Buying and Selling: May 2017 Archives

How do you transfer house ownership after someone dies and leaves you the house in a will?

The will must be probated. Once all debts of the estate are paid and the court agrees to a final disposition of assets, the executor will then create a deed giving whoever the heir is title to the property. It may or may not be part of the executor's job to record the deed with the county - so make certain it gets done yourself if you are the inheritor. It may cost some money, but it prevents huge problems down the road.

Note that if there's a loan or other liens in effect against the property, the mere fact that your predecessor died does not render them in any way invalid. Most specifically, Trust Deeds still have the power to foreclose if the payments are not made in a timely manner. Sometimes the estate has the money to pay them off; more often it does not and somebody better keep making those payments during probate, which lasts a legal minimum of 9 months, or the issue will be academic before probate is resolved. Nor can estates, in general, secure financing, so refinancing the loan can be difficult. Relatively few dead people earn significant amounts of money.

On the other hand, if your property is in a Trust, then there is no probate on that part of the estate. Title to the property remains in the trust, which didn't die. Control passes basically immediately to the successor trustee, who must comply with whatever instructions are made in the trust with regard to the property, but is otherwise free to do with it as they will within the limitations of the law. Among other issues encountered in probate but not here, this permits refinancing in whatever name happens to have the income to keep making the payments.

Caveat Emptor

Original here

I bought a condo in DELETED, CA. Zero down. For 7 months I paid every bill on time - mortgages, HOA and taxes until... The Homeowner's Association told us that we MUST pay a $20,500 special assessment.

My realtor had told me nothing about possible coming special assessment. I lived from paycheck to paycheck and had to leave the property.

I didn't pay ANY bills until my property was foreclosed. Today, AFTER ONE YEAR it was foreclosed, I received a letter. They say that I owe "prior the date when the property was foreclosed... delinquent in payment of the assessments, late charges..." $24.773.08

I can agree that I owe HOA monthly payments until the property was foreclosed but special assessment?

With a delay of seven months, I consider it unlikely (although possible) that the assessment was proposed prior to your purchase. It's usually no more than three months from proposal to assessment.

Usually, special assessments of that magnitude are not required to be paid immediately in one lump sum, but rather eligible for payments of so much per month over so many months. However the condo association has the right to levy assessments for repairs and required maintenance. This is part of owning communal or common interest property. Your assessment was larger than most, but the Association does have that right to make those assessments. It's in the CC&Rs, which you had to accept in buying the property - the former owner did not have the right of severing the unit from the association, and neither does the current owner. Usually assessments are recommended to the board by the management company, approved by the board (itself elected by the owners) and confirmed by vote of the owners. You most likely got a ballot in the mail. Whatever you did with yours, a majority of a quorum of owners in your complex voted in favor of the assessment. They need to keep records of all of this - board minutes, ballots mailed, ballots returned and how they voted. My guess is there were pretty good reasons the other homeowners voted for such a large assessment, and unless there's something wrong with how it was conducted, it's a valid lien on your property, and against you personally if you were owner of record on the date of assessment. If something was concealed from you regarding the assessment, it would be in the records of the association.

I doubt you were bamboozled by an already approved assessment. In California, you're required to receive what's called a "condo certification," from the HOA within seven days of the accepted offer. Among other things, that condo certification will show special assessments, whether under consideration or already approved. Furthermore, every single regulated lender in the known world is going to require that condo cert in order to fund the loan, and if there are special assessments known, they will require that you qualify at the increased rate of payment. So I'm betting you got full disclosure at the time.

This was a buried problem, and the only way to ferret it out for certain is asking members of the board point blank at purchase time about any deferred maintenance issues, but sometimes things like this can take an association by surprise. For example: fires, burst pipes, etcetera. A condo inspection only looks at your unit, not all of the others. Alternatively, you've got to walk the entire property looking for problems, and hope it's not hidden inside something where there's no way to know it's there. One final way that might spot problems is in looking at the level of association reserves in the condo cert. it takes a good buyer's agent to ferret it out before a sale, and an even better one to tell you about it. Most of this stuff isn't part of basic due diligence, and telling you about it is a noteworthy example of "no good deed goes unpunished," because it's going to mess up the transaction, and most clients will kill the messenger by not working with that agent on their next offer. If you didn't have a buyer's agent, you were all on your own, because that listing agent certainly isn't going to investigate in the first place and get their client angry. There's a reason why Dual Agency is a sucker's game from the buyer's perspective. Well, actually there are hundreds of reasons why dual agency is a sucker's game, but this is one of them.

It appears that you were the owner of record at the time the assessment was made. It may be payable in payments, but the full amount is due from the owner of record as of the day of the assessment. It's an all or nothing thing. It wouldn't matter if you were two days from buying it - the seller would have to pay it in order to deliver clear title, while you would not be obligated, although if the owner didn't pay it and clear the title, it's unlikely the transaction would proceed. If you were two days from selling it, same story. You would have to pay in order to deliver clear title, as required by the purchase contract, and the buyer would have the right to expect that you would do so, and the title company would refuse to insure the property until you did so, so the transaction would not happen without that assessment being paid. If you had bought it the day before the assessment became effective, well, you would have been informed by the condo certification, but it would be attached to you. You owe this money. The fact that you are no longer the owner as of this moment is irrelevant. Nor does default wipe it out, in general.

The homeowner's association has the right to assess the individual owners for needed repairs and maintenance. Indeed, they have a duty to do so in order to preserve the value and marketability of the property. What this person did was pretty darned silly, but done is done and there are no do-overs in real life. The board and owners don't make assessments gratuitously, because they're also assessing themselves, and every last one of them had to pay that $20,500, the same money this guy would have paid. Twice that, if they own two units. I may wonder what caused a large assessment unforseeably, and consider it likely that a good buyer's agent would have caught some deferred maintenance issues, but the cold hard fact is that he owned the property on the date of the assessment, and he therefore owes the association that money. He needs to talk to a lawyer if he wants to get out of it, but I don't know anything except bankruptcy that might do the trick, and that's only likely to reduce the damage, not wipe it out, and bankruptcy on top of a foreclosure is very bad juju for your credit rating and your financial future for several years. It could cost him five times as much as the actual money he'd save by not having to pay off the debt in full.

Caveat Emptor

Original article here

I was looking through some real estate listings and saw one property described as: "Contractor's special, first time buyers and investors. House needs TLC." Does contractor's special mean u better be a contractor if you wanna buy this place?

It means it needs some serious rehab work, but it's priced too high for you to make a profit paying to have it done, so the people they're trying to attract are people who are inexperienced home repair folk who don't realize what their time is worth, and won't realize how much time and money and dirt and sweat and just plain hassle that living with the problem and getting it fixed is going to entail.

In point of fact, it's an uncommon "contractor's special" that isn't overpriced. We're not talking about just carpet and paint here. We're talking some major league repairs. Foundation breaks. Significant settling damage. Plumbing that's broken and leaking water. Mold in the framing (which will usually spread). Wiring that's a fire hazard. The list goes on, but they've all got one thing in common: You're dealing with stuff that adversely influences the habitability of the property. Without those repairs, you're not going to get reasonable enjoyment out of the property. It fails the most essential test of inhabitability for a property: The ability to live the same kind of lifestyle in that property, as the rest of the country does in theirs, and to do so for the foreseeable future.

Martha Stewart notwithstanding, you can live with stained carpet. Whatever you read in Better Homes and Gardens, you can live with spots on your walls, or even holes in the drywall. It's possible to live with both old and ugly, if you get get electricity and hot and cold running water when you need them, and the house isn't falling to pieces around you. You can't really live if every time you plug something in or turn something on, there's a significant chance your property will burn down around your family's ears. You can't live if hot water is leaking out and eroding your foundation support, as well as keeping you from taking hot showers. You're not going to live indefinitely with a foundation break - sooner or later, it'll either rip the house apart or tear it apart.

Many such properties aren't a residence at all, when you really think about it. I'd sooner put your average family of four into a one bedroom apartment than a "contractor's special." Sure you got a low price - on a property you can't use. Kind of like getting a deal on dog vomit. It begs the question not only of why you'd pay for it, but why you'd want dog vomit at all. Me, on those rare occasions when one or another of my four-legged best friends has lost their dinner, I'd willingly pay someone who offered a small amount of money to get rid of it for me.

This kind of property can be an opportunity, IF you really know what you're doing, and IF it's priced correctly so that you can do the work and make a profit, and that includes some significant cash for being the one to deal with it. But it's no coincidence that the serial decorators who line up to replace bad carpet and paint ugly walls give "contractor's specials" a wide berth. The work that needs doing is far too expensive to be "worth it" - at least at the levels "contractor's specials" are usually priced. The most recent one I was in, a four bedroom place not very far from my office, was priced about $20,000 below what would have been appropriate for a turn-key property in the area - and it needed roughly $60,000 worth of work that I saw. For a forty year old 1600 square foot house, with position issues, floor plan issues, and not a single surface in the entire property that presents well. A more appropriate price would have been land less demolition and haul away. Which is about what it's going to go for - once the owners price it somewhere in the appropriate ballpark. Oh, I can fight the battle and often even win a signed purchase contract for the correct amount - but it's a lot more effort than finding someone who at least is willing to admit the realities of the situation up front, and the owner who hasn't faced reality is very likely to find an excuse not to consummate the sale. Sometimes, I'll see if I can get a client the property is appropriate for to make a test offer, just to see if the sellers and their agents are willing to admit the obvious truth. If not, we move on.

What the owners are really hoping for, of course, is someone who only sees only the relatively cheap price, but not the cost, in all senses of the word, of the work that's necessary to have a useful property once they own it. But this kind of cheap is no bargain. I've said it in the past, but Know What Can Be Fixed and What Can't, What's Profitable and What Isn't, which is only one of hundreds of reasons why You need a buyer's agent, whose job is to bring up all of these not so minor concerns that owners and listing agents would rather buyers didn't understand, because it means they get more of that buyer's money.

Caveat Emptor

Original article here

I get occasional questions about the difference between these three kinds of activity. Well, there are subjective parts to the answer, but here are some general guidelines:

A true flipper is looking for a quick turn on the property, usually without much work done to really improve the property. They don't typically keep the property and rent it; they're not willing to accept the work of being a landlord. They make their money off of desperate sellers and getting a very low price for a property. Typically, their profit comes from how far down they can drive a desperate seller.

A fixer is someone who is looking to make a profit by making the property more attractive. By making it more attractive, they are able to sell for more money. There is both an art and a science to fixing, so that you don't spend more than you make. Fixers typically sell when the renovations are done, although many will wait for a full year to gain better tax treatment. They do not typically rent the property out, although they may live in it while it's being renovated.

An investor has the idea of buying and holding for a certain period of time, usually leveraging rent to make the payments, sometimes breaking even, preferably with positive cash flow, usually while eventually hoping to cash in on capital appreciation, but always holding for periods that start at two years and go up from there.

Now I've heard a lot of folks who are really fixers call themselves flippers, but I've never heard a flipper call themselves a fixer. Why? Because the general perception admires flippers more, because they theoretically make money by their wits instead of by the sweat of their brows. It's more status to call yourself a flipper, although why people think it's better to tell people they make their living by shorting people who really have no choice, instead of by actually creating value by improving the properties they purchase, is beyond me. But due to the huge long swell of the last seller's market, many people got addicted to the fact that it enabled people who didn't really know what they were doing to buy properties for too much money, and six months later sell for a profit despite not having done anything to improve the property.

Right now, the local market is able to support flipping again. However, more than one flipper lost their shirt in the downturn. Indeed, I know of a couple of properties out there on the market that went through more than one sale from desperate flipper to optimistic flipper, and then the optimistic flipper gets desperate and sells to another optimist. With those values having stabilized, fixers who know what they're doing are doing well again, although the market has changed how best to make a profit. It's no longer a gamble as to whether fixing will yield a profit after expenses in the usual fixer's time frame, but the margins are both thinner and lower. There are quite a few out there that are suitable, and many more that are not.

Investors pretty much always do well, mostly because they're not subject to time limitations. If market conditions aren't right to sell, they keep the property until market conditions are right. When there are a lot of desperate sellers out there, and so long as investors have got positive cash flow in a sustainable situation, all they've got to do is wait for the market to move in their favor. Until then, they are making money every month. Real investors never turn into desperate sellers, because they always have the option of hanging on to it. It might not be their most preferred option, but it is there.

I love working with fixers. It's a lot more work to find suitable properties right now, but that's fine. And, of course, families who buy for a personal residence in the current market (despite the very frustrating frenzy) will do very well in the longer term.

Caveat Emptor

Original here

I got an ill-mannered complaint email about how an evil loan officer from another company ordered the appraisal without waiting for the inspection to be done, and it turned out there was a minor problem that the seller likely could have had repaired, but this clown chose to walk away, and as a result is griping about having to pay for the appraisal.

First, that appraiser did the work based upon your representation you wanted the property. You signed a purchase contract saying that you were intending to purchase the property. You submitted a mortgage loan application, and as a result of that someone acting on your behalf ordered the appraisal, which has to be done if you're going to get a loan. That appraiser did the work. They are entitled to be paid.

Second, scheduling an appraisal promptly protects you. The longer the entire process takes, the worse the loan you are going to get. If they didn't order the appraisal right away, the loan officer is gambling with your money. But rate locks aren't free, and they are for definite periods of time. The longer a rate lock is, the more you will pay for it. Furthermore, if you go beyond them you're either going to pay a tenth of a point for five days, or a quarter for fifteen (both assessed in full on the first day of extension) or pay worst case rates. The person who ordered the appraisal was acting in good faith to protect your interests based upon the representation that you wanted the property. If you didn't, why did you make an offer and sign the purchase contract and submit a loan application? Speed is important in getting a loan done, and even if in some instances people like you end up paying for an appraisal when they cancel escrow, the people who actually want the property benefit by having everything done right away. Appraisals are around $350. A tenth of a point of $400,000 is $400. A quarter of a point is $1000. Or you can pay a quarter of a point more - $1000 - for a longer rate lock in the first place.

The assumption when you sign that purchase contract and loan application is that you want the property and loan, which means the appraisal has to get done, and you want the lowest rate, which means the shortest practical lock time. People get sued - successfully - for not ordering the appraisal right away. This person was doing exactly their job, and in the best possible way for a buyer who really wants the property.

I have stated before that I will bet money, based upon no additional information, that a loan done in thirty days or less will be a better loan than one that takes sixty or more. Due to all the new regulations and procedures delaying the loan, add thirty days to those numbers but the principle is still valid. Ordering all of the services: inspections, appraisal, disclosures, zone report, etcetera, right away is part of how a good loan officer - and good agents - get a transaction to close fast, on time, and to the loan quoted. For the buyers who carry through on their intention, as evidenced by that signed contract, doing this is the only correct way to do business. Delaying the appraisal until after the inspection adds to the time it takes to get the loan done. In the vast majority of cases, the inspection is going to reveal something you didn't know. Sometimes it's trivial, and sometimes it's major, and all gradations in between. Most people manage to deal with it like mature adults and negotiate something reasonable. I recently negotiated some sellers to pay $20,000 plus to hook up a sewer connection when the septic was shown to be failing, something I had no way to know when I checked out the property. The repairs were made, the deal closed, my clients are in the property and very happy. But this person who wrote me to complain canceled and walked away from something far more minor. How do you think the seller feels about everything they had to pay for, now that this person who said they wanted to buy the property flaked out?

A purchase contract should not be something you enter into lightly, thinking you can get out of it easily if the slightest thing goes wrong. This is part of the reason for buyers agents. They should explain to you that this is a binding contract, and you are agreeing to purchase that property, and in many cases the seller can sue to make you buy the property. A buyer's agent will also spot a lot of problems before you make the offer. Don't think of them as building inspectors; few agents have that license (and I'm not one of them). But there is nothing that says that I can't spot potential issues and bring them up. In the particular case of the person who emailed me this question, it was a trivial issue that I spot and tell my clients about on a regular basis before they make an offer, and as a result, we have dealt with the issue before the contract is agreed to.

Caveat Emptor

Original here

Why doesn't real estate just sell for the asking price instead of having to go thru all the paper work...? Wouldn't it be easier to just put a price on it and sell it for that price? We don't go thru all of that when purchasing cars or anything else. Where did this practice start?

This practice started millennia ago. The practice of buying stuff off the shelf at the marked price is the recent practice. Only when stores started selling so much they couldn't haggle over price was that practice invented. It's easy, but it's not suitable for transactions larger than the utterly routine. If Supermarket A has better prices than Supermarket B, people will tend to drift there over time - unless B has different merchandise A doesn't carry. This is the model for a couple of major chains. But every parcel of real estate is different from every other.

Land is important, it is immovable, they are not making any more, and it is uniquely identifiable by location. It is used as a basis for taxation, and social status. Not too long ago, the vast majority of the population worked by farming land. It's big enough, and expensive enough, to be worth extended negotiations, as even small percentage differences will be a large amount of money by the standards of any other transaction.

Precisely how much land goes with a parcel, and precisely what the boundaries and limitations are, is critically important. Taking just a few square feet away can mean that it cannot be used for a given purpose. Rights of easement are important to everybody served by that easement. Wars have been fought over simply the right to pass over a piece of land. Zoning disclosures are a real issue with at least twenty percent of all properties, as well as any number of other issues about the condition, permitted uses, boundaries, and appurtenances.

Because of its importance, its permanence, and its value, there has been a lot of fraud committed over land, therefore the systems of title and escrow. Misrepresentations and just keeping silent about very salient defects can be worth tens of thousands of dollars, so people do that (or try it) regularly. Add that to the fact that land is taxed by most governments, and you have all the reason needed for public records systems.

Because of its permanent and immovable nature, lenders will loan money secured by land on better terms than anything else. But since a fair number of people over the years have gotten money for land they don't own, or gotten more money for land than it is worth, the lenders have instituted safeguards such as the appraisal, inspection, and lenders title insurance. It still happens, by the way. Just before I wrote this, I looked a a property in a fantastic location, but really old and badly run down. By the market, I'd say it was maybe worth $600,000 - but the owners convinced someone to loan them $1.8 million dollars on it.

Every part of the process has a reason it is there. There is no need for anyone who is not a professional to learn them, but the reason those professionals exist is so that you don't have to know what they know - and that runs true for everyone from the escrow officer to the title officer to the agent, and trying to shortcut the process is a recipe for disaster. Nor is it pure information, in a lot of those cases, but experience and knowledge and judgment acquired over time, and the one that most people misss: how to put it in context. Just ask the people who got burned, and whose cases are the reasons for all that paperwork and hassle you have to go through to buy or sell a property. And people still get burned today. Most often, it's the people who try to shortcut the process to save a few dollars. "You don't need that appraisal! You're paying cash!" "You don't need that inspection! Solid as a rock!" "You don't need an agent! Trust me!"

There are good solid reasons why you don't want to cut any corners, and why you want a professional working for you every step of the way. Proper disclosure will save you from lawsuits most people wouldn't believe. Proper investigation will stop you from walking in to the problem in the first place, or at least get you some serious concessions if you have a good buyer's agent on your side. And if they fail to do their job properly, it gives you the right to go after their insurance and their broker's bond. This is all critically important. Professions such as real estate and all the allied professions exist for your protection, If they fail to protect you from the things they are supposed to guard against, then it is only moral that you be indemnified for that failure.

Caveat Emptor

Original here

One of the things I've heard and read other agents complaining about is that they can't find qualified buyers to represent.

Welcome to Unintended Consequences 101.

The way that the market had been working is this: Young, often unmarried, buyers buy a starter place, usually a condominium of some description. A few years later, once they're married and have a couple kids, they trade up, using their equity for the down payment and (usually) increased income in order to make the payments. They may do this a second time when the kids are teenagers, or when they get another rise in income. This is all simple demographics.

However, we all know that most buyers want to stretch to their maximum, and even a bit beyond, not understanding that there is no magic wand to make borrowing money more affordable. The absolute hardest thing for a buyer's agent who's trying to do their job correctly, is persuading buyers with property lust in their hearts to limit themselves to properties they really can afford. Traditionally, the penalty for failing to do this was a failed transaction, and a ticked off client who had already spent hundreds of dollars on appraisal, inspection etcetera, and quite often, multiple trips to the decorating store planning and a month or more fantasizing about the decorating they're going to do. When that all comes crashing down, it's kind of difficult to hold onto the client.

During the Era of Make Believe Loans, however, the immediate downside disappeared, and by the time people figured out that they couldn't really afford the property, those agents and loan officers were long gone with their commissions, leaving those buyers high and dry. With easy loan qualification, and initial payments way below a sustainable level, there was no immediate need to restrict themselves to selling what a client could afford. Since given one client or set of clients, most agents would rather make more money than less, they sold higher end properties than clients could really afford. The clients, for their part, were happy that there was no apparent need to spend years living in the lesser property, building equity.

However, by skipping over those starter properties, those agents greatly exacerbated their future problems. When the condominiums and other starter properties don't sell, the owners are stuck with them, and they cannot afford a larger, more expensive property until those properties do sell. These folks are the largest single source for buyers of archetypal three and four bedroom detached housing. If you bought a condo for $90,000 and sold it for $200,000, you have roughly $100,000 down payment for a $500,000 home. This lowers the payments from about $3415 (assuming PMI) to $2398, total cost of housing from roughly $4045 per month to $3030, and the income to qualify from $9000 per month to about $6730, a full 25% less, assuming no other debts. Considering the median family income is approximately $5500 per month in San Diego, this makes a major difference to how many people can qualify - far more than a proportional difference. Assuming a standard normal distribution, you're going from about 3.5 standard deviations over area median income to about one and a quarter. This increases the number of people who qualify from 233 in a million to 110,000 in a million (via Hyperstat). Now, you have 470 times as many people in your target group! But in order for this to happen, the condominiums and other starters have to sell.

The temptation is always there for agents want to hunt the big game, but now that the make-believe loans that enabled it are gone, we've got a situation. We've conditioned the public to believe that everyone can afford the property of their dreams, right off, and that's just not the case. This makes it much harder to sell them starter properties that fit within their budget. Their friend John or Jen was able to get that dream property, why can't they? The fact that John and Jen are fighting a losing battle against foreclosure doesn't enter their thought process. The people that already own the starter properties, having bought five or ten years before and gotten to a position where they're ready to move up, can't. Not until the starter sells. This made the crimp in the market far worse.

If condos and other starter properties don't sell, you don't have the usual influx of buyers with a down payment that enables them to afford more expensive properties. When you're essentially putting contact superglue on the bottom-most rung off the property ladder, you can't be too surprised when the higher rungs are vacant. So if you want buyers for higher end properties, and you want your higher end properties to sell, we've got to start going through the demographic "property ladder" of previous years.

Caveat Emptor

Original article here

Whenever I go scouting in public forums, somebody is always asking, "What's the secret? How do you get rich in real estate?" The alternate to this question is "What do you know that I don't?"

These people are sure there's some magic formula for getting rich quick in real estate, but nobody is willing to share. They're a good person, they're a smart person, and in their mind, they deserve to make money as much as the next person. Why won't anyone tell them? No con artists need apply, of course.

The reason nobody except con artists will tell them is that there is no such secret. There are no mystical secrets of the universe that make you an overnight success in real estate or any other field. Like any other investment, it takes money to make money in real estate, and the more money you have and are willing to risk, the more money you can make. Leverage in real estate is a fantastic instrument, but in order to get the lender to loan you money, you have to be able to convince them you can repay it. This takes money, and it takes income. It can also be overdone, as many people have. Even if you win the bet about your property increasing in value, if you cannot make the payments you can bet on losing the whole thing.

Other people are skeptical of the value of real estate agents at all. "What do they know that I don't know?" is the question that I see asked the most, when they don't proceed directly to an assumption that the answer to this question is "Nothing," and from there the bashing begins.

Until somebody hits a real world snag, of course. "My house isn't selling. What do I do?" "A buyer offered me $X. Should I accept?" or "This happened. What do I do now?"

The issues are mostly preventable, and had even a brand new agent with the ink on their license still wet written the contract, chances are good that the potential problem would have been foreseen, and safeguards against it devised. This is, after all, what we're trained for and what we do. If people could learn your job by reading a couple books, nobody would need to pay you for whatever you do - real estate is no different. Well, I know enough about many subjects to know that I can't learn everything I need to know by reading books, and that any pretense otherwise on my part would be foolish pretension. It might be one thing for me to pull my little girl out of a 5 foot deep swimming pool when she gets in over her head. It would be something else again to try an open ocean rescue of a 200 pound adult.

And a financial lifeguard is an entirely apt analogy. It's not that you don't know how to swim, for crying out loud. It's that you got in to a situation beyond your capabilities, beyond your experience, and now that you're there, you can't get yourself out. Unfortunately for those who ignore "no lifeguard" signs in real estate, it's very difficult to go find that lifeguard while the trouble is going on. It's not like you can get a time out, and many times the fact that you are drowning may not be apparent until you breathe in water, months or years later. If there is a agent present the whole time, you can sue their insurance carrier for your losses, but most often, they will prevent the deadly misstep in the first place. Any agent with a lick of sense won't get involved when there's already an existing problem. That's where attorneys come in, and attorneys get much more expensive than the agent in a hurry.

It's not what good agents know, but what they know. Anybody can read the financial press, and it's not too difficult to understand what they're saying. But knowing it and understanding what it really means are two entirely different things. Being able to formulate a plan of action to come out as well as possible is a whole other level beyond that. What good agents understand down deep at a level of calm certainty that nobody with an expertise less than theirs stands a cell phone's chance in an IED of talking them out of, and that is a system of approaching the transaction that debunks the hype, the nonsense, and makes certain that the numbers all work and the traps are all evaded. If you're not willing to pay the agent what it takes, spend a couple of years of your life familiarizing yourself with all of the issues, and you'll still likely fall short, because it's not just book learning, but experience, and even a new agent has a supervisor with a wealth of experience to draw upon. Nor is it just "sticks". There are an awful lot of carrots out there that are very valuable if know when and how to use them, and will cost a lot of money if you do not know when and how not to.

Here is a fact: The vast majority of people who claim they did fine doing a transaction without an agent say things that inform me and everyone else who understands the way things really work that they got taken for tens of thousands of dollars. Most often they say them while attempting to brag about how well they did, when they're really saying something like, "I threw the seller (or buyer) thirty thousand dollars extra because I don't really understand what's going on!" The number of dollars wasted can quite easily amount to a third of the property's actual value - well in excess of $100,000 for middle class homes here in the San Diego area.

There aren't any huge and critical secrets. But there is a wealth of experience and understanding and little tricks that make big differences. People who do not deal with the real estate and mortgage markets every day are unlikely to have this knowledge. Whether you're a computer programmer or any of a thousand other occupations, ask yourself if someone fresh out of college could do your job correctly on the first attempt, even if that's what they spent four years studying it (which you almost certainly have not done for real estate). You know the answer. It doesn't change because you're the one who wants to do someone else's job.

Caveat Emptor

Original here

The phrasing in parallel with Animal Farm is intentional. Sellers need to understand this, and so do buyers, especially in a hot real estate market. Some offers are more equal than others, and knowing how to choose between competing offers on the selling side is critical. On the buyer's side, understanding this and anticipating it so as to make your offer attractive to a seller with a good agent is critical to success in making offers.

Even if they are for the same number of dollars or even for larger amounts, some offers are much less likely to actually consummate than others. If they don't consummate, all that happens for sellers is that they wasted their time, their money, and came up with nothing. Furthermore, once you have a fully negotiated purchase contract, the chances of renegotiating it so the seller gets more money are nil. Most purchase contracts, the seller needs to make concessions due to things discovered to be suboptimal with the property. Sad to say, there are even some very shark-like real estate types that go around making offers with the intention of using every little thing to renegotiate the contract in their favor. They make their offer look superficially attractive and then once they have a purchase contract start demanding concessions right and left.

There are currently three major things likely to prevent a transaction from actually going through. The first is the Home Valuation Code of Conduct sticking the transaction with an appraisal that's lower than the purchase price. I had an appraiser choose two completely trashed lender owned beaters down the hill as comparables ("comps") for my client's beautifully maintained property in a more desirable location, and there wasn't a thing I could do about it even though there were more comparable comps. When this happens, all the issues in When The Appraisal Is Below The Purchase Price for Real Estate come into play. If the loan standards are eighty percent Loan to Value Ratio and the buyer only has 20% to put down, when the appraisal comes in low, the cash isn't there to make it happen and the transaction will fail. In some cases, private mortgage insurance can maybe extend it to ninety percent currently, possibly 95% in some cases, but 100% financing is out of the question for anyone but veterans, and adding private mortgage insurance often means the buyers don't qualify on the issue of debt to income ratio. Most often, if the appraisal comes in low it means that either the transaction is going to fall apart, or there is going to be a mixture of the buyer adding more cash to the deal and the seller lowering the price. If the buyer doesn't have more cash to add to the deal, it doesn't take much predictive ability to see that things are going to boil down to the seller deciding whether they'd rather find another buyer or take less money, and it doesn't take much insight to see that a very limited amount is likely to mean you're better off taking an offer where this isn't an issue.

The second thing likely to prevent a transaction going through is issues with the property. Something is discovered during the buyer's due diligence period that causes them not to want the property, or to not want to pay the originally negotiated price. It could be anything. These issues are always with us. The only way not to be surprised by them is for the seller to be honest with themselves and do their own due diligence beforehand.

The third major deal-killer is buyer inability to qualify for the loan. Either they represented themselves as having more cash than they do, they really don't qualify for this loan on this property, or some miscellaneous loanbuster issue pops up. This is why I insist that every qualification letter I write and every letter I'll counsel my clients to accept be a pre-qualification written for that specific property and that specific offer. A generic "They qualify for $300,000" letter is wasted paper. The person writing that letter must also make specific representations as to why the buyer qualifies on the basis of debt to income ratio, loan to value ratio, credit score, and Cash to Close. For my listing clients, it the offer doesn't do this, I send the buyer back to try again. I tell them what the letter must cover, and I will counsel my clients never to accept an offer that doesn't include this information.

Running an automated underwriting program is easy and popular, but never acceptable for this purpose. Automated underwriting results are only valid if they don't change anything from how it was submitted. Let me tell you something that happened to me not that long ago: I got an automated underwriting accept and priced and locked the loan and sent the file through on that basis. My processor, for reasons beknownst only to them, took it into their head to run automated underwriting through again on precisely the same file and got a lesser acceptance that raised the cost of the loan and cost me most of the money I would have made on that loan, and it could easily have changed to an outright rejection of the loan. This was for a refinance where nothing of consequence changed except for a precise appraisal amount that was still well within guidelines. What do you think is likely to happen when the purchase price changes or the the precise loan amount or any of dozens of other factors changes by a little bit? I never accept automated underwriting results for a purchase offer. Manual underwriting rules, however, are universally good, particularly in the A paper world. If something happens at one lender that causes it to have trouble, somebody else will take it if the manual underwriting standards are met.

I should also stress that sellers live in a world where net proceeds are what is important. If the transaction doesn't close at all, the net proceeds to the seller are negative regardless of what was offered. Even if the transaction closes, an offer for $200,000 requiring them to pay $5000 for seller paid closing costs is in actuality $5300-$5500 less net money to them than an offer with no such requirements. A good buyer's agent is going to make careful consideration of this.

So keeping these in mind, which offer is the most attractive to a seller, assuming the same number of dollars and desirability of the offer?

All cash offers are always going to top this list. If the buyers don't care what lenders think, if they don't need a loan or a loan contingency, don't have to be concerned with loan standards, that eliminates an entire layer of complexity that includes most of the likely reasons why things fall apart. An all cash offer without an appraisal contingency is the Gold Standard. They are saying "The property is worth $X to me - I don't care what an appraiser thinks" They can still be intending to over-negotiate every little thing revealed by the inspection, but there is less to go wrong from a "nothing you can do in the initial contract" standpoint.

The next category on the list is offers where there buyer has significantly more cash than lender standards require for the contemplated loan type, particularly if they're planning to use it for the down payment anyway. This means that the buyer has the option of continuing the transaction even if the appraisal comes in low. Since all the incentives right now are for appraisers to come in low on the appraisal, this is happening a lot right now and there is nothing anyone can do about it except repeal those ridiculous appraisal standards. If the buyer has more cash, when the appraisal comes in lower than the purchase price the viability of the transaction doesn't depend upon the seller deciding whether to take less money or put the property back on the market. If the buyer has more cash than absolutely necessary, the parties can meet in the middle rather than the seller being the only one with room to give. Conventional financing purchase offers of thirty percent cash or more and VA loans where the buyer is putting down cash even though they don't have to fall into this category, and even FHA loans where there is a cash cushion. I always want to address the question of "How low would the appraisal have to come in before this transaction has difficulty because of it?" Offers where the buyer has this cash cushion means that if the appraisal comes in slightly low, it isn't just the seller deciding whether to take less or put it back on the market.

I would rather have conventional financing than government. Government involvement puts a bottleneck, or single point of failure on the transaction - if the government won't put their seal of approval on it, we're done. It also takes longer. That said, I need to say that both VA and FHA are unfairly tarred in many agent minds because until a few years ago they were costly bureaucratic nightmares for the seller. The bureaucratic issue has largely changed, but it is still an issue even if it is a much smaller one, and a VA loan in particular does not permit a buyer to pay a lot of very real and necessary costs, so the VA loan needs to be for a higher number of dollars to break even on this point with conventional ones.

If a buyer wants a government loan but can go conventional, that will delay the transaction if they start out government but need to change to conventional, but it should still close. There is a fallback position. This is a critical difference and makes such an offer superior to one where they have no choice but a government loan, particularly some special or limited funding government program like the mortgage credit certificate or locally administered first time buyer programs, both of which are limited budget and usually run out almost immediately upon receiving a new funding allocation.

Both when writing an offer and evaluating one, I always want to address the question of what circumstances or combination of circumstances could cause this to fall apart. As a buyer's agent, I want to show the listing agent that my client wants the property and I have considered how to get around potential failure points. As a listing agent, I have a fiduciary responsibility to help my clients evaluate offers and make an informed choice on which offer to accept based in part upon likely failure points. Comparatively few agents meet that responsibility (one reason we've got such extreme transaction fall out now) but the good ones are all among them. A good listing agent is always looking for evidence in an offer that the buyer's agents have considered possible failure points and how to get past them.

Waiving the appraisal contingency is always an argument in favor of an offer. It can be symbolic, but it says "The property is worth $X to me, and I'm willing to pay that whether or not the appraiser agrees". Nonetheless, if there is a loan contingency attached to such an offer it's not an unlimited blank check. If the appraisal comes in lower than the difference the buyer can cover, the transaction is still going to fall apart. If the buyer has no extra cash, waiving the appraisal contingency accomplishes nothing. But a prospective buyer having $10,000 extra cash and no appraisal contingency should be something that is very valuable to well informed listing agents and their clients.

What if your offer is less desirable in these terms, quite likely because you have no choice? Well then you need to offer more money to sweeten the deal and give the sellers a reason to choose your offer over any others. When I'm acting as a buyer's agent, I always discuss how much competition we're likely to see from other offers if my buyers like a property. It's not a perfect science, and I never trust a listing agent telling me how many other offers they have (Unless the answer is "none") or for what dollar amount, but it's like gravity: if you don't take it into account, you're certainly not going to get where you want to go - a successful purchase.

Caveat Emptor

Original article here