Buying and Selling: February 2019 Archives

I am buying a house. I signed the contract but the seller said contingent to sell until she buys new house?

Is that normal?

People do it. It's smarter to avoid the stress and complications of dealing with both at once, but there's nothing wrong with a contingency sale, so long as you agreed to it in the contract. Note that once you have a fully negotiated contract, you can't just add a contingency to it. It has to be agreed to before there's a valid purchase contract, and if it isn't agreed to before then, the question becomes, "What concessions is the other side going to demand for this?" There will always be concessions, but by waiting to negotiate them after the contract is complete, you lay yourself open to a suit for specific performance. You agreed to that contract. Just because you forgot something important (or if you intentionally omitted it), does not mean you can just tack it on as an extra consideration, any more than the other side can unilaterally change the purchase price by $10,000.

Contingency does add a lot of complexity and not an inconsiderable amount of cost and uncertainty to the process, however. The buyer shouldn't lock their loan until they know when you can fund it, and if they don't know yet, this means the loan sits and sits, perhaps increasing in rate and cost. If you lock it, it definitely increases in rate and cost - the longer the lock, the more expensive it is. This is an exception to the rules for when to lock the loan. There's also the issue of whether your seller will qualify for the loan on the new residence, or the purchasers of your buyer's soon to be former residence can qualify for their loan. Not to mention the anxiety of whether you will qualify for your loan in time for the transaction to close so they can get their home, and I can go on.

There are better alternatives for this situation, and if your agent didn't give you a couple of ideas during the negotiating process, well, let's just say there are better ways to handle it, especially right now when you cannot afford to irritate or lose any buyers.

A contingency sale is most often for the convenience of the seller. Whereas this it doesn't make a lot of difference in a seller's market where as soon as you put the sign in the yard you get three offers, a buyer's market is something else again. By being unwilling to accommodate a particular buyer, you may not get another offer. I understand very well not wanting to move twice, but the person who is willing to work a little harder or go through some extra inconvenience usually gets it returned in the form of cash when the transaction is over. How much is dependent upon the competition of the moment. It can make your property a lot more attractive, and mean a significant difference on the sale price, if you're willing to cooperate with the prospective buyer on not making them wait while you find a new property to buy. In a market like today's, where buyers have all the power, it can make the difference between selling for a good price and not selling at all. Any time you find yourself unwilling to do something that one prospective buyer wants, you run a high risk that you won't get another, or won't get another as good.

Some buyers want contingent sales as well to allow them to sell their current property. This is even harder to accommodate than on the seller side, because there's no way to tell when they are going to actually sell it. If they're not marketing it right, they won't get any offers. Even if they do get an offer, what happens if the one they choose can't actually consummate the deal? Or if the only offer they get isn't nearly good enough to allow them to close the deal they have going with you?

Just as being willing to work with a buyer without demanding a contingency will often mean selling more quickly and for a better price, a willingness to grant a buyer their contingency can also make money. You can ask for a larger deposit, a higher sales price, or for the right to continue to market the property - so you've got this offer, or a better one if that comes along, as they are not likely to be able to perform when you drop that Notice to Perform on them because you now have a better offer. If they could have performed, they would have already performed. If they really need that contingency, they've got to deal with the same market you're dealing with!

When there is a strong buyer's market, if you are willing to do what it takes, you are competing more strongly for the available buyers. Similarly, if you as a buyer have fewer needs that you ask the seller to cooperate with, chances are excellent that you will get a better price. Remember that there is a reason why he who has the gold makes the rules - because he's going to be shelling a good amount of it out in order to get his way on other things. If you want the best price as a buyer or seller, be willing to forego contingencies. However, being willing to work with someone in a contingency situation can mean thousands to tens of thousands in your pocket.

Caveat Emptor

Original here

I am seeking to sell my properties to my tenants. I want to create a mortgage and then sell the mortgages. Properties are undervalued in this area as they have been historically fixer-uppers. Ours are in very good condition due to major renovations. This would interfere with a regular mortgage, but temporarily holding one might eliminate this problem. Is there a way to do this or is this not possible?

The first question one would ask is why you would want to do this. The answer, easily enough, is that this way you aren't chained to lender requirements as far as the appraisal goes, so you can sell the property for more. When you've got a property above the neighborhood in quality, it's very hard to get an appraisal for as much as you might be able to get at top dollar. Why? Because there's nothing else in the area as good. This phenomenon has a name: Misplaced improvements. Over on my other site, I've spotlighted several of these. They are not good investments, but they are an excellent way for buyers to get a significantly better home for not much more in the way of purchase price. If you've got a beautiful 5 bedroom home with 3000 square feet and all the amenities, and nothing else in the neighborhood is over 1500 square feet, and kind of run down at that, they are still your comparables (comps). If I understand the rules correctly, the appraisal can only be a maximum of 25% over the comps. So if everything else in the neighborhood is selling for a maximum of $400,000, this one can't appraise for more than $500,000, even if it might be worth $800,000 in a neighborhood of like properties. Best property in a neighborhood: Bad investment (relative to other properties), but a good way to find a great home for your family to live in at a bargain price.

Furthermore, you're offering something useful to buyers, and so have good prospects of getting a higher price than you would otherwise. This is a potential benefit to buyers, that they can get approved for this loan where they couldn't get approved for loans they couldn't be approved for otherwise. There's a good reason for this: They can't afford it.

So this person wants to get around that, and has an idea as to how. Forget lender standards, he'll just make the loan himself. Well, he is permitted to do this. Willing buyer and a willing seller agree upon the price, and since a regulated lender isn't involved to force the evaluation into a LCM, or "lesser of cost or market" format, the appraisal becomes irrelevant. Buyer and seller agree upon a price, and part of the transaction is that the seller carries the note.

The first issue is the "due on sale" clause of most mortgages. So if you sell the property in this manner, any mortgages you have become due when you sell the property. No problem if you own it free and clear, or if you've got the cash to pay it off somewhere. A large problem if you don't. It is possible that some lenders may allow the loan to be assumed, and to put the loan you are actually holding behind their mortgage as a second trust deed. You then have justification for charging a higher rate of interest on the portion you actually hold. Cool, from the seller's point of view. Not so hot from the buyer's point of view. Remember, they've got to actually make those payments. Some lenders may also agree to modify their trust deeds so that you're still holding them, but they become "pass-through" type investments. Expect the lender to require a modification that raises the interest rate in this instance.

Let's ask the next question: Why would the tenant want to pay more than the area is worth? Well, I wouldn't, but it does happen. There are "Rent to Own" appliance stores everywhere, and PT Barnum underestimated by several orders of magnitude. Many people think that for some unguessable reason that they are not qualified to buy a property, or that they are less qualified than they are, and many loan officers and real estate sharks prey upon this sort of buyer. It is for this reason among many others that I counsel everybody to shop their loan around and find a good buyer's agent, who should inform you as to the issues involved and represent your interests, so that if you end up doing it, you walk in forewarned and forearmed, and have someone with a fiduciary responsibility to you and only to you that you can and should sue if they don't. Because buying under these conditions is not likely to be in the buyer's best interests in the kind of situation envisioned by this seller. The buyer ends up owing more than the property is worth according to a lender, making it difficult to refinance, even if general values have increased. I would certainly want some major concessions in price or interest rate in order to consummate the loan. Note that it isn't wrong of the seller to do this as long as you do not misrepresent the situation; everyone wants the best possible bargain and both sides are entitled to pursue that best possible bargain, and sometimes, one side does a much better job than the other.

Let's assume that all of the above has been done. Willing buyer, willing seller, price agreed, exchange made and transaction done. We are going forward to the seller wanting to sell the note. Can they expect to be able to sell?

The answer is that yes, the holders of the notes can sell, but in my estimation they would be better off not doing so, other factors being equal. You see, all of the other lenders out there selling their notes have a track record. Even lenders just starting out can document their underwriting standards. Furthermore, CMOs and MBSs are normally sold in lots of $50 million or more - in other words, pretty good risk diversification, as that is at least 100 different loans from 100 different borrowers in 100 different areas at a whack, and the chance of that lender taking a net loss is far less than if there are only ten or twelve. Furthermore, as most lenders can document their risk management practices, and the ones who have been at it for a while have a track record of thus and such a foreclosure rate, and thus and such a loss write-off rate, they get a price for their notes that is commensurate with the value. In most cases, pretty darned good, netting three or four percent over value after paying the security brokerages who act as go-betweens. Do this six or ten times per year, you make some pretty decent money even after paying for everything it takes to do those loans.

In the case under consideration, however, those security brokerages are going to charge about the same amount as they charge on much larger issues. After all, they have to do basically the same work, so they want the same pay. Furthermore, you're going to have some real trouble convincing prospective buyers that your risk management underwriting is acceptable, as you are missing at least one of the most basic protections for lenders that there is: the assurance that if everything goes south, they will be able to market the properties for something approximating their investment. This goes back to that missing appraisal. Lenders are going to require that you perform an appraisal in order to sell the loan to them, and since the appraisal will come back with the same value that you were trying to ignore in the first place, and the price they will offer for the loan will reflect that, and they will offer far less for those notes than you have at risk. All of them are in the same area, and all of them have the same issues. A lot less diversification of risk than what they normally see, and with other issues as opposed to loans underwritten by regulated lenders, as well.

If you can sell enough properties in one area, the comparables will start to reflect these values, for which neighboring properties will certainly thank you, but the real point is that after a few of these sales, both in the MLS and publicly recorded in a short period of time, your appraiser can start to get value, at which point regular lenders start being willing to sign off on them, if you've got a good appraiser who can justify choosing the comparables that they did. If you're selling out a sixteen unit condominium conversion, most of them should be "model matches," but if they are all single family residences of varying floor plan and not particularly close to one another, there are likely to be persistently difficult issues with appraisals.

The upshot is that in most cases, when you go to sell the note, you are going to take the same "loss" (of value), if not more, than you otherwise would have "suffered" by simply putting the property up for sale at prices that the neighborhood comparables would support, and letting the lender's chips fall where they may. Don't get me wrong; if you're in a position to hold the notes yourself it could be a great way to make some money, although you've got to watch out for foreclosure issues. But if you're planning to sell the notes, you're going to have to go through the same rigmarole that the regulated lenders do, and come out much the worse for the fact that you did not go through the same process that they would. As a final note, this has a lot in common with a couple of scams I've read about, and Wall Street is certainly a lot sharper than I am on that score. Just because you're being honest does not mean that the flinty-eyed people who invest other people's money for a living are going to believe you're honest, especially when what you're doing looks like a known scam to them. Oh, you'll be able to sell the notes, of that I have no doubt. But I sincerely doubt that you'll be able to sell them at face value or anything like it.

Caveat Emptor

Original here

A while ago, I got a call from a hard money lender, asking what I could to to "rescue" one of his clients by refinancing. He was being about as altruistic as a drowning man. What he really wanted was for me to get someone else (i.e. another lender) to voluntarily hold the bag on his money losing loan.

Unfortunately, this guy already had a Notice of Default filed on that loan. When it comes to new loans, subprime lenders would formerly sign off on 30, 60, and 90 day lates - but drop a notice of default on the property and even during the Era of Make Believe Loans the worst subprime lenders wouldn't touch it any more. Had he just held off on the Notice of Default - or even called me earlier, I could have taken care of it. Nonetheless, I have a method of dealing with even Notices of Default - "hard money" lenders. Unfortunately, the one undeniable requirement for "rescuing" someone in this situation currently is a Loan to Value Ratio below 70 percent. The current lender had a loan amount about $350,000, and represented it to me as a $550,000 plus property. Therefore, initial indications were that it could be worked with, and we set up a meeting with the owners.

At that meeting, I found out the address and characteristics of that property. That wasn't a $500,000 property. In fact, it might have been worth $370,000, absolute maximum, in the market at that time. Three words about the likelihood of any new loan: Absolutely none whatsoever. A paper, Alt A and A minus are certainly not going to touch that loan - even if the Default were to suddenly vanish, the effects on the credit score would have driven the borrowers below their minimums. Even with the ability to document enough income, subprime isn't going to touch a defaulting borrower at 95 percent loan to value ratio in the current market - and that's without rolling one penny of costs or penalty into the new loan. That leaves only other hard money lenders, and if there's one great constant about hard money, it's that they absolutely will not go over 75% loan to value ratio, ever. In fact, their limits are usually 65 to 70.

These folks could not refinance with any lender out there. They can't afford their mortgage - no way. Even had they protested to the contrary (they didn't), they wouldn't have been in foreclosure if they could have come up with the money. Unless they've got a wealthy relative who will save them, they're going to lose the property, and if they had that kind of benefactor, why hasn't he appeared before now? The only mystery about the entire situation is the precise mechanism whereby they're going to lose the property, and precisely how badly they will be hurt.

Now from some of the code phrases that the hard money lender they're already with dropped, I am pretty sure he knows this - he's just hoping for another sucker to volunteer to take his loss by refinancing his loan out. Well, I'm not going to knowingly commit that sort of blunder. Nobody sane is. Do you think even the stupidest brokers haven't figured out they're going to be liable for bad loans by now?

HVCC and other disastrous regulation imposed from without (I'm looking at you, Barney Frank) made market recovery much more difficult.

But when I asked him about waiting, he represented that "I need my money now." Well, that's fine and that is his right. However, if he needs it now, he's not going to get all of it. What he was really trying to do of course, is build a path of least resistance where I hose myself, the new lender, and the owner so that he can walk away with every penny that's technically "his." Like any sane loan officer, I'm going to decline to do that - the money I might make no in no way compensates for what's going to happen later. Questions of ethics and whether the loan should have been made in the first place aside, he willingly undertook that risk when he made that loan, and he was richly rewarded for doing so by an interest rate well into double digits. Even the stock market doesn't return that kind of money over time, and it definitely doesn't do so without risk. But evidently nobody covered that with him in "Loan sharking 101."

So when I did the logical thing and started talking to the owners about minimizing damage, he freaked out. He said I'd lured him there "under false pretenses," and that was before I had said one word about short sales. Nothing could be further from the truth; he was the one who led me to believe the situation was other than it was, and everything I had said was explicitly predicated upon the representations he made to me over the phone. But he saw his carefully constructed scenario collapsing in front of his eyes, and he didn't want to accept that collapse. Unfortunately, the consumers involved were Spanish speakers, and he spoke much better Spanish than I do. I've written about sharks marketing to a given ethnic group in the past, and this appears to be a prime example. He hustled them out of the room, no doubt intending to look for some other sucker. Unfortunately for him but fortunately for everyone else, the loan officers who were willing to do that in my area have long since been forced out of business, and even the ones who may have gotten away with it in the past are not eager to take new chances in this environment, and I think that's a very good thing.

For several years, the real estate and loan market was not much short of an ATM feeding cash out as quickly as it could. That has now changed. Instead of way too loose, loan standards have become way too tight as investors in full panic mode abandon all but the most perfect of borrowers. Many people who became used to the way the market was working in the last few years still don't understand that it has changed, why it has changed, and why it's not going back to the way things were the last several years. They're still in denial that, having bought all the rope necessary to hang themselves, they're now struggling with that rope around their necks some distance above the ground. It doesn't much matter if that distance is half an inch or several miles - they're in just as much trouble in either case.

The sooner you get out of denial and accept the damage that has already been done, the sooner you will be able to limit future damage - and the damage does keep getting worse, There are alternatives that don't hurt as bad as foreclosure. Furthermore, there are those out there who will claim they can perform miracles, but they are almost always setting you up for a scam.

Here's the bottom line: If you don't make enough money to make your payments and pay your real cost of interest, the best thing that can be said for you is that you're circling the drain. But if you'll make up your mind to get it over with, and deal with the situation based upon the facts, you'll come out with less long term damage. Not to mention more life still in front of you than would be the case otherwise. There really aren't any good reasons not to get past an unsustainable situation as fast as you can.

Caveat Emptor

Original Article here

This is a nationwide program for first time home buyers that helps them qualify for the loan by saving them even more money on their tax bill. With that said, however, the state of California accounts for more than 50 percent of all MCC Certificates.

Each individual area has its own administrator. Within the County of San Diego, for instance, there are three individual programs, although one company administers two of them. You must submit your paperwork to the correct authority, under the correct program. Each program has its own allocation of money, and if you submit to the wrong program, the application will not be approved, wasting your money.

Now, before I go through all the rigamarole of the program, what does it do for you? Simply put, it boosts the value of the mortgage interest deduction.

Here's how it works. During the escrow period, the time between the purchase contract being agreed to and the consummation of the transaction, you apply for a Mortgage Credit Certificate (MCC) through the originating lender. This means the people who take the loan application. This program is emphatically open to loan brokers. If the broker participates, it does not matter whether the funding lender participates, because it is not required that the funding lender participate, only that the originating lender participate. There is a nonrefundable upfront fee involved. This fee is paid to the authority administering the program. Some brokers may front this money on your behalf, but they will expect to be paid back several times over upon funding. Remember: There is no such thing as a free lunch. Your lender submits the application and the fee, and receives an approval from the authority on your behalf. This approval is good for up to 120 days, and in most cases, it may be transferred to another property if this escrow falls apart (albeit with conditions).

What does it actually do for you? It converts part of your mortgage interest tax deduction into a direct tax credit. 20% of your mortgage interest, to be precise. This applies to both first and second mortgages on which interest is being paid and payments are being made. It does not apply, however, to first time buyer assistance loans on which there are no payments, or only nominal payments.

Let's do some math! Let's say you're buying a property for $400,000, using 100% financing (This was valid and common at the time I originally wrote this, and likely will be again, but it isn't available right now). Of that, $320,000 is a first mortgage at 6%, and $80,000 is a second mortgage at 10%. Let us examine the situation you should be familiar with, the normal mortgage interest deduction, first. This is the situation without MCC:

You also have property taxes of $5000 per year (California rule of thumb. Yours may vary), which are deductible. Total: $32,200. The amount over this is deducted from your income before computing tax. The net benefit to you is based upon what exceeds the standard deduction you'd get anyway. For married couples, this was $11,600 in 2011. $32,200- $11,600 = $20,600, at a 28% tax bracket, sees a net benefit of $5768. This shaves $480 per month off of your federal tax bill.

Now let's look at the situation with MCC:

So you get a $21760 deduction and a direct tax credit of $5440. Your deductions total $26,760 with property taxes, using the same numbers from the first scenario. Less $11,600, your real deduction is $15,160, times 28% tax bracket is $4244.80. That's the reduction you see on your taxes due to the deduction. You'll also see a tax reduction due to the credit of another $5440, for a total of $9684.80 tax benefit, or $807.06 per month. That's over sixty percent more you save off of your federal taxes. What's more, is because the credit is a known number, not subject to alteration as to your deduction status or other tax situation, it can be used to help you qualify for the loan, increasing the loan you qualify for. That $5440 credit works out to $453.33 per month that can be used to help you qualify for the loan.

When I first took the training, I thought I'd have some interesting arguments with nonparticipating lender underwriters, but that has worked out not to be the case. Why? Because the money runs out so damned quickly. There are fresh allocations twice per year, and it's usually gone within thirty days at most. When the budgeted money is gone, there are no Mortgage Credit Certificates available. Oh, there is usually plenty of money for the very lowest income bracket but basically nobody in that bracket is actually able to buy a qualifying property. When a single mom who can barely afford a condo is in the "Middle income" bracket for which the money is gone two weeks after the allocation is received, how much sense does it make to reserve roughly half the money for a "low income" bracket that can't afford a damned thing?

Participation in this program is not universal. There are fees to be paid, and some cities can't or won't. Many entire states do not participate. In other cities, there is no qualifying housing. For instance, within the county of San Diego, the City of La Mesa was not participating when I first took the training, although they have since returned to the program. The Cities of Del Mar and Solana Beach also do not participate, due to the complete lack of qualifying housing within those two cities.

There are basically three qualifications, in addition to submitting your request to the correct regional program and buying a property in a participating area. First, you cannot make more than the appropriate income limits. In San Diego County in 2014, this is currently $80,600 per year for a household of one or two persons, $92,690 for a household of 3 or more persons. Qualifying income adjusts annually. Second, MCC is valid for owner occupied dwellings only. You must occupy the home, or intend to occupy it as soon as the purchase is finalized, and then you must actually occupy it. Therefore, only single family occupancy properties are eligible; no duplexes, apartment buildings, or other properties with more than one living unit. Condominiums are fine, as are manufactured homes on owned land, as these are both single family dwellings. If you move out, you will lose the benefits of this MCC. As a side note, any tenants displaced by this program are entitled to compensation from the program, so if the current owner is renting to someone other than the prospective buyers, expect the application to be refused. It must be vacant, owner occupied, or rented by the prospective purchasers. Third, and finally, the property must be within the maximum limits for size of the purchase. In San Diego County, these limits are currently $643,847 for a resale property, $643,847 for a newly built property being sold by a developer. In some "targeted" census tracts, specifically designated due to their low income, the qualifying limits for the purchase are higher: Currently $786,924 for resale, $786,924 for brand new properties. About these census tracts, more very soon.

Now, what is a first time buyer for purposes of this program? A buyer qualifies if they have not owned their primary residence for three years or more. This is proven via federal income tax returns. You may own another property off far away somewhere else, too far away from your job to commute, at least according to the interpretations I heard.

There is a way for people who are not first time home buyers under this definition to take advantage of this program. Remember those "targeted" census tracts I talked about two paragraphs ago? If you buy in one of those "targeted" census tracts, it does not matter if you're a first time home buyer or not. As long as you meet the other criteria, most particularly including owner occupancy, you are eligible. These targeted tracts change with every decennial census. We're in the middle of such a period now, so no changes are anticipated soon, but they do change from time to time.

Now, there are some financing limitations on this program. It is aimed at people who really can afford the loans they are getting, and so these loans must be done full documentation. Stated income loans or NINA/No Ratio loans are not eligible. In other words, you must prove you make enough money to justify the loan. Furthermore, the emphasis is on being able to afford the loan. Negative amortization loans are not allowed with this program, nor are ARMs or hybrid ARMs with an initial fixed period of less than three years. Interest only loans are allowed, but they must be both fixed rate and interest only for at least five years. Finally, because the money comes from the same place as the CalHFA and Cal-Vet loan, it cannot be done in conjunction with those loans. I think MCC is a better program for the vast majority of buyers anyway. For instance, the MCC can be layered with a local purchase assistance program, which those cannot.

There are two major flies in the ointment. The first is refinancing. The MCC dies when you refinance, unless you get it reissued. This involves another fee, and getting an RMCC (for Reissued Mortgage Credit Certificate), and doing so within a deadline. There are no income restrictions once you have the MCC on getting an RMCC, but if your property has ballooned in value 200% and you do a "cash-out" refinance, the RMCC will apply only to that portion of your loan that relates to your original loan amount.

The second fly is the possibility of paying recapture taxes. This program was originally established under President Reagan, and people were selling the properties for high profit in short time frames. This caused it to be de-funded, as it was painted as causing windfall profits. But it proved popular enough that they brought it back, albeit with the recapture provisions. If you actually sell, as opposed to merely moving out and renting, within nine years of purchase, there's a formula for whether you'll have to pay taxes on the gain or not. But the maximum possible tax is half the gain, and the money they get helps them keep the program going. It has to do with how much your income was versus the guideline you qualified under, plus a yearly five percent adjustment for inflation and people earning more later in life. This is based upon the maximum qualifying income guideline, not what you actually made when you qualifies. Furthermore, it is waived in cases of death or divorce. In general, avoid selling in years you get a major windfall. It is to be noted that the competing programs have this recapture feature as well.

When you weigh the advantages of the MCC against those of the competing programs, as well as against doing without such a thing, the value of this program to the middle income home buyer becomes clear. Indeed, this national program is probably the broadest brush, easiest to obtain home buyer assistance program there is. Funding is not unlimited to say the least, and here locally runs out almost immediately. Furthermore, a lot of lenders seem to sign up to lure first time home buyers in, and then direct them to loans that are not eligible for MCC; this is a major part of what motivated me to undertake the training myself. Furthermore, it's not free. But if you fulfill the requirements, the payoff is enormously better, at a cheaper price, than anything else of which I am aware.

Caveat Emptor

Original here

Somebody sent me this story via e-mail: Feeling Misled on Home Price, Buyers Sue Agent

Marty Ummel feels she paid too much for her house. So do millions of other people who bought at the peak of the housing boom.

Knowing only this, I would have no sympathy. This is part of the risk you undertake with any investment - that it may decline in value. There are no guarantees that any investment is a good one. I worked hard to inform potential buyer clients about the state of the market when it was in the danger zone, and it cost me a lot of money. Quarter million dollars, absolute minimum. Most of them just went over to other agents who pretended that we could continue to gain 20 percent plus per year indefinitely, or were too ignorant to know better. Not precisely the most ringing endorsement possible, but it was hard to get people to hold off when the market was going crazy. Fear and Greed.

The situation when I originally wrote this article was 180 degrees reversed from that - the best buying opportunity in at least fifteen years, and probably the best we'll ever have from this point forward. I did everything except promise free beer to try and get buyers off the sidelines when it was in their favor, but most people look back at what the market has done recently, not where it is going. Fear and Greed has another side.

Getting back to the subject at hand, however, here's the deadly piece of information:

Ms. Ummel claims that the agent hid the information that similar homes in the neighborhood were selling for less because he feared she would back out and he would lose his $30,000 commission.

The question I want to ask is did the buyer's agent actively hide it or was he unaware of it? Not that being unaware is any excuse. If you have a fiduciary duty to someone who's buying a property, how can you not check out what sales there have been in the immediate area in the last few months, at least on MLS? This was a million dollar property, for crying out loud, but it would apply just as strongly to a "cheap" condo. If you're not willing to do the work, you shouldn't take the client. If you're never willing to do the work, why are you in the business?

If the agent was aware of these sales but actively hid them, that leaves the realm of negligence and into the realm of active malfeasance. He deserves to lose his license as well as the case, and this would be the wedge that might do it.

Now we get to the crux of the matter:

"We have seen so much misrepresentation over the last five years," he said. "So I appreciate where these buyers might be coming from: 'I'm a lowly consumer, you're certified by the state of California, you didn't do X, you didn't do Y, and I got hurt.' "

This is exactly what an agent is agreeing to when they accept the task of agency, real estate or otherwise. This isn't some pick-up game of softball where you pick your friends. Buyer or seller, you're not just picking someone who's going to get a check for thousands of dollars. If that were the case, real estate agency would have died by now. You're picking someone whom you believe is both capable of everything necessary to guard your interests, and willing to speak up even though it may cost them a commission. I get at least one e-email a week complaining about what a rotten job one agent or another did. When I respond back and ask them how and why they chose that agent, the response is always something along the lines of, "I met him and thought he was a good guy."

This isn't about who you're going to have a good time with at the football game this afternoon, which that means of choosing might suffice for. You're not choosing a date for the ball, you're picking an alleged professional who's supposed to competently guard your interests on a transaction that's probably several years worth of your earnings. Whether you pay for the property with cash or with a loan, it's still the same number of dollars, and you're still going to have to pay that loan off if something goes wrong. Treat buying real estate like what it is: putting enough money on the line to quite literally beggar you for life if you make a mistake.

I wrote an article a while ago titled Which Makes More Difference - Buyer's Agent or Listing Agent? The answer was and is resoundingly that a buyer's agent makes more difference. Yet many people who would never pick a listing agent in such a casual manner will choose somebody they meet at an open house or go without representation, trusting the listing agent to look after their interests. But the listing agent has a contractual obligation to get the seller the highest possible price - not to negotiate it as low as possible. If something is in the seller's interest but against yours, you can bet the seller's interests are going to win. It's a win for listing agents if the buyer doesn't have an agent of their own - for perhaps an hour of extra work, they get paid double, and without taking on any new liability if they're even moderately intelligent.

Picking someone you meet at an open house is nearly as bad. HELLO! Earth to prospective buyer! They're a LISTING AGENT with a contractual obligation on behalf of that seller and who knows how many others. If they're not trying their best to sell you that property, they're violating their contract with the seller - but you want an agent who's not only going to tell you about the problems, but also about what it really means to you. There is an irreconcilable conflict of interest there. A good - by which I mean competent as well as ethical - agent will not put themselves or their clients into that kind of situation. I write it into every contract that I will not represent both sides in the same transaction, and make it clear to prospective listings exactly where the line is. If I bring someone I've contracted to represent as a buyer to one of my own listings, I am breaking that fiduciary duty to one or the other of them - perhaps both. It's one thing if someone calls me out of the blue asking to see a property I have listed. It's my job to show the property. It's something completely different to bring someone I already have a buyer's representation agreement with to that listing with an eye towards possibly buying. The same objection applies if I try and get that prospective buyer who called out of the blue to agree to let me represent them in buying. Who gets less than my best efforts, and is that something you want as a consumer with hundreds of thousands of dollars on the line? That's what you're volunteering for when you pick a buyer's agent in either one of these fashions.

It goes back to the illusion of comity. Agents are salespersons, and it's much easier to get a sale, and particularly a better price, if you pretend everybody here is everybody else's friend. In fact, that's pretty much the only way to make Dual Agency appear even vaguely palatable. Give someone an obvious path of least resistance. But let's consider the nature of the item at issue: A middle of the line detached single family residence is $500,000. How many people would you trust not to try to finagle an extra 2%, when it means they make an extra $10,000 - two months gross wages - whether they are buyer or seller? To very politely and non-confrontationally slip away with an extra ten percent that means $50,000? I've seen people finagled out of forty percent of the purchase price by a sharp or lucky listing agent, and they never did figure it out. I went out and interviewed a few on purpose not too long ago on the subject of their recent purchases. Whether out of ego defense or just sheer ignorance, every single one of them was very happy with the purchase, and they told me they would do the same thing again.

Agents fall into the trap of "go along to get along" as well. It's one thing to be collegial. Two boxers each out to pummel the other into senselessness can be polite. The formality of the old code duello, governing two gentlemen so angry at each other that they're going to shed blood to settle the matter, was faultlessly polite. Often, though, agents go too far and get into you scratch my back and I'll scratch yours mode "You don't beat me up with your buyer, I don't beat you up with mine, and only the buyers get hosed, which we'll make good when they want to sell it with a whole new set of suckers buyers." The whole thing turns into a repeating cycle of suckers who don't know any better.

Well pardon me for not believing that just because you were taken advantage of in the purchase of the property does not entitle you to take advantage of someone else when you sell. Two wrongs still don't make a right, and they never have. The property is only worth what a buyer is willing to pay - if you don't like what is offered, you need to persuade me and them it's worth more - and to do that, you have to risk that I will persuade you it's worth less, because that's what negotiation is. Neither side gets to bully the other, and there are always other properties on the market. The other alternative for the seller is to find a buyer willing to offer more, which brings us back to the illusion of comity again. In this market, that's the real trick, isn't it? It's no coincidence that people find out about issues like this primarily during buyer's markets. When fear and greed are driving prices crazy, a bigger fool is very likely to materialize. When it takes something on the order of a divine command to get someone to be willing to buy, those who are willing to buy have thing much more to their liking.

To give the mass media credit where credit is due, they have managed to cover the basic point that listing agents represent sellers, and have a responsibility to the sellers, not the buyers. Thirty years ago, it's my understanding that Dual Agency was far more common, and the illusion of comity less likely to be dispelled, where now, roughly two-thirds of all transactions at least do have a buyer's agent involved.

But what if that buyer's agent doesn't understand the difference between comity and collegiality? That seems to be the most likely explanation for the situation illustrated in the NY Times article I linked at the beginning of this piece. To be fair, many agents on the listing side suffer this fault as well. The illusion seems to be essentially that as long as we keep it all in the family, nothing will go wrong. Furthermore, the buyers in the article were in exactly the same situation as the ones I interviewed on their overpriced purchases. Fat, dumb, happy - and ignorant, until something went obviously wrong. When prices fell, they went looking for someone else to fix their bad situation upon. And if prices falling was the only concern, neither I nor anyone else should have any sympathy whatsoever for them. But it wasn't just the bad luck of a down market, forseeable or not. This agent not only did a horrible job of discharging his fiduciary duty, he didn't tell his victims about relevant facts which would have made that failure obvious before the transaction was consummated. It's interesting to note that had he admitted his failure, he probably still would have gotten paid, because even if the buyers had moved on, they probably would have kept him - people do the silliest things. However, this was a real estate transaction, where pretty much everything is a matter of public records that are kept forever. The buyers or their lawyer did the work and dug into the records, and predictably, hit paydirt. The agent undertook the duty, should have understood the duty, and basically decided to act like a minimum wage worker with a fax machine despite the fact he was paid $30,000 to guard the buyer's interest. Hello! That commission check is not a reward for a winning personality! Well, I suppose in a market rising 20% per year where it's hard to do anyone lasting damage, it can be, much to the eventual distress of their client. Because no market can sustain that kind of increase over time unless the income of those able to buy the property keeps pace. I don't need to ask for a judge's ruling on that one.

People want their daily routine to be without confrontation, violence, or real argument. It's a temptation to just go along. The little stuff - a dime missing out of your change, having to sit through an extra cycle of the traffic signal - just isn't worth making a big deal out of. It's a path of least resistance thing. But when you accept the responsibility for someone else's interests, it's not your call to make, and we're usually talking months worth of wages, occasionally years. I may advise someone that the deal is about as good as I think we're going to get, but I still have to spell it all out. That's why I make the money I do for the work I do when I'm working on a full service basis - my services really are reliably worth several times what I make to my buyer clients. And that's why the agent that just sits in the office with a fax machine can rebate half or two-thirds of that co-operating broker's percentage, and why I am perfectly happy to work on that basis if that's what a particular buyer wants - if my only liability is passing along faxes, I'm making ten times more per hour for less liability. I've written about this before, but pay attention to what you're getting in services as well as what you're spending for them.

The divine only knows how many other people bought property and are now in this situation, and how many lawsuits we're going to see because of it. I have zero sympathy for the agents and brokerages involved. They have richly earned whatever judgments are rendered against them and any license action under taken by the Department of Real Estate. But the consumers involved assisted their own downfall for just taking the obvious, apparently easy path to a transaction, by not taking the time to shop for a good buyer's agent in the first place. If you were getting ready to buy a property, which situation would you rather be in this time next year? Find a dedicated buyer's agent who will guard your interests while explaining what you need to know, or just take the path of least resistance? As of this moment, the folks the New York Times wrote about are out $75,000 in legal fees, and who knows how much in property value, their own time, and the quality of their lives, because they chose the latter path. Nor does anyone know at this point how much of that they're going to get back. But speaking as someone who knows intimately the endpoints and results of both paths, I know which path I'd choose.

Caveat Emptor

Original article here

The first piece of advice I have for buyers who want to get a fantastic bargain is to find a good buyer's agent. Nothing else will make as much difference as a good buyer's agent who is dedicated to the idea of getting buyers a bargain. They spot problems before you're stuck with them, keep you from wasting time, bargain hard on your behalf, debunk all the nonsense that sellers and listing agents throw your way, and most importantly, know when and under what conditions it's a good idea to walk away.

The second piece of advice I have for buyers who want to get fantastic bargains is to be willing to zig when everyone else is zagging. The gorgeous property in a high demand area of town, the award winning new development that's selling like hotcakes, and the freshly remodeled high end property are not where you're going to find bargains. Timing is as important as location and condition. It's much harder to find a bargain in the spring and summer, when everyone else is looking to buy, than it is to find a bargain around Christmas, when nobody wants to move that tree. You find bargains by being willing to consider what relatively few others will. A buyer's market is where the buyers have all the power simply because there are so few buyers in proportion to the number of sellers. Seller's markets are the exact opposite, but it's pretty easy to get people to want to buy during seller's markets, and difficult to get people to buy in buyer's markets. The psychology of increasing prices motivates greed on the behalf of buyers, but if you want to make a large profit, buy when nobody else wants to. When everything is going bananas and prices are increasing 20% per year and everything sells in three days or less is the time to be selling, not buying.

This isn't to say that every property or every situation that everybody else is avoiding is a ripe bargain. That is not the case. Sometimes the reason why a given property isn't selling is a sane, rational reason - far and away the most common reason for a low asking price is a defect that means you can't get a loan on that property. If you don't need a loan, and the issue with the property is one you are certain you can fix, that's a real opportunity. If the property is next to an explosives factory or a maximum security prison, there's a good reason why people are giving it a wide berth. There is a reason to do due diligence on every property.

The third piece of advice I have for bargain hunters is that the beautiful, turn key property where you sign the papers, move your furniture in, and you immediately become the envy of your neighbors is not bargain priced. Those properties don't need to be bargain priced, because they appeal to everyone, and people will line up to pay top dollar for those properties. The owners don't have to negotiate much, because everyone's making offers on these. You find real bargains by being willing and able to consider what other buyers can't or won't. Bargains happen for people who are willing to make it beautiful, not for people who already want it beautiful. The prospective buyer who cannot or will not sink cash into the property can't touch it. The person who isn't willing to work - or pay to have work done - won't be interested.

This segues into the subject for the fourth piece of advice: Being on solid financial footing is worth gold to buyers - lots of gold. Not being on a solid financial footing may or may not be worth waiting until you can fix it, depending upon your market. That's a question that can only be answered on an individual basis. But people with low credit score, low to zero down payment, or insufficient ability to document income will have substantially fewer properties to choose from, and a lot less bargaining power to boot. These challenges become much more difficult if you've got more than one of them. Any one of these issues can be dealt with. Stated Income is dead, leaving you with the options of a seller carryback, higher down payment, or less expensive property. People without much of a down payment have to go through the rigamarole of a government loan - which many sellers are unwilling to put up with. People with bad credit can still get loans if they can document income and provide a down payment - or even if they can't document income with a larger down payment. But put these items together, and you're very constrained as to which properties you have the opportunity to buy. Sellers want cash, not promissory notes, which means the ones who are able to offer carrybacks have a huge lever to hold on you. You're likely to end up paying full asking price or more simply because your options are that property or none.

You have cash, or at least the ability to pay the seller in cash via a loan. The sellers have property and they want cash. Every property is not appropriate for every buyer, and I've yet to find a property that's an exception to this rule - but cash is appropriate for every seller. Your cash, my cash, Uncle Sam's cash - sellers are complete agnostics when it comes to whose cash. That dollar from your pocket is worth exactly the same as the dollar from mine. It all spends, and any seller with any pretense to rationality is going to be the ultimate agnostic about who that cash comes from. So long as they get it, it all spends. Cash is always king - but it never produces more cash just sitting there.

But you have needs and wants for the property, and unless you've got a license to run your own private currency printing press, you don't have an unlimited budget. You have to know what that budget is, and blowing your budget is the mistake most likely to cause a disastrous failure in the home buying process. One of the things I do that my buyer clients absolutely hate is I force them to sit down with me and have a talk about what's important to them in a property, how important it is, and what's not important. Furthermore, I always want to cover alternatives. If they can have two or three features of lesser importance, are they willing to give up one item that may be highly desirable but extremely expensive? People hate this because they hate any indication that they might have to "settle" for anything less than a dream home, but dream homes turn to nightmares very quickly if you don't stay within a budget you can afford. You can always move up again later, but if you can't really afford it now, you will be better off not buying it. A good buyer's agent should give you a very good idea how well your budget and your desires match up before you look at a single property. Furthermore, when looking at properties, always shop by purchase price, not payment. Never never NEVER choose a house or a loan based upon payment!

All of this reduces to one word: Planning. People hate to plan. A good working definition for human beings is, "an otherwise sentient species known for its unwillingness to plan." Me, too, except where there's something important on the line, and getting my clients a better properties at lower prices is a large part of how I feed my family. Effectively planning your purchase will save you many thousands of dollars. Several tens of thousands, around here; perhaps hundreds of thousands in places like Manhattan. I plan everything about my client's purchases except whether they'll like a particular property. There is no way in the known universe to predict that. I've found people exactly what they told me they wanted, at a price within their budget, only to be told "Show us something else." I've had people immediately fall in love with something that I almost didn't show them because it really didn't match up with the desires they told me they had. I've had people insist they wanted a property even though I gave them a dozen good reasons not to. They're the boss. I'm just the expert. Push comes to shove, people will buy what they like - it's my job to make certain they know about the warts and have a chance to avoid them. People marry people with warts and buy properties with warts all the time. Most properties, just like most people, have their warts. It's my job to make sure my clients know about that property's warts - not to prevent them from exercising adult judgment on whether it's something they can live with.

About warts: If you're one of those people that cannot accept the fact that everything in real estate is a trade-off, you're not going to do well. If you're only willing to buy a perfect property in the perfect situation at a perfect price, there are three possibilities. One: you pay a lot more than the property is worth. Two: You don't buy anything, either because nothing satisfies you or because someone else gets into escrow first. Three: You are the victim of a con where they pretend to have the perfect property in the perfect situation at a perfect price.

There are properties without metaphorical warts of any kind. They all command a premium in any market. If you want a bargain, there are going to be warts. There's going to be a reason why buyers didn't line up to outbid each other, because that's what happens with premium properties in any market. Location, surroundings, condition, size, floor plan, orientation, structure, commute, missing something it needs or has something it shouldn't. Usually, more than one of these. Some things that are a big deal to most prospective buyers are cheap and easy to fix, while other things that don't seem important at first are expensive or impossible. Some things make a large difference on resale, others don't. Some things are impossible to live with, some things trivial. A good buyer's agent will make all the difference in the property you choose, and it's not just knowledge, but attitude as well.

Penultimate item: Sometimes, there are things that are more important to the seller than some amount of cash, and if they are less important to you than that amount of cash, this is a good way to get a bargain. Sometimes there will be clues in the listing that a good buyer's agent can spot. Sometimes, a seller who wants it all their way will give away this crucial information in negotiations, usually by asking for something other than the way things are normally done in your area. Once again, it's the buyer's agent who is going to spot that and know what it's really worth in the way of other concessions. Everything that's unusual, out of place or out of the ordinary is a possible flag here. This works both ways, so if you don't have a sharp buyer's agent and the seller has a sharp listing agent, you can very easily put your foot in your mouth to the tune of thousands of dollars or even blowing the purchase altogether. Get with your agent and plan how you're going to craft your offer to get from where you are to where you want to be.

The final item, and one of the most important: Always negotiate honestly and in good faith. Never make an offer you're not prepared to have accepted. Never represent yourself as being happy when you're not, or being unhappy when you're trying not to chortle with glee. It's amazing how many people simply do not understand how likely this is to bite you. The purchase contract is not the end of negotiations - even the consummated sale may not always be the end of negotiations, but that's the way to plan. It takes two willing parties, a buyer and a seller, to get from the purchase contract to the consummated sale. One side gets too greedy or too demanding, the other side gets disgruntled and walks out. The net result is no transaction, and you're right back where you started from, except you're out the time and probably a not inconsiderable amount of money. Lose-lose, where a viable transaction is always at least commensal, and symbiotic is better.

None of this is "Buying below market." There is no such thing as "buying below market". Market is whatever the price a willing buyer and a willing seller agree the property is worth. End of discussion. If you don't understand this, don't get involved in buying and selling real estate. You would only get hurt. But it is a collection of ideas and principles that enable savvy buyers to get the real bargains - the sort where you look back in amazed satisfaction at how well you did, and if you don't know any better, you'll think it was dumb luck. And luck does happen, but fortune in real estate favors those who are prepared, who get good advice, and who are prepared to undertake reasonable risks when the probability and magnitude of a payoff more than compensate. Real estate is always a competition, and like every competition, you want to practice, you want to prepare, you want to have the best coach and the best strategy, and you have to be willing to take calculated risks. The prize isn't a gold medal - it's a property where you can be happier than in the property you didn't spend tens of thousands of dollars more for, and resell when the time comes faster and for a higher profit.

Caveat Emptor

Original article here

Is there any problems with having all your money in only real estate?

That was a question I saw.

The answer is YES there are problems!

1) No diversification. The real estate market tanks and you are hosed. The more so because of the leverage attaching to most real estate investments. If you own five properties with a total value of $3.5 Million maximally leveraged, and the market loses 20% of value, you may have lost more than the entirety of your equity. If you need to get out now for some reason, the fact that prices are down hurts you much worse in real estate than any other investment except maybe commodities. If you had other investments, you likely would be able to hold on until market recovery and still make money.

2) Most people who do it get too strongly leveraged. Leverage is great, it makes your money work harder. But you've got to do some heavy thinking about how much leverage you're going to accept. If your cash flow is positive or tolerable, you can last out downturns. If you get into a situation where you can only make the payments for a certain amount of time, that can create desperation, and force you to accept an offer that leaves you owing money to the lender, and money to the IRS.

3) Real Estate is not liquid. This is the real kicker that drives the first two. You can't just call your stockbroker and get cash in seven days or less. You have to find the right buyer to get a decent price. If you need money in a hurry, this can force you to sell property for less than it's worth. If there are no good offers but you need to sell, you can find yourself forced to accept a bad one.

4) Landlord issues. The more properties you have rented out, the more likely that either blind chance or one of your tenants is going to do something to one of your properties which requires a lot of money in a hurry. If you're maximally leveraged and have no money anywhere else, where are you going to get that money? Particularly if the nature of the damage renders the property uninhabitable, in which case you're not likely to get any new loan on the property until it is fixed, and your lender might just decide to keep any insurance money in order to cut its losses.

If they're not rented out, of course, you're flushing cash every month.

Don't get me wrong. Real Estate is a great way to make money. In fact, given the phenomenon of leverage, you can make more in real estate with less risk than in practically any other investment field. But you've got to have some money somewhere else, and the larger your investment in real estate, the more money you need in other investments.

Caveat Emptor

Original here

Unpermitted additions are popular in California because of property tax implications. You see, due to Proposition 13 back in 1978, taxable assessments are based upon purchase price plus no more than 2% per year since acquisition (although if you bought prior to 1975, it's based upon the taxable basis in 1975). Let me say that this is a very good thing, because someone who buys property today has a reasonable assurance they won't be taxed out of their property, something you could not say prior to the passage of Prop. 13, where the legislature had more than tripled property taxes in the three years before it passed. Indeed, Prop. 13 has been one of the background factors leading to the elevated values today. If you bought a property for $40,000 in 1975, your taxable assessment 40 years later would be just over $88,000. In the open market, it would probably be about a $500,000 property, perhaps even $600,000, even with the market having taken its recent tumble. People who bought in the early nineties are sitting around $200,000 assessments for the same property, and even those who bought back around the time of 9/11 have assessed values of perhaps $300,000.

However, one exception to Proposition 13 is if you build an addition. New additions are assessed based upon the value it adds to the property when it is built. So in the case of the person who bought in 1975, expanding the living room or putting in a new bedroom could double the owner's property taxes. A new master suite could go much further than that. Building a second story to add multiple rooms could make your tax bill resemble a new purchase.

But if the county never finds out about it, and never updates their records, they don't make the new assessment, and the property taxes don't go up.

The way the county keeps track of all of this is via building permits. The theory is that anyone making an addition is going to get the proper permits, have all the inspections done, and happily pay their newly increased taxes.

Yes, I'll wait until you're done laughing, but it works out to be the intelligent thing to do, as we'll discover.

This is aside from all the usual headaches of dealing with your self-interested bureaucracy. Predictably, a lot of people decide that they will do anything they can to keep the county from finding out about that addition. No permits, no plans, no inspections, no bureaucracy, just do the work and enjoy the results.

Well, not quite. Licensed, insured contractors have legal and insurance based requirements to make certain any work they're involved in has all the necessary permits, inspections, etcetera. Go to Bureaucracy, Go Straight to Bureaucracy, Do Not Pass Go, Do Not Collect your nice little tax evasion. So this also encourages the use of unlicensed contractors, who as a group aren't precisely known for their unswerving dedication to high standards of construction and repair. Their work may or may not adhere to code, it may or may not do what it was supposed to, it may not continue to do so even if it does initially, and it may or may not even be structurally safe. Not to mention you're going to need Divine Intervention if someone gets hurt building it, or even on that portion of the property at a later time. Homeowner's Insurance companies have been known to be sticky about such details, and for excellent reason.

But if the county finds out about it, you've got all the issues you were trying to dodge right back at you with penalties and compound interest. I said if, but it's really more a matter of when.

You see, most folks want to sell the property at some point in time. When they sell it, they want to get a price appropriate for the property. They've got a 4 bedroom 2000 square foot property now, so the owners want the price 4 bedroom 2000 square foot properties are bringing in the market, not a 3 bedroom 1400 square foot price. When that happens, somebody usually notices that what they're trying to sell doesn't match county records for the property. It's one click on MLS to find out. The Era of Transparency bites everyone with something to hide. An agent I know told me he once asked someone in the assessor's office how they found out about cheaters. The answer? Mostly Real Estate Agents, but the context and way he told the story leads me to believe that the real answer is more properly "people unhappy with some other party to a transaction that may or may not have come off." It doesn't take much. Given even an anonymous tip, there isn't a judge in the world that's going to deny the assessor the right to investigate, especially given that you're on record trying to claim it had something more in order to sell it for a higher price. It's not like MLS records are private, or that the county assessor doesn't subscribe. Unless you've got some trick to make the extra room vanish when the tax man knocks on the door, they're going to find out the truth.

If the addition happens to be to code - current code as of the time of investigation, not the time of construction - you can get a retroactive permit. The process isn't too horribly much worse than if you'd done everything legal in the first place. But you're still going to pay all those back taxes, plus penalties and interest.

However, it's rarely to current code. Building codes get updated all the time, and when you get a permit legally and dot all the i's and cross the t's, you almost always get grandfathered into any code updates along with everyone else. It was fine and to code when you built it, so unless it has somehow become unsafe, you're still cool as far as the code goes. I see stuff every time I go looking at property which couldn't get approved now, but because the permits were obtained, the work was done, and everything was legally signed off however many years ago, it's still legal today.

Grandfathering doesn't apply, though, if you didn't do things the legal way. It's the code now that's important, and if it's not to code now, they can and will make you bring it up to current code standards. This often entails completely demolishing it and starting over, or simply putting things back to the way they were originally, if anyone can figure out what that was. Whatever happens, you're going to have the county inspectors looking over your shoulder every minute until the situation is resolved, and the licensed contractor you're going to have to retain isn't going to have much sympathy for what you did to yourself without paying a member of his brotherhood (most contractors are male). Upshot: It's going to be a lot more expensive and time-consuming than if you did it correctly in the first place.

It can be, and often is, worse than that. If the addition is unsafe, if you don't bring it to code within a specified period of time, they can make you demolish it. Actually, they can make you demolish the entire structure if it's bad enough. Suppose there's other stuff done there that was legal at the time, but there were no permits needed then? Nobody believes liars and cheats, and that's you at this point.

Sometimes, the additions are not compatible with zoning, set back regulations, etcetera. In that case, they're coming out, end of story, and the entire structure may be condemned. Granny flats are one common issue that often impacts setbacks and or zoning. I may not like it, but it's not like I've been elected dictator for life. We've got to deal with the law as it is, not how we would like it to be. We can work to change it, but in the meantime, it is what it is.

Now, about buying such a property: Are you really comfortable plonking down your hard earned cash (or worse, borrowing money so the seller can have cash) for a property where part or all of it may be at risk of being demolished, when (not if) the county finds out? Particularly the same price the your new neighbor paid for his fully permitted property? I don't think that's likely. Not many inmates of insane asylums are purchasing real estate, and when they do, they need to get their trustee involved. I can't see any trustee agreeing to it either.

There is one potential loophole: If you can show the property was as it is when you bought it, then the addition will be treated as part of the sales price, and you can potentially get forgiveness as an innocent purchaser, but it's still got to be to current code. See above for issues with that. There's a also time limit on this, usually two years from date of purchase is my understanding. The issue is this can be difficult to show without the cooperation of the former owner, who's going to be assessed for the difference, plus penalties and interest, and is therefore unlikely to cooperate! I understand there are other limits upon this loophole, but these are the most important ones.
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Even if you manage to unload one of these white elephants upon some unsuspecting fool, you're not in the clear. It can come back to bite you. I heard about one case not too long ago where the seller bought in 1986 and sold in 1999, and they swore it was like that when they bought, that they had no reason to suspect it was unpermitted. All to no avail. The judgment was rendered against them, and they're going to have to find the people who sold it to them to get any satisfaction in return. Good luck with that, especially if they're dead.

One final issue: In the era of make believe loans, anything went, but lenders are once again balking at lending at properties with unpermitted additions. In particular, they're not willing to lend based upon the current configuration, but based upon what's in county records if at all. As one lender fairly close to my office found out when they tried to sell their repossessed 1500 square foot lender owned property that the county records showed as 640 square feet, this can put the kibosh on the vast majority of potential sales. How good of a price do you think you're likely to get when the buyer can only get a loan for about fifty percent of value, and the lender wants to treat that as 100 percent financing? Result: It sat for eight months until a buyer came along with the resources to deal with it, and that buyer got a fantastic deal as the property was essentially ineligible for a loan.

(Question: How many "get rich quick in real estate" seminars mention that most of the very best deals happen for buyers willing and able to sink a lot of cash into the property for the time it takes to deal with the issue that's preventing everyone else from buying it?)

in short, unpermitted additions are a landmine waiting only some random event to explode, and it can do so years after you thought it was no longer your problem. They can be good news for buyers with the resources to deal with them, but they can cripple your ability to sell the property, particularly for a good price. They can actually cause you to be forced to sell for a price below what you'd get without doing any of the work at all. Looking at the costs, I find it difficult to believe that anyone considering things rationally would willingly do this, but in looking at MLS and visiting 20-30 properties most weeks, I see a lot of hard evidence that not everyone thinks these things through.

Caveat Emptor

Original article here

There's really nothing mysterious about this. There are some subsidiary tricks and issues, but the most important thing is obvious. The economic games theory is crystal clear, as is the research into what really happens. But most people don't like what the theory says, and think it somehow doesn't apply to their ego wonderful property.

Price the property correctly in the first place.

Negotiating strategies are variable. In seller's markets, your optimum marketing and negotiation strategies are significantly different than in buyer's markets. But every optimum strategy, in every market, starts with the same piece of advice. Price the property correctly from the moment it hits market. That price won't be the same price it would have been six months ago, and it won't be the same price it would be six months from now. But just because it changes over time does not mean there isn't an optimum price now, and now is when you're trying to sell it.

A good listing agent can keep you from under-pricing the property, and can keep you from giving away the farm or losing the sale in negotiations. But nobody can reliably get you more than the property is really worth, and the attempt is almost certain to end up costing you lots of money.

Here's how things work if you price the property correctly. You put it on the market, you get people coming by to view it because they can afford it and the basic numbers fit. If middle class properties are priced correctly, you're going to get offers within the first two weeks - probably more than one, even in the buyer's market we have going right now. You all negotiate in good faith, you reach an agreement with one of the prospective buyers, you go through escrow in about 60 days (30 days or less if there's no loan), and within ninety days the property is sold.

But when you over-price it, here's what happens: When buyers compare your property to the others that are available and competing with yours, yours falls short. Result: They make offers on other properties, not yours. It's as if you wanted to sell a $20 bill for $50. Guess what? It's precisely the same situation with a different commodity.

Time goes on. You spend money on the mortgage, the property taxes, the insurance, and the upkeep. Plus any number of other possibilities, for instance if there are HOA dues. Even if there aren't, let's consider a median sales price in the zip code my office is in: $390,000. Let's say you've got a loan for eighty percent of the value at 6%, pro-rated property taxes at 1.25%, and $100 per month for insurance. You paid $1560 in interest charges for one month. That's cash, right out of your checking account! I don't count the cost of principal because you're paying that to yourself, but pro-rated property taxes would be slightly over $400 per month, and add the $100 per month for insurance and you're well over $2000 that not selling for that month actually cost you, plus the phantom of another couple hundred dollars principal out of your checking account that you're essentially giving the bank to hold for you until the property sells - except that extra month decreases the eventual sales price. It's worse than this if your property is highly encumbered, or caught upon the fact that prices are receding in most of the country. That $390,000 property today would have been $500-$520,000 at the peak of the market, and lots of folks were buying then and are discovering now that those prices weren't real. So if your property doesn't sell for 4 months (the average days on market locally), that's nearly $10,000 out of your pocket that you're not getting back.

Actually, it's much worse than that.

Your period of highest interest is right when the property hits the market. The longer it's on the market, the fewer people will come by. The buyers who already looked have already made their comparison and decided they're not interested. The buyers who are new to the market will see that it's been on the market for thirty, sixty, ninety days or more and the idea foremost in their minds is going to be "What's wrong with it?" What's wrong with it is a completely preventable problem - It was overpriced when it hit the market. The only cure for this problem is expensive: cut the price further than the price it would have sold for in the first place.

The higher the "Days on Market" counter goes, the less inclined buyers will be to go view the property. Remember, at this point it's all numbers as far as the buyers are concerned. You can stage the house, paint it, remodel the kitchen, replace the carpet, landscape the yard, and nobody will notice because these don't translate to attention grabbing numbers. The property is what it is, has what it has, and the counter is ticking up, and every day this property sits . The only number you can change to induce people to come back is the asking price, and guess where it has to go? That's right, down. At this point, you have to give them a reason to come back and look that has its root in numbers. If you're now the cheapest property in your class in your area (or more precisely, the lowest asking price), that has a good chance of working. Maybe if you're now the second cheapest, you'll get a smaller amount of interest. But if there are still a significant number of lower prices in your class, this won't work. Nobody comes back to look at the 18th cheapest 3 bedroom home, even if there are 1000 others in the zip code, despite the fact that these numbers say you're in the best 2%. You've got to be priced significantly below the market to drag people back, where you didn't have to be nearly that low if you priced it correctly in the first place. Furthermore, attempting to negotiate the price back upwards is extremely unlikely to work. People came to look and made an offer based upon your implicit representation that the asking price would be an offer you'd be happy to accept, and if that turns out not to be the case, expect them to walk away no matter how hot the seller's market.

Tricks exist to reset Days on Market, of course. The various MLS affiliates are wise to most of them and getting better at catching them. Not to mention that the buyer's agent is going to check back and see if it's been on the market anytime recently, if they don't happen to recognize it off the top of their head. Listing Agents are becoming correspondingly more reluctant to play games to reset that Days on Market because they can lose the ability to place properties in MLS altogether when MLS catches them playing games. Buyer's agents are tired of this game, and many of them are perfectly willing to put their competition out of business by bringing their malfeasance to the attention of the MLS operator. I haven't done it yet, but I'm becoming more tempted in a couple of cases.

I see a lot of nonsense put into MLS by owners, and by agents who know better about how high the automatic valuations, CMAs, and appraisals for a given property are. These are all worthless. For one thing, this data can be manipulated, and sellers have just a little motivation to want it manipulated in their favor. More importantly, none of these influence sales price, and representations that they do or should is worthy of ridicule. What influences whether you get any offers, and from that, sales price is how good of a deal prospective buyers think they're getting, which in turn flows from the asking prices for comparable properties, as well as recent sales. If there's only two properties available for sale in the Zip Code that thousands of buyers want, sales prices are going to be increasing rapidly. Reverse this if the opposite situation applies. Incidentally, these are reasons a buyer's agent needs to be a fount of information on both the attractive points and the not-so-attractive ones.

With this information freshly in mind, what does all this say about the competence and ethics of an Agent who accepts the listing at a too-high price "to see if we can get it"? Nothing good. They're deliberately inducing the seller to harm themselves in order to get that listing. It's hard to put a monetary value on hurt feelings of betrayal when the agent starts pressuring them to drop the price the instant they have the signature on the listing agreement, but for a lot of folks, that's even worse than all of the cash it's going to cost them.

Lest anyone mistake me, this is no way relieves the need for an agent, and a good one. How many of the comparable properties that sold in your area in the last few months were you in? How familiar are you with all of the competing comparable properties? Try and put it on the market without that knowledge, and you're basically spinning the roulette wheel as to whether you're in the right ballpark, price-wise, with completely predictable downside if you're not. Who's your target buyer? What are the effective ways to attract their attention to the property? How to convince them they need to make a better offer? I guarantee that buyers don't care about "what you want to get" for the property! If real estate were easy and obvious, anyone could do it about as well as anyone else, and that is definitely not the case. Finding a good agent isn't trivial, and their pay isn't what most people think of as "cheap" but it will more than pay for itself in time and money.

The attitude of the seller is also critical. Sellers that expect to be treated like royalty are royally hosing themselves. If everything has to be convenient for you, you won't get as good a price as if you make everything convenient for the buyer, and in buyers markets, it often makes the difference between a good price and not selling at all. What are you willing to do in order to sell your property, to make it more attractive to buyers with special issues? Especially, what are you willing and able to do if it will get a higher price? Being willing and able to offer things that other sellers are not is an excellent way to appeal to buyers with special needs, perhaps even to the point where they have a choice of your property or none at all, no matter how many properties are "for sale" where the owner can't or won't. Do you think that might induce someone to offer a good price? To use some examples I've encountered recently, are you willing and able to carry back part of the purchase price? That's one way to give yourself an advantage over competing properties in any kind of market. Are you willing to work with someone who has a need for immediate occupancy? Can you carry the property for an extended escrow period if you're properly compensated for it? A good agent can use all of these, and others, as wedges to get the property sold, sooner and for a better price, but they can't do these things for you. You have to be willing and able to do them.

There are a few other things: Have the property ready to show before it hits the market, do what you can to enhance visual attractiveness (it's amazing the difference polishing furniture that's going to leave with you can make!), and especially make showings absolutely as easy as possible. It's a better sales tactic to get the family heirlooms and other valuables out and type, "Just Go!" in the showing instructions than just about anything else (although "5 minutes notice so we can leave!" is even more effective), and permissive or restrictive showing instructions can make all the difference. If you've got tenants in the property who want 24 hour notice, you're in a world of hurt in a buyer's market, and even in a seller's market you're going to find that your traffic and final sales price will suffer because of it. If you want to sell your rental for a good price, offer your tenants something that makes them willing to cooperate or get them out.

The asking price should take all of these factors, and more into account (and almost entirely as subtractions from a theoretically perfect sales situation), but choosing an optimum or near optimum asking price in the first place will make more difference than anything else, because the money a seller ends up with is about the time it takes to sell as well as final sale price.

Caveat Emptor

Original article here

It's the same reason the phone company doesn't want to compete, General Motors doesn't want to compete, Wal-Mart doesn't want to compete, Disney doesn't want to compete, and Microsoft will do everything in its power to appear as if it doesn't have to compete. They make less money when they have to compete, and they have to provide a better quality of product.

But people know that all of the above have competitive alternatives. If you don't like one brand of automobile, there are dozens of competing alternatives. Ditto retail outlets. "Kid safe entertainment" is a bit more of a niche market, but there are competitors if you'll look. Finally, we should all be aware that computer OS's are one of the biggest Drazi Wars there are. There is competition.

But many agents and loan officers make their living by pretending there is no competition, or by actively manipulating consumer choices to preclude the possibility of competition. This takes many forms, from requiring large deposits for loan officers through exclusive agreements with agents. There's nothing fundamentally evil about this - everyone needs to make a living. But there's nothing that says any particular consumer - by which I mean you - has to put up with it. Furthermore, the agent or loan officer who is confident enough to work without these devices is likely to be a better, stronger practitioner. Ask yourself who you'd more easily believe has more on the ball: Someone who tries to keep you from considering the competition, or someone who's happy to compete? If you were interviewing two applicants who want to work for you, who'd be more likely to get the job: The person who walks out as soon as they find out you're considering someone else as well, or the person who gets their act together and out-competes the other applicant? If you were interviewing with two companies who wanted to hire you, which offer would you be inclined towards: The one where you have to hide the other interview, or the one who's willing to compete head-on for your services?

Nobody's going facilitate competition for the job they want. Nonetheless, it is to your advantage to force them to compete. If you don't understand why, consider that for all the griping about various phone companies, the situation is far superior to what it was when there was only one. Here's a particularly poignant reminder of that era.

Here's the facts of the situation: If you're only going to talk to one provider, they can quote you anything they want. There is no check upon the situation. If I were the only loan provider in California, I could charge anything I wanted. I'd auction my services to the highest bidder, work a couple hours, one day a week, make as much money as I wanted and go on to spend the rest of the time having fun with my family. If anybody didn't like the level of service, that would be their problem. But that's not the case. In fact, the further it is from being the case, the harder I have to work, the less money I make per transaction, and the better the service I need to provide. It's also the case on the voluntary level, which is to say if you voluntarily restrict yourself to one potential provider, as well as the involuntary. If you only talk to one, there might as well be only one. It doesn't matter how many loan providers and real estate agents there are, what matters is how many you talk to.

People in the real estate business get told all the time that the way to success is to avoid competing, especially to avoid competing based upon price. If ever a week has gone by without some clown wanting to charge me a thousand dollars to learn how to avoid competing on price, or avoid competing, period, I certainly can't remember it. They work, by and large, on two levels - pretending you're the prospect's friend while engendering fear of the competition. "You know I'm your friend, George. You know there are sharks and cutthroats out there who will take your money and leave you high and dry, but you know I won't do that, George." And there are sharks and cutthroats out there. The guy talking to his pretend friend George here is one of them. This is the way he talks George out of checking up on him, comparing his services and prices to either objective standards or to any other provider's. Nor are women any superior - in fact, I've had a report of one of the worst sharks I'm aware of preaching a "female solidarity" line of attack to cut out her competition. Other sharks attack via ethnic or religious solidarity, or even political similarities. What these have in common is that none of them have anything to do with competence at real estate, and they may not have anything to do with conscience. I've seen people preaching the gospel about taking care of your fellow man while extorting thousands of dollars from their client's pockets. Newsflash: The sale of Indulgences went out with the Reformation, and for good reason, too. I'm certain it happens with other religions, as well, it's just that there's fewer members of those religions around here.

One of the ways I constantly see this abused is even people who should know better advising their readers to "ask someone you trust for a referral." Well, referrals are great - if the person making the referral knows what they're talking about. If they don't, it's just another goat lined up for sacrifice, willingly led in by the previous victim, If not worse. Here's an article from illustrating someone who used this process to gain victims (HT: FraudBlogger.com, who always has a relevant example of bad behavior handy). No matter how trusted the source, it still needs to be fully vetted - you need to do your own due diligence, and part of that is comparing them to some other potential service providers.

There just isn't any valid advantage from the consumer's point of view to forking over a large deposit or the originals of any documents to a loan provider. They don't need originals, and the only thing that large deposit does is give them some money to hang onto if you find a better loan. All of the better loan providers I'm aware of work on the basis of "fees at point of service," not requiring a deposit in advance. In fact, a cash deposit can induce people to accept loans that are many times the amount of the cash deposit worse than other, available loans. People understand that check they wrote out of their account is real money, where most of them are a little bit hazy about loan costs paid by rolling them into the loan balance. I saw someone pass by a loan I had that was four thousand dollars cheaper up-front and would have saved them $1000 per year they kept it because another lender already had a $1500 deposit from them. Here are a few more pointers on shopping for a real estate loan.

Admittedly, I have come to the reluctant conclusion that it is in the consumer's interest to list their property for sale via an Exclusive Right to Sell. However, this doesn't mean you shouldn't shop agents extensively before you make that commitment. This only means that you're going to make that commitment to one agent once you have done that research. Failing to do so risks locking your property up with an incompetent agent. When you ask "what's so bad about that?" ask yourself if you'd be happy taking ten to twenty percent less for the property (or worse!), after you keep paying the mortgage six more months? Around my area, with the median sale being $423,000 last month, and assuming a loan at six percent on eighty percent of value, not only does signing up with someone who can't get the job done cost you $42,000 on the sale, it'll cost you about $2200 cash for every month that property doesn't sell! Realize it or not, you're risking a lot of money on an agent, and just because you're not writing a check to them directly at sign up in no way changes this. However, I don't advise going with the agent who asks for a short term listing, either. That's an appeal to cowardice - decide by theoretically not deciding, and make no mistake, you are deciding when you sign a listing agreement for any period of time. This isn't to say you can't bargain the time for commitment down if you're willing to take a chance on a less experienced agent - it's just saying don't decide by pretending not to make a decision. That way lies disaster. Here are a few more tips about Shopping for a listing agent.

For buyer's agents, there really isn't a reason for an Exclusive Agency Agreement, except to allow an agent to wrap up your business for whatever period of time. There isn't hardly an excuse. The only place I can see it being an effective alternative for the consumer is if they're working the foreclosure market, and that agent is spending the money for all of the "quick notification" services so that the client doesn't need to. But the vast majority of the time, agents are locking in people who simply don't know any better with an exclusive agency agreement. I've seen listing agents who wouldn't show a property without an exclusive buyer's agency agreement - a clear violation of fiduciary duty to the seller, not to mention a huge Conflict of Interest if they actually want to put an offer in on that property. Non-Exclusive Agency Agreements protect the buyer's agent just fine, but they also give you the right to fire non-performers by just not wasting any more of your time. You can also use them to separate the wheat from the chaff among buyer's agents. Sign any number of Non-Exclusive agreements you want. The good agent will still do their work; while the lesser agents will select themselves out. While we're at it, here's a few more tricks to finding a good buyer's agent.

Agents and Loan Officers don't like this. It means they might not get the business when they're exposed for the buffoons that some of them are, and it means they might not make as much money for the time they put in. Nor is exercising your choices as an informed consumer simple - far from it. You also need to consider what agent services are worth how much to you. But considering the average price of real estate around here, and the cost of the loans that most people need in order to buy, doing proper diligence beforehand will save most people more money than they make in a month - perhaps more than they make in a year, possibly more. When you consider the differences in that light, the hourly pay for doing your due diligence about agents and loan officers and forcing them to compete is absurdly high.

Caveat Emptor

Original article here