 years and then if possible rent it out as an investment.

The new home builder has a 2-1 buy down plan so the rates on a $519,000 5/1 arm would be Year 1: 3.75%, Year 2: 4.75%, Year 3-5: 5.75% on the first mortgage and 9.375 on the 2nd (which I would try to refinance right away).

The condo is $335,000 (a similar model sold on recently for 400,000) and the rates are 7% on the 1st and 8% on the 2nd. Both loans are with 100% financing.

I really like the house but don't wanted to be lured into a larger loan if it might come back to bite me. I would go for the condo if it would be a better investment in the long run but would be sad without a yard. I my income is 94,000 a year and I have good credit, my fiance will also be contributing to the monthly payments.

Thank you for reading my lengthy email, I'd really appreciate your help!

I am not going to pass judgment on either property and its worthiness as an investment, its comparative value, etcetera. Those are buyer's agent questions. The real question I can deal with here is numbers: What can you afford? If you can afford both, is the more expensive property worth more money to you?

You make $94,000 per year, which equates to $7833 per month. At a fifty percent debt to income ratio, that is total monthly housing and debt service, you can afford $3916. That's got to cover first, second, taxes, insurance, Mello-Roos and HOA, etcetera, as well as your existing debt. A paper fixed rate firsts allow basically 45 percent, while A paper hybrid ARMs are usually lower, and compute based upon the fully indexed payment, not that low initial payment. Matter of fact, what they're trying to sell you on looks like a Temporary Rate Buydown, so they can sell you the property based upon a low initial payment.

Let's look at these two situations.

On a $335,000 condo, that's a first of $268,000 at 7% and a payment of $1783. On the second, that's a $67,000 second at 8%, which is a payment of $492. At 1.25% (standard California rate) your property taxes would be $349 per month. Insurance is not required for condominiums even though it's both cheap and a really good idea, so it doesn't impact debt to income ratio. On the other hand, there will be HOA dues, and may be other monthly expenses such as Mello-Roos. As long as these, plus your other debts do not exceed your remaining $1292, you're likely to be able to afford it. Add in 75% of whatever your fiance will sign a lease for, as standard allowance for rent, in addition to the $1292. Bottom line, based upon the information provided, it looks likely that you can afford that condo.

On a $519,000 property, that's a first of $415,200 and a second of $103,800. The second gives a straightforward payment of $863. The first has an initial payment of $1923, but that's not the real payment. The real payment is $2423 - $500 more. Nor is this the qualifying payment that an A paper lender will use, which is computed based upon what would happen if that loan hit the end of the five year initial fixed period today. That rate would be 7.125, or a payment of $2797. Yes, I like 5/1 ARMs, but they are perversely harder to qualify for than fixed rate loans. I get that basic California property taxes would be $541, I'm guessing insurance would be about $100. Total is $4301, and we haven't considered Mello-Roos, HOA (if any), or your existing debt. On the plus side, we haven't considered your fiance's contribution, either, but it's not looking good as you're nearly $400 over your monthly total payment limit already, and that's without considering possibly lowered debt to income ratio guidelines.

Now, let me point out a couple of tricks going on here: That temporary buydown isn't free, or even cheap. Nor is 5.75 available on a 5/1 without points right now, from any lender I'm aware of. This developer is not going to do your loan for free just to unload the property, and they used the temporary buydown to make it look like the payment is lower. They came close to hooking themselves a sucker fish, too, from your email. The money to do all of this is coming from somewhere, and the only candidate I'm seeing is the pockets of the buyers. It's almost certainly a waste of money as well as defeating the purpose of a hybrid ARM to pay points and temporary buydowns - and you would be paying them. If not explicitly, through being able to negotiate a lower price on the property without the developer paying for all of that. Which would you rather have: slightly lower payments for a while, or a lowered amount of debt in the first place? They pad the price, so they get more money right away, while paying out a part of it to make the payments look lower for a while. If you offer someone a dollar for thirty cents, most of them will take you up on as many dollars as you have, then turn right around and hand you back a portion of the money you just handed them. When you reduce it to the basic mechanics, that's what is apparently happening here. Of course, the average consumer is clueless about this - all they understand is that they're getting a beautiful property that they didn't think they could afford for an initial payment they're happy with. Well, they really can't afford it, but someone who knows a critical bit more of how the game is played persuaded them they could.

All of this is one more argument why everybody should get a good buyer's agent. If you don't have one, especially in dealing with developers and their lenders, nobody has a fiduciary responsibility to you. That and shopping your loan extensively are the best ways to avoid rude awakenings expensive enough to jeopardize your entire future that there are. In fifteen minutes with a calculator and my professional experience, I may have just saved your financial future. The other side has people whose job it is to get that property sold for the most possible money and make money with that loan, too. They're paid to act like your friend while picking your pocket. If you really want to play that game without someone on your side who knows the same tricks they do, you're a foolhardier braver man than I am, Gunga Din.

Caveat Emptor

Original article here

Quite a while ago, I wrote Top Ten Reasons You Bought The Wrong House and Top Ten Reasons Your Home Isn't Selling. In that vein, I'm going to write a list of the most important things when you're shopping for a property. Lots of folks shoot themselves in the foot, and it's easy enough to see why in retrospect - but isn't it better to not make those mistakes in the first place? I'm going to count down from twelve to one and try to inject what humor I can.

12)Short escrow periods, but only if you can perform. That seller is out money every day of the escrow period, and every day that passes while the property is Pending is another day that other potential buyers aren't looking at it. This daily racking up of costs has been known to cause seller panic. Knowing that there's a limit to how many days the property is going to be tied up is certainly something that can be useful in convincing a seller that this is a better offer. Warning: The deposit is always at risk, so if you cannot perform within the time period you agreed upon, you could find yourself out the deposit money. Since this article was originally written, the time to reliably get a loan done has risen from 2-3 weeks to 2-3 months due to regulatory changes and procedural changes on the part of lenders to comply with those regulations.

11) Short term leasebacks: If the seller is living in the property, accepting your offer means that they have to get on the stick to find their next home. This can cause them quite a bit of anxiety, especially if they're not certain the transaction is going to close. The sellers can sign a lease and risk not needing the leased property while still having to pay a mortgage, they can enter into another purchase contract and find themselves unable to perform, they can find themselves living in a hotel because they didn't allow enough time, and with the problems in the market today, they can often be risking homelessness. If you're not in a particular hurry to move in (and you shouldn't be!), offering to lease the property back to them for up to thirty days after closing is a major anxiety reducer for the seller. Delaying your own gratification - the ability to turn that key and say "Mine, mine, all mine!" like Daffy Duck - can be a lever to get a better price or something else you want out of the seller. Short sales are a particularly good time to offer this - you're looking at an extra six weeks, possibly three months or more, before the lender gives their blessing to the transaction, then usually wants to close faster than the speed of light while the buyers are trying to get their loan done and the sellers are stressing about the tax implications and whether anyone is going to be willing to rent to them along with everything else. To add both parties suddenly having an urgent and immediate need to pack up for a move that they're not certain is going to happen and sign a new least or give thirty days notice when they're possibly going to be without a place to live doesn't make things any easier. As long as the actual move-in happens within thirty calendar days of closing, loan standards for "owner occupied" loans are still satisfied, making it a win for everyone.

10)Buyers have liquid cash - Sellers have an illiquid property. Cash money is the universal problem solver - everybody takes cash, everybody needs cash. What most buyers have isn't the full price in actual cash - but the seller gets cash proceeds from the loan as well. That seller isn't sitting upon the crown jewels of the world either - they have the most illiquid investment there is, and they are attempting to exchange it for cash - that universal problem solver. Otherwise you wouldn't see that property listed for sale. The buyer is the one with access to the universal problem solver, and if that seller wants that problem solver, they had better be cognizant that their problems are not the buyer's problems until the deal is done. If the property has problems, it is the seller's challenge to persuade the buyer that it is worth the buyer's resources to deal with those problems. Otherwise, that seller is stuck with those problems.

9) Be willing to do without meaningless contingencies. The appraisal contingency is the prime example of this. By requiring an appraisal contingency, you're saying that you don't want the property unless everything is absolutely perfect - unless some appraiser can pretty much arbitrarily be persuaded to say the property is worth at least the official purchase price. That's a weak offer, and it puts a lot of sellers in the position of resistance because they "don't want to sell for less than it's worth". If more agents explained what the appraisal is and is not, this would be a much smaller problem. I am always looking for value, and always mindful of the minimum necessary appraisal amount, but I'm also pretty much always willing to give up the appraisal contingency if I even put it into the offer in the first place. If there's a loan, the loan contingency is going to cover my clients. If there wasn't a loan, why would you care if the appraisal came in? You shouldn't ever offer more money than the property is worth to you, so why should you care if the property appraises? Being unwilling to give up the appraisal contingency is the sign of a weak offer from a buyer who isn't really sold on the property.

8) Zig when everyone else is zagging. The time to buy a property is when nobody else is willing or able. If potential buyers are waiting for the market to bottom, if they're scared they'll lose money on paper, scared they'll lose their job, or just don't want to move right now because it's Christmas, that's the time to be out buying. On the flip side, as this whole housing bubble and Era of Make Believe Loans should have made clear to everyone, when everyone is convinced that prices are going to keep going up 25% per year and therefore real estate is selling like hotcakes is probably the time to sell yours and go rent until the bubble pops. Don't confuse mass psychology with the fundamentals of the market. This applies in reverse as well.

7) Know what cannot be improved or fixed. Location is the first item on that list. If the property is already the best in the neighborhood, it's not a bargain. If everything around it is selling for half the price, it's not a bargain, it's a misplaced improvement. The area is what it is, and while sometimes they do improve, it's not under any individual's control unless you're a corrupt public official capable of zoning that airport or that sewage plant out of existence. There are other items here - environment, view, desirability, etcetera - but what I wrote about location finds a good analog in each of them.

6) Look for properties you can improve: If they're the cheapest property in the neighborhood, that is an opportunity for profit. The beautiful turn-key property where everything is already perfect is not an improvable property - at least not at a price that's worth it, not only because everything easy has already been done, but because those properties are in high demand. When everybody wants it exactly as it is, that's not a bargain property. If you look at it and fall in love with the beautifully done kitchen and bathrooms, that's not a bargain property because most buyers are willing to pay a premium for those sorts of things. Which leads us into-

5) Look for solid, not beautiful. Even if it hasn't been updated in fifty years, a good floor plan is a good starting point. Most people will not look past an outdated surface to what is underneath - solid foundation, good floor plan, solid construction, good location, lot with plenty of usable space. Yes, you're going to have to do some work to make it shine, but you're looking for a bargain property, not the one that's already been over-improved by a devotee of one of those house-flipping shows. The people that have done that work expect a premium for all that effort. If you want already beautiful, you can expect to be the one paying that premium. If you're willing to take something solid and make it beautiful, you're going to be the one getting that premium.

4) Don't fall in love with one particular property Be willing to walk away if the negotiations don't work out, or if you discover something about the property that's worth walking away from. I see people get all worked up over the possibility of losing a $3000 deposit and sign on the dotted line for things that are going to take ten times that much money just to bring the house up to where it should have been already. I tell buyer clients that the ideal time to fall in love with a property is as I am handing them the keys - something that doesn't happen until escrow has closed and they actually own it.

3) Have a plan Why are you buying this property? Is it a starter property for a few years, are you trying to flip for a profit, or is the home you're going to live in the rest of your life? Are you planning to hold onto it and rent it out once you're done living in it? Is it the basis of the plan to use leverage in your favor so you qualify for a better property when you sell this one? Is this the end property, or is it a shortcut for getting where you want to be? Each of these possibilities has consequences and implications that make it advantageous to do one thing and not the other. A good agent knows what they are. Plan ahead for what you want, and the right things to do to achieve it are a lot more definite.

2) Good buyer's agent. This is the expert who will help you with how best to make the transaction in your favor, as well as reverse engineering what the sellers and their agent are trying to do. Everything about a real estate transaction happens for a reason. You want someone who can take the what and figure out the why from that, as well as the how of getting from where you are to where you want to be most efficiently and effectively. It is easy to find a good buyer's agent if you make the effort. But this is not number one because the best buyer's agent in the world can't do you much good if you haven't got the

1) Patience If you're only willing to look at a few properties, if you're not willing to investigate the property and the market, if you're not willing to consider that maybe another property might be better for you - if you're going to get your heart set on one beautiful property because it's the most upgraded one in the neighborhood, there's not much anyone or anything else can do for you. The more patience you have, the more I and other buyer's agents can do for you. If you're not in any particular hurry, we've got time to make things happen your way. If you need to be under contract in two weeks, you've got about a week to start negotiating an offer, and no plan B available if that first negotiation fails. This weakens your bargaining position, to say the least.

Bonus item: Higher Deposit People are funny about cash. Perhaps it's because they had to earn that cash dollar by dollar, not spending it on other things. Every dollar in that deposit represents something that they could have bought, fun that they could have had, but didn't. A large deposit is therefore indicative of someone who has made some serious sacrifices and is putting that money on the line in the pursuit of this property. That says a lot of positive things about how serious they are, how certain they are that they want the property, and how certain they are that they can make the loan happen. A large deposit is also (usually) indicative of someone who's in the habit of saving and therefore really does have good credit. The deposit is always at risk, but there are steps you and your agent can take to minimize that risk. Look at it from the seller's point of view: You've got someone willing to put thousands of dollars of their own money potentially on the line, versus someone who's scraping together change out of the seat cushions of their couch and asking for help from relatives because they can't save money. Which of those two offers would be more attractive to you?

Caveat Emptor

Original article here

The majority of the protections that folks have are aimed at helping non-professionals have a chance in the complex and nearly incomprehensible maze that is real estate. The legal presumption is basically that you are a babe in the woods, and can easily be led astray by the fast-talking real estate broker and the big bad mortgage lender. And actually, this isn't too far off. I have seen enough to know that however bad a choice Negative Amortization loans are for 99 percent of the population, an unscrupulous agent and/or an unscrupulous loan provider can talk 95 percent plus of the public into getting one of them simply by accentuating the low payment and not mentioning the fact that your balance increases, among other things that a fully informed consumer might regard as inimical about them. Particularly in combination, each of them hoping for a big commission (the agent from a house beyond what the client can really afford, the loan provider from the associated loan), they reinforce each other's credibility beyond all but the most skeptical of laypersons to withstand.

When you get into investment property, however, this isn't just your personal residence any more. This is no longer something every living person needs, a place to live.

You are now intending to make money.

You are now in business. You are a businessperson. It does happen, of course, but it is difficult to have much sympathy for a businessperson who doesn't know enough to conduct business of that nature. Some Poor Guy who wants to get in on the American Dream is entitled to significant legal protection against all the sharp and smooth operators out there. But once you get out of the realm of personal use and get into the realm of making money, now you are telling the world that you know something about this (or at least that you should know something).

You have promoted yourself into the realm of sophisticated user. The legal presumption is no longer that you are a babe in the woods, although you may be every bit as much of one as the person in the earlier example. But because you have promoted yourself to someone trying to make money, many of the protections and disclosure rules do not apply.

It's not like you went out and got a real estate license (unless you did) or passed the bar, which automatically gives you the right to a broker's license in most states. There are still significant protections even there. But if they wanted to push the point, your agent and loan provider could probably eliminate half the forms you're asked to sign. The three day right of rescission on refinances goes away because instead of being presumed to require consultation with professional experts, you are presumed to be a professional expert. Why are you in the business if you're not an expert?

Needless to say, this point has become quite the illuminator of experience for many folks who see others making money via real estate investments, and think, "That's easy! I can do it too!" All too often, people who may be used to the protection afforded the general public get burned when they are presumed to be experts by the law. Not that the government has done a particularly good job of protecting the general public, but the sharks in those waters have to make it look reasonable. The sharks who swim in the waters of investment property have no such limitation. They talked you into a bad loan? For your own personal use, you have the three day right of rescission and many banking laws designed to require that the bank show something that can be construed as a benefit to you, the borrower. Lower payment, lower interest rate, something that persuades a judge that a rational person might have done this. The person with an investment property doesn't have that protection. So what if it leads to bankruptcy? You did it. You must have had some reason.

I am not a lawyer, but I have seen enough happen to have some appreciation for the protections consumers do have. Real Estate investments, handled correctly, can make you a humongous amount of money. The point I'm trying to make is that they can also lose the unwary a lot of money. The amount of loose money available in real estate for the picking is the lure for a large number of professional sharks. A professional who wants to be one of those sharks has any number of ways to make something appear to be to your benefit when it really isn't.

Caveat Emptor

Original here

When Israel invaded southern Lebanon a few years ago, this picture from Reuters ran worldwide

The problem was that it was heavily photoshopped by a Palestinian stringer trying to make it appear like the Israelis were setting the entire city on fire indiscriminately. This was original photo:

It shows one fire and smoke from it drifting as it dissipated, presenting a far different picture of the situation. Instead of shelling everywhere, Israel was making precise strikes at locations where there actually were terrorists firing at their troops. Reuters got a lot of bad publicity out of this, and it cost them a fair amount of money because it wasn't what they were representing it to be. Reuters claims to be reporting the news as it really is without an agenda to grind, and items like this (of which there have been many) punch significant holes in their credibility with people who really pay attention to what's going on. (If you care, I got the photos from an article Little Green Footballs did on it)

So what's this got to do with real estate?

Unlike Reuters, listing agents don't have any sort of obligation to report the news as it is. Theoretically, agents and Realtors have a duty of fair and honest dealing with all parties, but this is more honored in the breach than in any other way, and they figure that if you can come out and see the actual property, doctored photos don't matter. It's their job to make the property look attractive. Hundreds of thousands of dollars are at stake. People lie, cheat, steal, commit felonies and risk jail to sell real estate for a higher price - on that scale, the minor dishonesty of doctoring photos just doesn't register. Result: Lots of photoshopped pictures.

I do not understand why people pay attention to online photos. Actually, I do. I'll admit to being a bit slow on the uptake - it must have taken two months back when I first started being an agent for me to stop paying attention to them. People think they're saving the time and gas of driving to ugly properties. The truth is that there really isn't a lot of actual correlation between ugly photos and bad properties, or good photos and worthwhile properties. I usually don't look at photos at all unless clients want to talk about them - I look at several other factors that tell me whether there's a possibility of finding a bargain here.

Most buyers, however, won't listen until they've had a certain amount of bitter experience with cold hard reality, which is that somewhere between the camera lens and the online listing pictures, there have usually been alterations made. I tell my clients point blank that I never look at photos, but when people are starting to look it seems they just can't help but shop for property by the photographs. After all, this apparently saves the effort of driving to the property! Even when I ask people point blank whether they've heard of photoshopping, they won't connect it to this situation - until they've dragged themselves to a couple dozen properties where the photos did their subjects entirely too much justice, if you know what I mean.

Instead of pictures, I tend to look at things like price (especially as compared to nearby properties), showing instructions, whether the listing acts like it really wants to sell or is doing the peasantry the immense favor of offering it for sale, whether the listing agent works within a very few miles or is from further away and a few other data points that most clients never do figure out the importance of. Are they telling us it's a "fee simple" title while admitting there are HOA fees? If they're trying to play buyers for saps, chances are that property is not going to be a bargain or even so much as worth looking at. That listing agent is hoping to get a sucker to come in and via Dual Agency make an offer based on an undebunked rose-colored picture of the property. Not only is this another reason buyers want to find a good buyer's agent before they start looking at actual property, but it's a sign that there are likely to be other games going on once you make an offer as well.

Sometimes pictures not only haven't been altered, but don't do their subject properties sufficient justice. It is just as silly to toss a property from consideration for a bad photo as it is to include it because of a photoshopped one. The only way to see what it really looks like is to go look at it with your own eyeballs - there are no acceptable substitutes. I've seen just as many real pictures taken with bad cameras from poor vantage points as I have photoshopped ones. As I've discussed, just because flinty eyed buyer's specialists like myself have learned to ignore online photos, or at least take them with an appropriate amount of salt, doesn't mean everyone has. Good photos can bring people out to the property to look.

I do advise against photoshopping in significant ways. If the photo doesn't match the reality, most people will figure it out at some point. It's fine to choose a good angle that shows the property to advantage, but if you change an entire room full of clutter to what George Orwell would have called unpersons, people who actually come look at the property, which is what you want pictures to cause them to do, are going to be turned off. If you simply showed things as they are, someone might have thought it was good enough. It really is a matter of managing expectations. Lure people with a promise of something super, and the merely satisfactory doesn't cut it, but if they're only expecting the satisfactory, they might be happy with it.

I don't trust any real estate photos I can't vouch for personally, which means that I have learned not to pay a whole lot of attention to them. Similarly, doctoring photos doesn't really help. If potential buyers are obsessing about the cool pictures of the bathroom, the kitchen, or the backyard pool, they're more likely than not going to be disappointed when they actually go to the property, and disappointed people don't make good offers, which is what the sellers (and their agents!) really want.

Caveat Emptor

Original article here

If you don't know, chances are your agent doesn't either. Even if you know, chances are that your agent is as clueless as a newborn about loans.

I and my clients get asked for all kinds of nonsense (to put it very kindly). Every single one of them has some kind of idea what makes a good lender letter, and none of them are correct. As of this moment, not one single agent (other than me) has asked for anything in the way of a lender letter that means a damned thing.

The first thing to get into your head is that there is no such thing as a letter that guarantees funding on a loan pre-purchase contract. No loan officer can write a letter that guarantees a loan will fund. The only guarantee of funding is a loan commitment written by an underwriter, which may or may not have conditions a particular borrower can meet. Commitments are always written to a specific property, and require (among many other things) either already holding title to the property or a fully negotiated purchase contract to buy a specific property. You tell me how any buyer is going to get that before the purchase contract is negotiated. Go on, we're waiting.

The fact is that loan officers cannot be held responsible for preapproval and prequalification letters. Unforseeable things really do pop up, and loan standards do change. I got lucky and didn't lose anyone when Freddie and Fannie changed their standards on investment property in late January 2009 - but that was sheer luck. Skill had nothing to do with it. I can name loan officers that lost sixty percent of their loans in progress through no fault of their own. One day those were perfectly good loans that everyone wanted - the next day nobody could fund them.

Sometimes, a full underwrite of the file finds that the borrower applicant has somehow misrepresented their situation. More often, there was something lurking in the background that the loan officer didn't know about and the borrower didn't realize was important. Upshot: there is no such thing as an infallible lender letter. Nor can you successfully sue the loan officer who wrote the letter. Since you can't sue the loan officer, many loan officers get very lazy about writing their lender letters. There is no magic bullet for determining who is and who isn't doing full due diligence. The loan officer writing a preapproval or prequalification has got to show his work, and you (or someone you trust) has got to have enough understanding of loans to follow that work and enough understanding of current loan standards to know whether such a loan can be done. There are no shortcuts to this that work, for all of the illegal, unethical, and just plain wishful thinking for one that get tried.

Let's list a couple of the wrong methods. The first and most common is dictating that you have to have a lender letter from a particular lender or loan officer. This is illegal under RESPA. I don't care how many years you've been doing it, or how many times you've done it, it's still illegal. it doesn't matter if the client is dictating the choice of lender, it is still illegal under RESPA. I don't care who the specific lender or loan officer is, it is still illegal under RESPA. Everybody involved is breaking the law - whomever designates the specific provider, you for going along with it, and any lender involved if they are aware of it. I offer the client the option of whether they want to go get the lender letter from the specified source anyway as a way of not making waves in the transaction, but this is common enough that I've gone to the trouble of making up a template for letters to send to Department of Housing and Urban Development later. The folks at HUD are well aware that agents and Realtors do this for kickback and mutual referral purposes, and they frown on it severely. You can win the argument for the transaction if you're silly enough to insist, but six months down the line HUD is going to be knocking at your doorstep for a RESPA violation, and it's probably not a good idea to be telling them how long you've been doing it wrong and how. An agent might keep their license over one although they're going to be facing hefty fines, and I'm sure that as a client you'd rush right out and sign up with an agent who has broken the law, right? Better for all concerned not to do it at all. If you're an agent who does this now, stop immediately. All it takes is one complaint, and HUD will often subpoena back records of all of your former listings. Ignorance is no excuse.

Of late, the "must have letter from direct lender" has gotten more popular, although this is another way of simply ruining a perfectly good piece of paper. No big loss, but getting your preapproval doesn't mean anything more from a direct lender than it does from a broker. Less, actually, as most loan officers working for direct lenders are a lot less experienced in the ways that loans get rejected. Nor are they any better at taking into account the effects of a specific transaction upon likelihood to qualify. They aren't any better at knowledge of lending standards, either. I've seen some pretty stupid letters from direct lenders that brokers with a broader knowledge of industry standards would laugh at. This requirement is useless if not counterproductive, and is usually practiced by agents looking for a cheap way to cover their backside in case the transaction falls apart, in which case they will show the client "See, they had a letter from National Megabank! If we can't trust them, who can we trust?" This entire line of thinking is what logicians call a Red Herring - an irrelevant distraction to the important question, and even counterproductive in this particular case, and if you have a competent real estate agent, they should know enough to know better.

Enough of what a good lender letter isn't. Let's talk about what it is.

First of all, a lender's letter must be specific to a given purchase offer. It has to be written in accordance with the purchase offer that is being made, and therefore written within no more than one business day prior to the tender of the offer. "Why" You ask? Because every single transaction is different. Rates change every day - or more specifically, the tradeoff between rate and cost changes every day. The purchase price being offered on this transaction is not the same as the purchase price they may have offered last time, and the down payment may not be the same, meaning the loan amount and the projected payment are not the same, either. The borrower may no longer have sufficient cash to consummate the transaction with all of these changes. All of this is basic, "hit the ball with the bat" level stuff. If any of it changes, so can the answer to the question of whether a loan is possible. There are people wandering around with lenders letters that are months old; with the standards changes and rate changes the only things those are useful for is tinder for a fire or a good laugh.

Second, and even more importantly, the loan officer must show their work. What's the borrower's known and documented income? What are their cash reserves available for this loan? You want a lender's letter that testifies to the exact amount of cash reserves the borrower has shown, details where any additional funding is coming from, and how long of a period how much income is averaged over (at least 17 months), to give a figure for monthly income. It should also specify the actual FICO score reported by each major agency. You can't hold the loan officer who wrote the letter responsible if the loan fails to fund, but you can hold them responsible for specific statements about assets and income and credit score. Not only that, having this information gives you the opportunity to check their work! Indeed, the only advantage of not showing such information is that it gives weak or unqualified buyer/borrowers a chance to pull the wool over someone's eyes, and since those buyers are risking thousands of dollars that is clearly not to their benefit either. These numbers are what is really important, not the identity of someone who writes a "black box" letter - "I don't know how they're qualified, but this says they are!" Wouldn't you really rather be able to check and know?

A good lender's letter will lead you through the calculations of loan to value ratio and the specific rate, point, and closing costs of the loan being contemplated, as well as required reserves for prepaid interest and impound account and compare it to known assets to determine that the buyer really does have enough cash to close the transaction. If they don't and you accept their offer, you are praying for a miracle because that is what it will take to make this loan close.

A good lender's letter will also go through the computations for debt to income ratio based upon the loan quoted. They have determined income averaged over a period which leads to average monthly income. You should be able to determine within a very close range exactly what the other costs of owning the property are going to be. The lender's letter should state a number for monthly debt service for existing obligations - credit cards, student loans, car payments, etcetera. This number is available right on the credit report, and if the credit report is not used as the source of this number, there should be a good explanation as to why the number on the credit report was not used. You don't need to know the social security number and all of the account numbers, or even all of the individual payments. What you do need to know - what you are entitled to know - is whether they qualify for the loan, which means the total of existing monthly debt service is necessary. It is also sufficient unto the task, which means you have no justification for asking for more information. If the total cost of owning the property and existing debt service fit within appropriate debt to income ratio guidelines, you have a qualified buyer. If not, you are wasting your time accepting their offer because they are not going to qualify. Stated income loans are all but legally dead, and I don't know of a single source that actually funds them right now - you can figure at least a two percent differential right now at the same cost as well as a rock bottom equity requirement of twenty percent - more likely twenty-five to thirty. Your buyer is going to have to document income to the lender in order to qualify for that loan, so they can bloody well tell the seller how much income they can document. That seller is making a decision of whether to grant credit, and if the buyers cannot qualify for that loan probably going to cost those sellers thousands of dollars. Therefore, the seller is completely justified in asking for this information - they are perfectly justified in requiring it.

The contemplated loan should have been priced within one business day of submitting that offer to purchase, and it needs to include both a rate and a total cost of that loan that you can check. Yes, the available tradeoffs between rate and cost vary every day, but the longer you go between pricing and submission, the more opportunity there is for change. I'm a lot more comfortable with lender's letters where the quoted loans priced with low to no points (if not a zero cost loan). Why? Simply because there is wiggle room on the quote. If rates go up a quarter of a point for the same rate tomorrow, or a week from now, the buyer can quite likely still make it work - particularly if they're not pledged right up to the limit of their available assets. Similarly, I like to see a lender letter that's built some wiggle room into the cash to close. It's the difference between a very qualified buyer who can still make the transaction happen if rates go up a bit or costs are slightly higher, and a marginally qualified buyer who is going to crash and burn if any little obstacle comes up (If the buyer was lowballed on their mortgage quote to use one all but universal example), or at least need the seller to bail them out with further concessions. If the loan officer who wrote the lender letter shows the work, it helps you know the difference between these two very different buyers, as well as between them and the completely unqualified bozo. It can be worth the risk of dealing with the marginally qualified buyer if you are getting a particularly good price and have the money to lose if the transaction falls apart, but it shouldn't be any surprise that the solidly qualified buyer is in a stronger bargaining position and likely to get a better price, thereby giving that solidly qualified buyer a reason to want to show all of this, demonstrating what a strong qualified buyer they are and what a strong offer they are making. Depending upon the seller's financial position, in San Diego this can be worth ten thousand dollars or more on the sales price of an average home!

I have shown that both the buyer and the seller are better off with a solid lender's letter that takes the cash and the income necessary to fund that loan and compares them in concrete numerical terms with the buyer's financial resources and liabilities. These aren't the only questions possible, and therefore the need for loan officer contact information. I call the loan officer on every single lender letter I get and ask questions - does this buyer own investment property being particularly important right now. If they're claiming something I don't believe can be done, I'm going to ask what lender is willing to fund that loan and then check if such a program exists to actually do so - and either I learn something new about the current loan market or I prevent my seller client from accepting an offer that cannot be consummated.

The important thing is concrete information being attested to, that allows any other person who knows enough about loans to retrace the work and verify whether a loan can be done under current conditions. If the agent can do it, great - agents should know enough about loans to do so! Even if they don't, any loan officer should be able to do the work. The identity of who wrote the letter is trivial - a distraction dreamed up by agents who are incompetent to judge, looking for kickbacks, or both. I prefer a letter with the required information from any loan officer that I don't know to be a complete and utter bozo, and even then, I have the information they are using to make that determination, which is one hell of a lot stronger than reputation or lack thereof. The critical information is specific concrete numbers about the buyer's situation that enable anyone who knows loans to make an informed decision as to whether this loan is doable, not whose signature is on it, or which letterhead it's printed on. When I make a recommendation to accept an offer or even just pass it along without a recommendation against, I am telling my seller that I have a reasonable basis to believe that this potential buyer has the wherewithal to make it happen. If I'm not doing the necessary due diligence before I do that, I have failed in my fiduciary duty - and that means knowing the difference between what is important and what is not. Having all the numbers for me or another loan officer to trace and check the work is important. The identity of who wrote the letter is not.

Caveat Emptor

P.S. If you're looking for an example of a good lender letter, you could do worse than The Qualification Letter I Use

Original article here

On a very regular basis, pretty much every buyer's agent who's worth anything gets clients who have difficulty making a decision. Not too long ago, I found a solid property with great potential that nonetheless needed about $20,000 of cosmetic work. In short, right now it was ugly and unappealing, but it had a WOW! view and it was priced $100,000 below a model match a few doors down. They looked at the property five times over the course of a month, and just as I finally had them willing to make an offer, somebody else put in an offer that was accepted.

Immediately, the property went from something they were reluctantly willing to consider living in to something they had to have, but at that point it was too late. The owners were already under contract. Unless the transaction fell apart - and it didn't - there was nothing anyone could do. Real estate needs one willing seller and one willing buyer. If someone else gets there first, you don't get the property. The seller's side has its own version - whomever competes the best for a given buyer wins. There are no prizes for second place.

There is no such thing as a perfect property. Unless you have an unlimited budget - and no one has an unlimited budget - there are always trade-offs. Trade-offs in the form of location, or amenities, or most obviously, price. You've probably heard trite little sayings like "paralysis through analysis" and the pithy "you snooze, you lose." They're trite because they're true. You must be willing to act when things aren't perfect in order to get any benefit. If you aren't willing to act in a timely fashion, you get nothing. The better the situation, the more risk there is of someone jumping in before you. Yes, sometimes this means you're at risk of being conned. There is no way to completely eliminate that risk. If you're only willing to jump into the perfect situation when all risk has been eliminated, you are wasting your time. Somebody else is going to jump first. The only way you're even going to buy - or sell - anything in those circumstances is if you're the victim of a scam. Reward is necessarily coupled with willingness to work and to accept risk. You can certainly work to reduce the risk, but there will always be an element of risk present. If you're not willing to accept any risk, welcome to the life of a spectator.

This isn't just my clients. Seems like every time I've taken something "Pending", I or whomever the listing agent is gets calls from people who are suddenly interested. I finished a transaction not too long ago where one suddenly interested buyer called the listing agent literally every day while it was in escrow. He was wasting his time. Once it's in escrow, you're too late. Unless it falls out, a thing that's not under your control, that property is committed to someone else. But it seems like the mere fact that someone wants it brings prospective buyers out of the woodwork, now that they can't have it. Kind of like sibling rivalry, only even more pointless because if it does fall out of escrow and become available again, you are sabotaging your negotiating position.

I've dealt with several families over the last few months who want to buy, but are convinced the market is heading down further. Fear and Greed is keeping them on the sidelines while the ratio of sellers to buyers has dropped from 42 to under 12. This ratio is the best measure of supply to demand ratio there is, and the most important indicator of the direction of the market. They are confusing past performance with market prognosis. Even during the most gonzo seller's market we've ever had, this ratio was about 4:1, and anything under about 12 or 15 to 1 indicates a seller's market. Furthermore, people who want to buy is building linearly with time, while the ranks of people who need to sell has already seen the strongest influx it's going to have, and the lenders are finally willing to act to prevent losing more money than they have to. On the buyers' side, everybody is crowding around, trying to get someone else to be the test penguin (1). On the seller's side, there is only so much desperation out there, and it appears that we've already burned through the vast majority, at least here in San Diego. Eventually, the buyers who are trying to get someone else to be the test penguin are going to realize that the people buying now are not getting eaten - in fact, just about the furthest thing from it - and they will jump in, en masse. (At this update, the biggest thing holding people out of the market is artificially restricted loan eligibility, due to Congress passing bad lending laws in 2008-10)

All real estate is only "good while supplies last." For sellers, this includes supplies of willing buyers. Since there is rarely more than one of property in a group, bargains only last until one person pulls the trigger. The easier the bargain to spot, the shorter the period to act. Even the hardest bargains to spot do not have an indefinite shelf life. Real estate is not like war, where if you don't attack the enemy, the enemy will attack you. So a bad plan now doesn't trump a perfect plan two weeks from now. But a good plan, acted upon in a timely fashion beats a perfect plan that waits just a little too long.

Caveat Emptor

Original article here

(1) Penguins don't jump into the water immediately. Instead, they crowd around the entrance to the water, and avoid being the first in, due to the possible presence of predators. However, eventually one penguin gets pushed in by the others. If he doesn't get eaten, the other penguins quickly follow. It is to be noted that those positioned to respond quickly, and hence most likely to be shoved in as "test penguins" also have the best shot at whatever food may be present. And the predators are always drawn by a hot market which enhances the likelihoods of making large amounts of money.