Buying and Selling: November 2020 Archives

In many transactions when I originally wrote this, the buyer has absolutely no money, or an amount that was not sufficient to pay the costs that they would traditionally be expected to pay in order to close the transaction. Today, unless they're eligible for a VA loan, there is no such thing as a "no down payment" loan, but the trick is to stretch the cash they do have to make the transaction work. In a buyer driven market, often the seller still wants to do business with them.

The usual way it's handled is in Seller Paid Closing Costs. The Seller gives the buyer an allowance to cover their share of the costs

Lenders have become somewhat tolerant of the practice, at least so long as the appraisal comes in at or above the official sale price. Many of them were starting to revert to the treatment this trick traditionally got, which is to say, if the sale price included a rebate to the buyer, then the sale price as far as the lender was concerned was the official price less the rebate. In other words, seller's net. Remember, lenders value real estate the same as accountants, on the LCM principal - Lesser of Cost (which is to say purchase price) or market (which is to say the appraised value). If the seller is giving the buyer money back, then the official price listed on the transaction isn't really the price, is it? Do advertisers tease you with the gross price of stereo or computer gear before the rebate, or the net price after the rebate? Same principle here. The lenders traditionally took this stance, although it has been more relaxed in the highly competitive lender's market of late, and although they were starting to change back, the dearth of qualified buyers with extra cash has made them reconsider that. The lenders are (typically) not going to lend more money than the lesser of those the two variables, cost and market, and they will base the loan parameters on whichever is less. You can always buy a house for more money than the value, as long as you have the cash to make up the difference.

The Sellers get their house sold. That and the ego thing of the official sale price seem to be the benefits to them. I would certainly rather sell for the seller's net in the first place, if I'm a seller, without an allowance, because I have to pay commission on that higher amount. A $10,000 allowance (as has become common here) costs the seller $700 to $800 or so in increased costs - agents commissions, title insurance, escrow fees, transfer taxes - even if the sale price is $10,000 higher because of it. This is neglecting the potential effects of taxes due to exceeding the $250,000 (or $500,000) maximum gain exemption from the IRS code Section 121. I recommend against it for sellers unless there is a substantial deposit, as it is often indicative of a not very qualified buyer. Even then, it's a real good idea to talk to your tax person. Furthermore, with the lenders in full blown panic right now, the only loans being accepted with little or no down are VA and FHA, both of which carry government guarantees. VA can do true 100% financing, but buyers eligible for VA are uncommon. For FHA, the zero down enabling down payment assistance programs are dead, but having 4-6% down for an FHA loan is a lot easier than 10%+ for anything conventional.

The Buyers get a deal, or so it appears at first blush. A piece of property without having to save for closing costs. When I originally wrote this, in many cases they didn't have to put a penny down, either. Pretty cool, eh? Get a house and actually skip a month of writing a check (due to the allowance covering prepaid interest), so effectively putting cash in your pocket. Keep in mind, however, that a competently advised seller is going to inflate the sales price to match, where (if they were smart) they would rather have accepted the net sales price without rebate. Furthermore, at least here in California, property taxes are based upon official original sales price, so you'll be paying for it as long as you own the property. Finally, because your purchase price, and therefore your loan, is going to be higher, your payment is going to be higher, you'll pay higher loan costs every time you refinance, and your eventual net on the property will be lower. If it is the only way to get into the property, and the deal otherwise makes sense, that's fine - but don't kid yourself that you got free money. Chances are that you're going to pay far more than the amount of any allowance because you got it.

If it's bad for the seller, bad for the buyer, and risky for the lender, why does it keep happening so much?

Well, it's a sale for sellers. The property has now been disposed off. It's also an ego defense for sellers. Instead of $470,000, they can tell everyone they got $480,000. So long as they don't mention the allowance, it sounds like a far better price to their friends, family, and soon to be ex-neighbors. In short, bragging rights. Buyers, it gets them into the property, formerly often without coming up with a penny in cash and still allowing them to save one month's rent or payment, effectively putting cash in their pocket. Mind you, that unwillingness is going to be costing money for as long as they own the property, but that's their choice.

Real Estate and Mortgage folks, get bigger commissions. $10,000 in sales price gets translated to $100 per 1 percent of commission. This is anywhere from an extra $100 to an extra $300 or $400 for each of the offices, buyer's, seller's, and loan. Furthermore, I know of loan agents who extract larger commissions because "it's such a hard loan." It does make the loan harder, but not by another point of origination's worth. Wouldn't you like to have extra money for essentially the same work? I assure you that your average real estate agent and loan officer are no different than most folks.

These days, the spoke in the wheel that prevents this from happening is usually the appraisal. With Home Valuation Code of Conduct, most agents in most transactions no longer have the option of steering business to the appraiser who will inflate value as much as possible. I'm not having problems on my purchase money transactions because if appraised value isn't likely to be there, I advise my clients of that fact. But it's putting a real crimp on the transaction mills.

There is nothing wrong with the practice of seller paid closing costs, so long as everybody knows what's going on. But it's certainly not something you want to do if you have a choice.

Caveat Emptor

Original here

As with anything you find on the internet, the critical thing to keep in mind with internet real estate is that it is subject to input control. In plain English, you only see what they want you to see. If they don't want you to see it, it's not going to be put into the internet so that you can see it there. The vast majority of the time, there is no check upon this simple fact of life. If the owner or listing agent don't want you to see something, it's not going to be available to you on the internet. You're going to have to get out and look at the actual property.

What is put onto the internet is a representation. It could be a good accurate representation or it could be an intentionally distorted representation. The online information is never all there is to see. Kind of like a facade - front facade, back facade, and now, internet facade. Online pictures, home for sale websites, virtual tours - they're all subject to any number of tricks that alter how the property is perceived.

You should never put an offer in without having looked at the property in person. I'm very good at what I do as a buyer's agent. Nonetheless, it is most disconcerting on those rare occasions when someone sounds like they might be intending to put an offer in without looking at it themselves in the flesh. Since I originally wrote this article, I have now done so - very successfully according to the family I did it for - but it was a very special set of circumstances and even so I was so nervous I couldn't sleep until they did manage to make another trip to physically see it. I have had to talk other people out of doing this. There is no such thing as a perfect property, and it's very difficult to point out all of the things I believe buyers need to be aware of when they're not there to see me point.

A lot of the most important things are never online. Even if there is a floor plan (rare), it's very difficult for people who are only looking on-line to get a good grasp of internal sight lines. It's also very hard to convey the full sense of the external environment. What can you see? What do you hear? Are there other environmental distractions? Do airplanes fly right over the house on departure when the wind changes? What's the neighborhood like, are there any obviously disturbed neighbors, what are traffic patterns like, how close and how good is freeway access, where is (are) your grocery store(s), and anything else that might be important to you? How accessible is the neighborhood via public transport? Note that some of these questions are double edged swords by definition. Public transport means your friends who don't have a car can get there, as well as making any public transport excursions you may have need far more bearable - but public transport is also a common conduit for undesirable visitors.

Nor can you really only visit one or two properties. The key to relative value is how the various properties on the market compare to each other, and that includes that whole list in the previous paragraph. No matter how much you make, if you figure you're going to visit an absolute minimum of ten properties before you put in any offers, the probability is pretty much 100 percent you'll end up glad you did.

The internet can profitably be used to narrow your search, by throwing out all of the obviously unsuitable properties. Doesn't have what you need? Asking price way too high? From the pictures, there's no way your family could live there? There's no reason to waste time and gas going to see those properties. You still need to go out and look at not only the properties that are left, but enough properties to give them context. I don't know how often I've heard from people who only wanted to view one property, but in such cases it always seems to be a property I wouldn't buy if the owners paid me to take it off their hands.

The internet can also make it easy to find properties to look at. It certainly beats driving around all the neighborhoods you might like to live in trying to find "For Sale" signs. But it cannot replace physically going to look at properties that might fit the bill. If you're short on time, might I suggest a buyer's agent (or several)? That time is their job, the mileage is a business expense, and nothing is so precious as the time people give us to look at property. It's quite likely that a good buyer's agent will narrow your search a lot more, because going out and looking at property gives a lot more information than the internet, and we do it constantly. Getting a good buyer's agent first will make more difference than anything else to how happy you end up (Here's how to find a good buyer's agent)

Property always needs to be evaluated in the context of the area it's in. A lot of what might sell for $500,000 in my area might be less than $100,000 in other locales. This doesn't mean San Diego is overpriced. It means that there's a lot of people who want to live here very badly, these people make comparatively large amounts of money, it's hard to get permission to build, and the prices for the area reflect those factors. If you've decided you want to live in a particular neighborhood you're going to have to pay about the prevailing prices if you want housing. A good buyer's agent can make a big difference, but nobody can find you something that doesn't exist, and in order to really understand what a good bargain is, you've got to go and actually look at some properties that aren't bargains before you understand what a bargain looks like.

Caveat Emptor

Original article here

The general public may not understand this, but the most critical parts of a listing agent's job all take place before the property hits the market.

The most difficult task of an agent who wants to successfully list property is one of those. No, it isn't the pricing discussion, although it's closely related and usually done at the same time. It's educating the owner as to what a good offer for their property would be.

The weaker the overall market, the more important this is. In a strong seller's market, if you blow off a good offer, you're likely to get another almost as good. In a buyer's market, telling a good offer to get lost is a great way to lose lots of money. I'm paid on commission. Believe me folks, I'd like to be able to get two million dollars for a not particularly attractive five hundred square foot condo in "the 'Hood" . The fact is that buyers look for the best property at the lowest price. I can market in such a way as to catch the attention of the people likely to be willing to pay the most, but I can't get more than those people are willing to offer. You can try to sell a property for more than it's worth, but it's not going to happen, and trying is the best way I know of to fail to sell at all, or to be forced to sell for a lot less than you could have gotten, and have to pay the carrying costs for the property for a much longer time than if you know a good offer when you see it.

You can't really have the pricing discussion until the owner understands what a good offer would be. The correct asking price is central to a successful transaction. People look at properties based upon asking price, and you are competing with other properties of roughly the same asking price. If you ask too much, your property will be competing out of its league. The people who are looking for something in that price range will have superior alternatives. If the choice is your property or, for the same asking price, a freshly remodeled house with an extra bedroom and bathroom and a lot that's twice as big in a better location, which do you think the average buyer is going to make an offer on? Ladies and Gentlemen, even if your own mother is looking for a property and knows you need to sell, that's going to be a hard sale for your property. On the other side, if you're not asking enough, people will line up to buy, but then you (and your agent) end up with less money in your pocket, and that's not going to make anyone happy except the buyer.

Furthermore, you've got to understand the market you're trying to sell in. In a strong seller's market, you can probably afford blow off offers below a certain threshold. In a strong buyer's market, you need to try and work with anything even vaguely in the right ballpark, to see if you can talk them into something more in line with reality.

Some agents won't do this. They'll either accept whatever the owner wants to ask or even actually inflate the asking price. This is called "buying a listing," because owners who don't know any better get dollar signs in their eyes and sign up with that agent. It isn't really "buying" anything - it's more like a political candidate's insincere campaign promises to repeal laws of economics and give voters everything their little hearts desire. Anybody old enough to vote should know better than to believe this, but it works, for the same reason Nigerian 419 scamsters are driving around in Ferraris: People want to believe in easy money. In point of fact, as I have written before, this actually sabotages any chance of actually getting the best possible price. Your time of highest interest is right when it hits the market, and the longer the property is on the market, the lower the sales price is likely to be, and when you over-price real estate, you're not only going to end up getting less money in the end, but you'll have to pay carrying costs for the property for a longer period of time. In short, this approach reliably costs sellers money. Large amounts of money. There is no reason but greed and ignorance to do this, but many rotten agents make a very good living conning people who don't know any better. One of the reasons why bargains are hard to find is that the definite majority of the listings out there have been the victim of such an agent. The property isn't going to sell for that price, or anything like that price, but by over-promising on the listing price, they get a signed listing contract, and when all these properties eventually sell for tens of thousands less than they really could have gotten, that agent gets paid (when the agent who tried to tell them what the property was really worth doesn't), and the con artist even looks like a "top producer."

Waiting until the property is on the market is too late. Everybody has already seen that initial asking price. Not to mention the owner still believes the nonsense they've been sold in the above paragraph. Waiting until you have an offer is definitely too late. The agent has been telling them up until this very moment to expect tens of thousands of dollars more, and now the agent is going to try to talk them into accepting what really is a good offer? Not likely to work, and not good for the relationship even if it does. Furthermore, one of the things you learn in this business is that the first offer you get is more likely than not to be the best. Oh, it's not rare or even that uncommon for a better offer to come later, but the most typical pattern is for each subsequent offer to be successively lower. And now you've lost what is likely to be the best offer you're going to get because your agent couldn't explain to you what a good offer was? Run that one by me again: Why are agents supposedly getting paid? I get paid for listings because I really do know how to sell them more quickly and for a higher price than any "for sale by owner". But why in the world would you want to pay someone who doesn't do that, and makes the sale take longer and causes you to have to settle for a lower price? I understand why it happens. I just can't understand why people would want to, other than a combination of ignorance, laziness and misinformed greed. Somebody once said, "Too bad ignorance isn't painful." Ignorance is painful, but it's financial pain, and the kind most of those burned by it never realize they felt, because they couldn't recognize the symptoms, and they have no idea how much better they could have done.

For a successful listing that's going to fetch an optimum sale, understanding what a good offer looks like, so the owners know how to react when they get it, and setting the correct asking price so that you do get such an offer, is critical. Failing to do so will put you in that group of people who don't get what they could have for the property, and since you don't understand how and why the problem happened, you're likely to repeat it every time you decide to sell a property. When the market rises rapidly for many years, as the San Diego area among many others did, you can even delude yourself into believing that you were "successful." But when the market returns to something more closely approximating normality, believe me when I tell you you that you'll find out in a hurry that you weren't as successful as you thought.

Caveat Emptor

Original article here

A while ago I wrote an article called, "What Happens When You Can't Make Your Real Estate Loan Payment." This is kind of a continuation of that, as I got a search that asked, "What is necessary to persuade a bank to accept a short payoff on a mortgage"

Poverty. In a word, poverty. You have to persuade the bank that this is the best possible deal they are going to get. You can't make the payments, and if they foreclose they will get less money.

A "short sale" or short payoff is defined as a sale where the proceeds from the sale will not cover the secured obligations of the owner. The cash they will receive from the sale is "short" of the necessary amount. The house is no longer worth what they paid for it.

When I originally wrote this article, I was looking ahead. There were more and more of these happening, but the big wave had yet to hit. That wave has now mostly passed. There are always people that lost their good job and can't get a replacement nearly as good. But for a while, there were also people that were put into too much house, and approved for too much loan, suddenly discovering their situation was not sustainable because they suddenly couldn't make the payments. Unscrupulous agents that wanted a bigger commission, loan officers going along, and nobody acting like they were responsible for the consequences to their clients. My concern for lenders who do stated income and negative amortization loans (and a lot of loans that are both!) is kind of minimal. Okay, it's very minimal. Like nonexistent smallest violin in the world playing "My Heart Cries For Thee" level sympathy. I forecast years ago that many lenders were going to go through bad times, using a forecasting method that's about as mysterious as rocks that fall when you drop them.

On the other hand, for the people who were led into these transactions by agents with a fiduciary responsibility towards them, I have great heaping loads of sympathy and I'll do anything I can to help. Yes, they're theoretically responsible adults, but when the universe and everyone is telling them all the things that buyers were told these last couple of years, it's understandable. Sure there's a greed component in many cases but when they're told by both loan officers and the real estate agents that they "wouldn't have qualified for the loan if you couldn't afford it," they are being betrayed by the same people who are supposed to be professionals looking out for their interests. I really do suggest finding a good lawyer to these folks, as those agents who did this to them (and their brokerages) better have had insurance which said lawyer can sue to recover money they never should have been out.

I'm going to sketch it out in broad terms, but there are a lot of tricks to the trade. Short sales are not something to try "For Sale By Owner," or even with a discount agent.

First off, you need to draw a coherent picture of the loan payment being unaffordable. If you were on a negative amortization approaching recast, or hybrid ARM (usually interest only for the fixed period) that is now ready to adjust, you're facing a much higher payments. Even if you were able to afford the minimum payment before, now you can't and you've decided to sell for what you can get before it bankrupts you to no good purpose because you're going to lose the house anyway. You're going to have to prove you can't afford your loan. The bank isn't just going to accept your word, but several late payments or a rolling sixty day late that looks headed for ninety have been known to be persuasive. If you can afford the payments but have merely convinced yourself you don't want to, please read Why You Should Not Walk Away From Upside-Down Real Estate. Nonetheless, there are a lot of tacks that you don't want to take. Remember, lenders want to be repaid and they've got a couple of pretty powerful sticks to shake at you. They are not going to agree to sacrifice money merely because to make the payments would be uncomfortable for you. You're going to have to persuade them it's impossible.

Second, you're going to have to persuade the lender that this is the best possible price that you are going to get, and that even if they think they'll get more by going through foreclosure, it will be more than offset by what they'll lose through the expenses involved. Not to mention that they might end up owning the property, which they don't want to do because then they have to spend more money selling it.

Third, you've got to be on the ball about the transaction itself. All the ducks have to be in the row from the start, which is when you approach the lender with a provisional transaction. If they're not, the lender is just not going to go through the process of approving a short sale until they are. Since this takes time, it has the effect of dragging out the transaction. Every missed deadline means the lender will look at the whole thing again, possibly changing their mind about approving the short sale. You need a qualified buyer. Furthermore, most short sale buyers end up bailing out of the transaction at some point, most often because they don't think it's going to get approved on terms that are acceptable to them. You need a full service listing agent who knows what they're doing to prevent this from happening.

Fourth, just be prepared for the fact that the lender is not only not going to approve the transaction if you get any money, but that they're also going to send you a form 1099 after it is all done. This form 1099 will report income for you from forgiveness of debt. This is taxable income! Many agents eager to make a sale will not tell the sellers this, and when you get right down to it, there is no legal requirement to do so, but I've always thought this was one of the ways to tell a good agent from a not-so-good one. It does seem like something you should be told about before you've got the 1099 form in your mailbox, right? At that point, you are stuck with all of the consequences, where if you had known before, you might not have been so complacent. It is to be noted I've been made aware of ways to circumvent the "no money to the owner" requirement, but they are FRAUD, as in go to jail for a while and be a convicted felon for the rest of your life FRAUD. It can be tempting, but committing fraud is one of the most effective ways I know to make a bad situation worse.

For the buyer, short sales can seem attractive for any number of reasons. Typically the seller is in a situation where they have to sell, and everyone knows it. The option of waiting for a better offer really isn't on the table if what you're offering is anything like reasonable. They can't bluff you, they should know that bluffing you is a waste of effort, and somebody should have explained to them that they really just want out now (and why this is so) before it gets worse. What's not to like? The answer is the fact that there's a third party with veto power over the transaction. The sellers don't have must motivation to bargain hard because they're not getting any money anyway, but many lenders are stuck in the land of Denial.

Your competition will also make things difficult. Because people think there's fast money to be made, these folks are the target of "flippers" everywhere. The large city, highly inflated markets more so than most. A couple weeks before I originally wrote this, we put one on the market and got three ugly low-ball offers within 48 hours, and this is part of why you need an agent to sell one. Remember, the seller isn't getting any money, but they are going to get a 1099 form that says they have to pay taxes. Don't you think most folks would rather it was for less money, and therefore, less taxes, instead of more? The more money the lender loses, the higher your liability. Had any one of the three made a better offer in the first place, they would have gotten the property at a price to make a profit, but they had to prove how rapacious they were, or something. As it was, we jawboned the first three vultures and two other, later entries, into a quasi-decent price, with minimal later tax obligation to our seller, and (eventually) got the lender involved to see reason.

In summation, "short sales" are a way to cut your losses for sellers, and a way to maybe get a good price for buyers, but you have to know how to convince the lenders to accept them, and how not to overplay your bargaining position, lest you get left out in the cold.

However, lenders are basically in denial for a variety of reasons, and they do not want to admit that their underwriting was at fault for lending more than the property was likely to be worth, and more than the borrower could really afford. For that reason, short sales are a long hard slog, and many times lenders are rejecting the transaction no matter how much sense it makes. So be advised before you even start that this is an uphill battle, and if the listing agent is not on top of the game, you may be wasting your time making an offer. Quite often, the lender simply says no - that they're not going to accept this transaction unless someone comes up with more money to make them happy.

Caveat Emptor

Original here

UPDATE: You may also want to read my new article on Mortgage Loan Modification

There's an old literary tradition that cautions the reader to "Be careful what you ask for. You may get it."

Many real estate purchase offers are good illustrations of that principle.

The rule followed by good agents is, "Never make an offer that you wouldn't be pleased to have accepted, exactly like it is." An Offer is a legal term. You're making an offer to fulfill these terms if the seller will. By simply signing the offer in acceptance, the other side can create a binding document with legal force, and at least potentially sue for specific performance. Specific performance is more often used by buyers than sellers, but it is available to both. An offered and accepted purchase contract is roughly equivalent to creating both a "call" for the buyer and a "put" for the seller in options trading. The seller has a right to insist the buyer buy, and the buyer has a right to insist that the seller sell, on these specific terms.

Usually, there are things discovered about the property while in escrow. It just isn't cost effective for prospective buyers to perform an inspection prior to obtaining a contract, and sellers should be mindful of the fact that subsequent discovery can void the purchase contract with an inspection contingency. On the other hand, I can't imagine a buyer insane enough not to build an inspection contingency into the contract. No matter how great a deal they may think they're getting at first, the whole contract is subject to a revaluation if the inspection uncovers major defects. I'd prefer to negotiate repairs or compensation rather than flush the transaction, whether I'm a buyer's agent or listing agent, but if the other side isn't going to be reasonable, sometimes it's necessary to walk. Note, however, that the opportunity to walk away happens because the contingency in the contract has not been satisfied, not due to the basic contract. No unsatisfied contingency means the contract is still in force and the other side can force you to live up to it. If the sellers have developed remorse and aren't reasonable about satisfying the inspection contingency but the buyer still wants to proceed, the buyers can force the sellers to perform by being willing to accept the original contract, as written.

The buyer usually has protection from the various contingencies in the contract - loan, appraisal, inspection, disclosures. But these have a specific limited duration, the sellers (via their agent) can insist the contingencies be removed in a timely fashion, and once they are gone, that buyer is as naked as the seller. Indeed, one of the marks of a good listing agent is being on the ball about contingency removals. Usually, it's the deposit rather than specific performance that the seller goes after because the reason the buyer wants out is it turns out they can't qualify for the necessary loan. Suing for specific performance in such instances is like demanding that men gestate and birth fifty percent of all babies. It's a physical impossibility that isn't going to happen. Sorry ladies, and sellers also. But the deposit money, and any other money in escrow, can be at risk.

Nor is that the limit of the seller's recourse. I'm not a lawyer, so talk to one, but damages certainly seem possible. Many lender owned addenda demand them if certain conditions are met.

The ultimate risk of a poorly written purchase offer, however, is that it leaves the buyer with a property that isn't worth what they paid for it.

It happens, particularly with large deposits. Buyers get into situations where they have a choice of buying or losing that cash deposit they worked so hard for. Even when the latter is clearly the least bad situation, many people, understanding the value of the cash they worked to save rather more clearly than the value of the payments they haven't made yet, will choose to consummate the transaction. They end up with an unmarketable property where they are obligated to make the payments on the loan, property taxes, and insurance. Since most folks are extremely happy to get a 2 percent deposit, this obligates you to 50 times that much by paying attention to immediate cash rather than the overall situation. Plus interest on the loan and property taxes. Ouch. Not a situation you want to be in.

There is a reason for each of the standard contingencies in a sale contract, and you can ask for others in the initial negotiations if you have a specific reason to be concerned. I just closed one where we negotiated an engineering report contingency because I had real concerns about the stability of the property (It was fine. But better my client spends $600 up front than spends half a million dollars for a property that's in danger of falling over). Standard contingencies can also be waived, creating a stronger, more definite offer. I'd be very careful about waiving them, and I always make certain the client understands the implications in writing. There are valid reasons to waive each and every one of the standard contingencies, but it is always a risk, and it can bite. The way I explain it is that it will bite, if you do enough of them - only nobody knows how many "enough" is.

If a buyer is giving up something that the standard contract gives them, there should always be something they're getting in return. If the seller isn't willing to do that, we're obviously making an offer on the wrong property. The same applies the other way around to sellers. One more way agents with good market knowledge serve their clients interests. "Yes, that model match sold for $X last month. But that seller gave the buyer 6% for loan costs, paid all the closing costs, and a twenty percent carryback as well. My client has a twenty percent down payment, doesn't need anything for loan costs, and is offering to pay half of all closing costs. When was the last time you saw all of that?" Every single one of those concessions the other buyer got means money in that other seller's pocket - money that should mean corresponding money my buyer doesn't have to pay in the form of purchase price.

Purchase price translates into property taxes for the buyer, and can mean exceeding statutory exclusions for the seller (i.e. they end up owing income tax, or at least having to pay an accountant to prove that they don't). The bottom line is that because the seller is getting things of value that the other seller didn't, they should be willing to give up something in the way of purchase price. If they're not, we're talking to the wrong seller and they're talking to the wrong prospective buyer. We want someone who's willing to see reason, he wants that prospective buyer who needs all that extra money from them to make the transaction happen (maybe). In most cases, I think such a seller is barking mad, but that's their prerogative. It's a free country. They're entitled to walk away from an offer from a more qualified buyer that's more likely to actually go through.

Another thing that a poorly written offer can do is "poison the well." The other side gets so angry about the offer (usually the price part of the offer) that when the prospective buyer comes back with something better, they aren't interested. Happens. Sometimes it's justified, sometimes it isn't. If you're not emotionally attached to the property, no big deal. If it's the one you've got your heart set upon, prepare to make major amends in the form of concessions in order to bring them to the table. Hair shirts and heartfelt apologies are not likely to work. You've set a warning flag in the owner's mind or the listing agent's, and they're going to want something extra to deal with you because they're expecting a repeat of the behavior.

A poorly written offer can also leave you stuck doing something you don't want to, or can't. Suppose you need a contingency for sale of your own property, but neglected to include one in your offer. Bad news. Now you're looking at the transaction falling out, with consequences for the deposit, or renegotiation, and that seller is going to want a goodie of their own for giving you what you need. Renegotiation is also subject to issues from deterioration of mutual trust, as the other side starts wondering precisely how much of the contract you intend to live up to. It should be expected that the inspections are going to raise some negotiation issues, even in "as is" sales. That's life with asymmetrical information - which is basically every real estate transaction. But try to avoid anything else as a reason to renegotiate.

This is by no means an exhaustive list of the dangers. With real estate, the answer to the question "What can go wrong?" is usually, "The mind boggles."* Purchase offers are probably the most noteworthy example of that principle. A poorly written, or poorly considered purchase offer can mean you're stuck with a situation you can't carry through on, and it can cost you anything up to the full purchase price of the property, and perhaps more than that.

Caveat Emptor

*Thanks to Robert Lynn Aspirin and Aahz

Original article here

This article is for sellers who want to put their property on the market priced too high "just to see if we can get it."

I know where sellers get this notion. A lot of people are out there hyping the notion that getting a higher price is a function of patience. It isn't. It's a matter of being worth a higher price. The higher priced your property, the lower the percentage of the population that can afford your property and therefore, it takes longer to sell higher end properties. But the notion that getting a better price for your property is a matter of patience is wishful thinking.

I keep telling people, if you want to be a successful seller, think like a buyer (The reverse also applies).

Here's what buyers do: They look for the most attractive property that best suits their individual needs at the lowest possible price.

Buyers are quite conscious of the fact that there are other buyers out there, and they want - very strongly - to harness the collective brain-power of those other buyers. As I had quite forcefully driven home to me recently, one of the things that buyers want out of listing services is "days on market." It wasn't a surprise to me, but the vehemence of the feeling certainly reinforced my understanding. I've written many times about the selling your property quickly and for the best possible price, and the effects of not adhering to that strategy. Buyers don't want to "waste" their time with picked over remains that nobody else liked, hence their rather strong focus on the variable of "time on market". It's incorrect, but that's the way the average buyer sees it. Kind of like the produce and meat sections of the supermarket at closing time. I cannot recall the last time a gateway client sent me an email about a property that had been on the market as much as two weeks - and at least 90% (maybe 99%) of them came onto the market within the last day or two.

So what happens when you put your property on the market over-priced? You might get showings, but when your buyers look at competing properties, they get a better deal - more of what they need and want for the same price - by buying those other properties. Therefore, they will make offers on those other properties - not yours.

Within a short period of time - usually a month or less - the showings will trail off. That pesky "time on market" counter. Buyers aren't interested in what's been picked over and rejected - they want fresh offerings, just like at the supermarket. There are any number of methods of gaming the time "time on market" counter to fool the buyers. Let me ask you: Would all these methods even exist if it wasn't important to buyers?

(Enforcement of measures against that gaming is getting stronger, by the way).

Once your property is on the market, it's effectively a depreciating asset, thanks to that "days on market" counter. It may not be as time critical as the fresh seafood counter, but it's a matter of how quickly it loses how much of its value, not whether it does. Suppose you're at the grocery store on January 7th - if you're looking at a fridge full of milk cartons, would you be looking for the one that expires January 5th, 11th, 21st, or February 1st? People are so used to doing this that they don't even realize they're doing it or that it may not be appropriate in this context. But right, wrong, or indifferent, they do it. Pretending otherwise doesn't make it so.

There is one way to refresh that interest in your property, and it's the same way that the grocery store does it. What's the feature of the "day old bread" table that people remember? Sometimes a grocer will have a place for meat or fish that's older than ideal as well, and they use exactly the same principle: lower the price.

At this stage, you've got to lower your price to compete with the other "day old bread," and to get a successful sale at this point, you've got to be priced like day old bread. This means significantly less than you could have gotten in the first place. Nobody buys day old English Muffins for a dollar when there's fresh ones sitting right next to them for that dollar, and it's not like people can't tell they're day old. So in order to sell those day old English Muffins, the store marks them down to fifty cents. The same principle will work to sell a property that's been on the market too long. Even though the discount isn't as steep, proportionally speaking, it's still cost you a large amount of money to put your property on the market overpriced. People still buy day old bread - just not for the same price as the stuff the driver delivered fresh this morning. Not to mention those carrying costs for a property. The fact is, putting your property on the market over-priced costs you thousands to tens of thousands of dollars. The longer it takes you to see the light, the worse it gets.

I've been writing all of this as if asking price was implicitly equivalent to sales price, which is not the case, but the relationship between the two is beyond the scope of this article (or any other article I'm likely to write here). Suffice to say that asking price is a representation by the seller of a sales price they would be pleased to accept.

But the buyer's perception of value diminishes with time on market, regardless of whether or not there is any merit to that viewpoint. In general, there is not, but it's kind of like believing in communism or social security or single payer health care, to construct a "Christmas Carol Ghost" parallel (disaster past, disaster present, and disaster yet to come). Doesn't matter how much nonsense it is - if enough people believe in it, it's going to be the law of the land until enough people change their mind or the whole system falls apart. Since the time between adoption and abolishment is longer than most property owners can hold onto that property, this means you might as well treat it as a fact of life, because from the point of view of a seller, it is.

You can avoid this issue by pricing the property correctly in the first place, and correct pricing should be a difficult discussion if your prospective listing agent is any good. If the pricing discussion isn't difficult, were I in your shoes I'd take that as a strong warning sign and tell that agent that their services are not desired.

Caveat Emptor

Original here

Short answer: It almost certainly won't sell!

If it does sell, it will take longer, and sell for a lower price than you could have gotten.

The first thing that happens is that when it goes onto the Multiple Listing Service, all the agents who see it know that it's overpriced. Even on the public part of MLS, the members of the public who see it wonder, "Are the walls gold-plated or something?"

The first thing you want when you put a property on the market is for everybody who is looking for a property of that nature to come and see it. Overpricing it is the best way I know of to cut down drastically on the level of interest. If they don't come see it, people are not going to make offers. Most particularly, they will not make good offers if they don't come see it. If they do come see it, they are going to be expecting something better, and disappointed people don't make good offers, if they make one at all. That high asking price communicates that this property has something above and beyond the reality of what it really does have. When prospective buyers find that it doesn't, they're going to wonder what in the heck you and your agent were thinking. They're going to go away shaking their heads at the waste of their time. If they make an offer, it will be a desperation check tens of thousands below what you could have gotten by pricing it correctly.

The agents in the area are going to avoid the property, also. They know what similar properties are going for. Why should they try to sell yours for $10,000, $25,000, $50,000 above market comparables? Yes, they'll make a little more if they do sell it, but it's much easier to sell a property that is a real bargain. I'd rather sell sell a real bargain at $400,000 than an over-priced turkey for $450,000. The difference in compensation isn't that much, and I'll work much harder, and I'll lose most prospects by trying to sell the over-priced turkey - buyers are neither stupid nor blind. I try to sell them an over-priced turkey looking for the sucker of the year, and a large proportion of clients won't want to work with me any more. I can make the commission by finding the $450,000 property we can get for $400,000 and have happy clients refer their friends and family, or I can lose the client by trying for $450,000. If they can afford $450,000 and want to spend that much, I'll end up happier by finding them the property really worth $500,000 that we can get for $450,000. Happy clients bring me more clients for free, and as any real estate agent or loan officer can tell you, getting potential clients in the door is the hardest and most expensive part of the business. I assure you that every real estate agent who has been in the business more than about three hours knows this. If you were priced right, I might have shown that client your property, but you weren't, and so I didn't. When you over-priced the property, you either placed yourself beyond their budget, or where I can find something better for the same price.

Furthermore, overpriced real estate tells me that not only does the listing agent not know what they are doing and does not know what appropriate pricing is, but also that the seller likely does not have their head in the right place as to what the property is worth. Six months or a year down the line, it's time to make a low-ball offer and see if you're desperate yet. And if you needed to sell in ninety days, you will be. Right now, if I bring in a client who offers what the property is really worth, that's so much wasted time on my part and that of my buyer prospect, because I'm fighting two people with their heads stuck in the Land of Wishful Thinking, and I cannot force either one of you to listen to reason. Six or twelve months down the line, the seller usually has to listen, as carrying costs have killed their bank account.

If people do come see your over-priced property, most of them won't make an offer. Most people don't look at just one property, even if they like yours. They may not look at enough properties, but they will look at more than one before they write an offer for anything. And since they have seen at least one other property, unless it's as overpriced as yours is, they're not going to make a good offer on yours. Many times, it may falsely communicate to them that the other property is a heck of a good bargain, and you just sold that other property, for which that other property's owner and listing agent surely thank you.

By over-pricing the property, not only do you set yourself up for all of this, but you miss the period of highest interest in your property, which is right after it hits the market, tapering off after about a month. One of the two hardest, most pernicious ideas for a good agent to fight is the idea of putting it on the market over-priced "just to see" if they can get thousands of dollars more than comparable properties are selling for. The other is the concept of "bargaining room." Not only are you unlikely to get more than the market comps, but by over-pricing the property during the period of initial interest, the owners have almost certainly frightened away potential buyers who might well have offered market value if the property was priced correctly. Nor do these people come back later. They're looking at the stuff that hit the market this week, not four, six, or ten months ago. The agents in the area remember that it sat on the market for six months even if you somehow manage to get the days on market counter reset. Result: You have to lower the price further than the price you could have gotten in the first place to attract interest, and you paid carrying costs for those months as well. Foot. Bullet. No assembly required, because you did it to yourself. If you had a need to sell by a certain time, or for the best price, it's not going to happen.

Indeed, several months out, you'll start getting those low-ballers I talked about earlier. They really do want to buy your property, but they won't offer anything like what you might have gotten earlier, because your property isn't worth that much to them. It's no secret that just waiting a little while on over-priced property is one of the best ways to get a bargain that there is. Most people put the property up for sale because they have a reason they want it sold. Most of those reasons are time-sensitive, and many are time critical. Wait until the deadline looms, or has passed, and the seller has no bargaining strength. I don't care how much "bargaining room" you gave yourself. Bargaining room is nothing. Bargaining strength is everything. When your best alternative is losing the property to foreclosure, you have no strength. If you won't deal, these folks will wait until the lender owns it. It's all the same to them, but it isn't to you.

Until recently, with prices falling, the appraisal wasn't quite the problem it usually is for over-priced real estate. But usually, if you actually do win the lottery - and the odds you are facing when you over-price a property really are in that league - and your listing agent sells it to the Sucker of the Year for more than the comparables, the appraisal isn't going to support the sales price. This means they can't finance the full sales price, and the Suckers of the Year are even less likely than other people to have the money for an increased down payment. I've said this more than once, but I it is rare for a first time buyer to have a significant down payment, or more than they planned on needing. Even people who aren't first time buyers usually want to buy with as little down as possible, and you've just boosted the amount they have to come up with out of their pocket if they want your property - not to mention that most purchase contracts these days have appraisal contingencies built in. Appraisals falling short is a major problem right now. With HVCC, most of them fall short of what they should be, let alone fevered dreams of over-pricing. When I originally wrote this, a couple of nitwits had recently put the house I grew up in on the market for 630,000! I took a look for grins and giggles. The owners had gussied up the back yard a little, but other than that it's the same as I remember. No way is that appraisal coming in even if they do find the Sucker of the Year to make an offer, so the Suckers of the Year have to front all those thousands of dollars to make the transaction work, and Suckers of the Year are just that - suckers. The chances of them having that kind of money sitting around where nobody else has conned them out of it are miniscule, to say the least. The only alternative I'm aware of is a seller carryback, and there are some real issues and problems with those. Meanwhile, of course, you are stuck in escrow with them and the clock is ticking and they may have grounds for a lawsuit if you are not careful. Even if they don't, they may sue you anyway, and tie up the title until the court gets around to ruling, or until the arbitration hearing and all of the appeals are over.

In short, over-pricing your property is the best way I know of to get yourself very frustrated, waste time, and end up forced to accept an offer that's less than you could have gotten if you had simply priced the property correctly in the first place.

Caveat Emptor

Original here

One of the most useless and overworked items in the real estate industry today is the pre-qualification for a loan. Sellers want buyers to be "pre-qualified", and buyers are seeking "pre-qualification" to convince buyers they are serious.

The level of work done for a pre-qualification varies. In some rare instances, the loan officer doing the work not only runs the credit, but verifies the income as consisting of the proper income documentation paperwork (w-2s and/or taxes, plus pay stubs and/or testimonial letter) for the loan, and determines how much of a payment you can qualify for based upon known income and known indebtedness, and actually includes the assumed property tax due to purchase price in the payment calculations, and gives you an answer in how much you can qualify for based upon current rates at the time. This is a fair amount of work, consuming hours of time. A loan officer at a direct lender who goes through this whole procedure might be done in two or three hours. A loan officer working for a broker can actually take a full day, or even two, making calls to various lenders and shopping the loan around after the primary calculations are done. On real transactions, I've gone over two days on multiple occasions, trying to find a better loan.

The pitfalls and caveats are many. If the loan officer doesn't run your credit, which costs money, they really have no idea what your credit is like. If they don't verify your income, they are making a giant assumption that what you told them is accurate for purposes of a real estate loan (you get to use gross pay, but there are a multitude of potential adjustments). The payment you qualify for when you actually go to buy a house and get a real loan is a so-called PITI payment, which stands for principal, interest, taxes and insurance. Insurance is always an educated guess, unless and until you have a quote from a prospective insurer on a particular property for an adequate amount of coverage. Taxes here in California will be initially based upon sales price, and unless you live within one of the high property tax areas, is pretty much a set rate for the whole state, but there are many special assessment districts, scattered all over the state. I've seen properties with as many as four of these, although many if not most properties have none. It's much harder in some other states to even come up with a meaningful rule of thumb figure. All of these factors throw the taxes figure off.

Principal and interest - the actual loan payment - is what's left over from your allowed payment. From this, you can compute a principal loan amount based upon known interest rates.

Here's where the games really start. The first question is "What type of loan are they basing it on?" The thirty year fixed rate loan always has the highest rate-cost tradeoff, which means that if they assume a thirty year fixed rate loan, they are going to be able to "pre-qualify" you for less than somebody else can. What's the lowest rate, and hence the highest prequalification amount? A month-to-month variable or even a negative amortization loan. Somebody assuming they are going to qualify you for a negative amortization loan is going to "pre-qualify" you for the largest loan - more than you can really afford, as millions of people have discovered the hard way since I started writing this site. Which is more attractive to a client who doesn't know any better? That's right, the negative amortization loan. Which loan causes someone who is educated in mortgages want to drag the loan officer into the sunlight and stake them through the heart? That's right, the negative amortization loan. Amazing coincidence? Not really. From personal experience, many people do not want to become educated, even to the level of a competent layperson, and they will get taken for a ride as a consequence. What they want is to look at houses, pick out one they like, sign a couple sheets of paper, and move in. What these people are likely to get is a disaster. For several years, many people in my industry made a very high class living ripping off people like this while setting them up with a gotcha that was going to bite, and bite hard, but not until after they had their commissions and depart the scene. "How many houses are they going to buy from me, anyway?" is the typical thinking.

One more concern is the fact that while sub-prime loan rates are higher, and in most cases they will have a pre-payment penalty, where A paper loan rates are lower and in most cases do not have a pre-payment penalty. However, the highest payment A paper loans will allow is less than the highest payment sub-prime loans will allow, due to lower allowable debt to income ratio. So the loan officer can typically qualify you for a bigger loan based upon a sub-prime loan. See my article "Mortgage Markets and Providers."

Additionally, the rates on loans change every day. If the rates changes, so does the amount you qualify for with the same payment. It takes only a calculator to show that even an honest and complete "pre-qualification" done on a rate that's valid today may or may not be accurate by the time you actually find a home that you wish to purchase.

Another game loan officers play is with the rate versus cost and points tradeoff. It is counter-intuitive but true that it is actually easier to qualify someone for a lower rate. If you qualify for a given loan program at 5.5 percent, you will qualify for the same program at 5.25 percent, but you might not qualify at 5.75 percent. The reason is that the payment is (or should be) lower if the rate is lower, and payment is what qualification is based upon. The cost to you is that most people refinance or sell before they have recovered the additional costs of these lower rate loans. (See Mortgage Rate and Points for details and sample computations.) So they're going choose a loan that sticks you with multiple points - costs you're not likely to recover - all in the name of qualifying you for a larger dollar amount. The money to do that can make a difference on your loan to value ratio, as it eats up your planned down payment. So you want to be very careful that the loan officer's assumptions aren't planning to use the same money twice, because you can't spend the same dollar both on your down payment and buying your rate down.

THERE IS NO WIDELY-ACCEPTED STANDARD FOR "PRE-QUALIFICATION." Let me say that again. There is no widely accepted standard for prequalification. One more time: There is no widely accepted standard for prequalification. Consequently, everywhere in the nation, but particularly in California and other high cost areas, the pressures on providers to "pre-qualify" you for inflated numbers is intense. If you don't qualify for enough to buy any home, they obviously don't have a transaction. If they pre-qualify you for less than someone else, most people are more likely to go to that somewhere else, and the loan officer doesn't have a transaction. The competition is qualifying them based upon month-to-month variable loans or even negative amortization, and so if they don't as well, they don't have a transaction. Few loan officers qualify clients based upon how things really are, and the easy transactions where everything fits and the people qualify based upon traditional measures are mostly long gone. If the agent and loan officer doesn't have a transaction, they don't make any money. If they don't make any money, they don't stay in business, they can't make the payments on the Porsche, their house gets repossessed, their wife has to sell her jewelry to keep them off the streets, etcetera. It's not a pretty picture for them, and it often leads to them putting clients into situations they cannot really afford (I originally wrote that in June 2005, long before the mortgage meltdown became plain to everyone else). Finally, of course, the size of commissions is based upon the size of the transaction, so if they "pre-qualify" you for more, they have the prospect of making more when you buy the bigger house that you cannot really afford.

This doesn't even go into the issues of a stated income loan. Stated income loans are gone now, but when we had them were intended for self employed folks who get to deduct a large number of expenses everyone else doesn't. They were where a borrower couldn't prove income according to industry standards via taxes, w-2s, pay stubs, or perhaps bank statements for sub-prime loans, so they stated their income and in return for a higher interest rate, the bank agreed not to verify the actual income level. Please note that it's still got to make sense for someone in your profession. For example, if you are a school teacher they are not going to believe you $250,000 per year. But people do make up numbers much larger than the real amount they make. It is not for nothing that stated income was often called a "liar's loan". That is fine and good, as long as you actually can make the payment. When you can't it becomes a real issue. Not necessarily for the loan officer, who's going to get their money and depart the scene, and as long as you make the first payment or two they're off the hook. No. The one who's going to have to deal with the mess is you, the client. Keep in mind that as soon as the loan is funded, that loan officer is out of the picture whether you went through a direct lender or not, and they know it. That real estate agent is also out of the picture as soon as you have your house, and they know it. You've got to live with the situation they created, and they kind of know it, but often it just isn't important to them, and certainly not as important as seeing that they get paid, and paid as much as practical. So watch out, and shop around. The person who "pre-qualifies" you for the lowest amount may be the one you should do business with, because they are using assumptions you can actually live with. Go over their numbers with a calculator in hand.

The stated income loan leads into our next issue, which is that few people will expend the necessary effort to do a "pre-qualification" correctly. It takes several hours to do an accurate "pre-qualification" correctly, but a Wildly Assumptive Guess takes just a few minutes. You may imagine which is done more often, especially since the numbers will change with available rates anyway. This especially applies if the agent does not run credit or does not get income documentation. Due to the availability of the stated income loan when I first wrote this, there was no absolute need to obsess about accuracy and being sure of the numbers, and many loan officers still don't understand that this has changed. Due to pressures to come up with high numbers, loan officers still make assumptions that range from pretty optimistic to wildly optimistic. This is wonderful if you just want to be able to say you were a homeowner for a few months while the bank forecloses on you. It's not so great if you're trying to get into a survivable financial situation.

You may get the idea that when it comes right down to it, most "pre-qualifications" are convenient fiction, worth an approximately equal size of toilet paper, if not quite so soft on certain portions of your anatomy. You'd be correct. So "Why are they so ubiquitous?" becomes the obvious question.

The answer is sellers and seller's agents. Sellers are going to go through a significant amount of trouble and expense going through the motions of selling their homes. Furthermore, they can only have one proposed sale in process at a time and they may have a deadline. They understandably want some kind of reassurance that this buyer can actually qualify for the loan. For their part, seller's agents can be some of the laziest people I've ever met when you come right down to it. They've paid the money for the advertising that draws people or joining the big well-known National Brokerage With Television Advertising! Once they get the signature on a listing agreement, many think they're entitled to sit around with thumb you-know-where and wait for the commission to roll in. They don't want to go over the buyer's pre-qualification with the seller, and most of them have no idea as to how to do it. But they certainly don't want to carry out their part for more than one proposed transaction, hence their desire for this Magical thing called the "pre-qualification."

The correct way to respond to this concern, for a seller, is simple and yet many people think it's hard-nosed. Require a deposit. Require it be remitted to you on the last day of escrow as part of the initial contract, whether or not the loan funds. Now the standard form in California, as a default, makes the sale conditional upon the loan for seventeen days, but this can be changed by specific negotiation. True, you might scare away some buyers who aren't certain that they're qualified, and in buyer's markets this may scare them away entirely. But you won't enter into escrow with anyone who's unsure. You shouldn't rely on a "pre-qualification", which is basically just a piece of paper that's now been filled up with meaningless markings and so can't be used again for something more important, like a game of tic-tac-toe.

Furthermore, many buyer's agents, knowing how useless a "pre-qualification" is, don't want to take the time to do them themselves and so tell their clients to go get one somewhere else, but that when the time comes they have someone who will do the actual loan. It didn't take very long for the word on this practice to get out, and so loan officers and agents with a very short time in the business learn not to do them unless they are going to get something out of it. Which basically means control of the transaction or an upfront payment. I certainly can't name anybody with more than a few months in the business who will do a "pre-qualification" unless a client either signs a Buyer's Agent Agreement or pays them a fee or does something that assures them they will get a transaction. And if your agent says go get a "pre-qualification" on your own, go and get another agent. If they or the loan agent they recommend can't be bothered, then obviously they are too busy to give you the necessary attention to get your transaction done properly and on time. It's very hard to fight the system that requires a "pre-qualification," no matter how useless it is, but it's part of the work they signed on for. They should do it themselves. If they try to get someone else do do their work, consider it a Red Flag not to do business with them, because they're already trying to skate by without doing work that they should be doing. Being a good agent or loan officer is work, and that's what we get paid for. Somebody who's trying to do less work now is likely to try and skate by without doing important work later.

Caveat Emptor

Original here

One of the things that has a lot of issues is any transaction between related people. This is not limited to purely family transactions, but applies also to transfers among partnerships and their partners, corporations and their officers.

The market theory holding that the value of a property is what is agreed to between a willing buyer and a willing seller is subject to the proviso that neither buyer nor seller has a reason to inflate or deflate what the property is worth to them. If the parties are related, there is an obvious reason to think that this may not necessarily be the case. Parents do things for their children all the time, siblings for each other, and as you're probably aware if you work in corporate America, major stockholders, investors, and executives often manipulate corporate versus personal transactions for less than wholesome reasons. Partnerships do the darnedest things, as well.

The issue, as far as the lender goes, is that they are trying to safeguard their money. Lending is a risk based business, and the lender wants to know that they are not taking more of a risk than they intend to when they take on this loan.

Let's say Jane Jones is CEO of SuperColossal Corporation. She wants to manipulate her compensation, so she has SuperColossal sell her property for half its real value.

This is actually okay by most lenders, if not securities regulators, IRS agents, et al. The loan is based upon the purchase price, the appraisal comes in double the purchase amount, and the lender assumes less risk than they price the loan for. Remember, the property is valued based upon LCM: Lower of Cost (purchase price) or Market value. When market value comes in high, the lender is covered. What isn't so cool is if Jane Jones sells SuperColossal the property back at twice its value. If the corporation gets a loan for 75 percent of alleged value, that's at least a third of the lender's money they're not going to get back in case of default, which becomes likely when Jane is fired and the new CEO asks why they are paying the loan when they owe half again what the property is really worth.

Needless to say, the lenders want to guard against that. Many lenders will not do related party transactions, period. For the ones that do, they will want to be very careful on the appraisal, which has now become their only guard against getting into an indefensible position. Many times, lenders may require related party transactions to go through certain appraisers, they may require in house appraisers, they may require multiple appraisals, and they may require that there be no contact between principals and appraisers. Whatever their required precautions, they need to be followed, as failing to do so will cause the loan to be rejected.

I'm going over this to make a point. Many lenders have additional requirements for related party transactions. Some may require full documentation only, others require that the loans have full recourse (they can come after you legally if they lose money). Each and every lender creates their own policy, and if your transaction is between related parties, it is probably more important to inquire about related party transfer policy and requirements than it is to get a good rate at a competitive price. Not much use having a great quote if you can't meet the lender's requirements. Even worse if it causes you to waste time with a lender whose requirements you cannot meet, and now your deadline for the transaction is here and you don't have a loan, and so cannot complete the transaction.

Just to be clear, I'm not talking about legalities of transferring the property. There are comparatively few additional rules about that, most of them coming from securities regulators having to do with corporations engaging in such behavior to the disadvantage of shareholders. This article is talking about the possibility of getting a loan from a regulated lender if you need one to consummate the transaction. Each of them will have rules they institute in order to protect their putative investment from being lost to fraud of one sort or another. The fact that you're not intending anything fraudulent isn't important - other people have, and they lose a lot more from one bad loan than they gain from several good ones.

Caveat Emptor

Original here

This article was inspired by closing one of many transactions where my clients did not make the high bid (or even close), but did get the fully negotiated purchase contract and the property. By building an airtight case that this client was capable of promptly consummating the transaction, I persuaded a rational seller to accept less money than they might theoretically have gotten from another interested party.

Let me make it very clear that this does not work every time, and you have to offer them something else they want that nobody else is offering. It takes a seller with a certain amount of knowledge of the market to make it work, and their agent cannot be clueless either. Your first time home seller with no knowledge of the reasons why transactions fail, or how frequently, is not likely to realize where the probability of money is. So after that seller eats carrying costs for the property for two to three months at several thousand dollars per month before they discover that the buyer cannot consummate the transaction, they might start to get rational about what's important - providing they haven't lost the property to foreclosure in the meantime.

The better the agent is, the more likely they are to be on the side of the more certain transaction. Over forty percent of all escrows started in the last year locally did not result in consummated transactions. Why did all those transactions fall apart? The loan couldn't be done. No other reason but "the loan couldn't be done." Transactions that fall apart for other reasons - newly discovered major repairs, and all of the little problems with interpersonal relationships that strike between contract and recording - are mostly unknowable in advance. We can all spot the purchase offer (or seller's counter) that says "Danger, Will Robinson!" but most of them aren't that bad. And the fact is, no matter how unwilling sellers may be to deal with newly discovered issues, they're stuck with them and the buyer isn't. Nobody's going to buy a house where you can't flush the toilets, as I had to explain at length to a listing agent not too long ago by way of explaining why his client was going to have to replace septic or hook it up to the sewer (Indeed, both law and lenders will make it very difficult). One of the most important questions in the mind of any rational seller or listing agent has got to be, "What assurance do I have that this buyer can consummate this transaction in a timely fashion?"

As a buyer's agent, that's what you want to sell in a competitive bid situation: increased certainty of the transaction happening.. Confidence that you and your client can make it happen, given the opportunity. Show the sellers why these buyers are qualified. Telling nothing but the truth, paint a coherent picture of an easy transaction. This is one of the big reasons why real estate agents need to understand loans, whether they're on the listing or buying side. Walk the walk, don't just talk the talk. If your clients are all cash buyers, pound the point home - demonstrate they've got the cash in the bank and get rid of that financing contingency! What's the credit score? What's the income, how stable is it, what's the debt to income ratio? The loan to value ratio? With client approval, you can even remove the account numbers from statements, and show them where the funds for the down payment are coming from!

Pre-Approval or Pre-Qualification letters will not get this job done. Neither one of them means anything real. I'll write them because other agents want them (usually for pure cover their *** after the transaction fails - again - because they don't understand what they're doing), but the only one I trust is one that I wrote. Why should I expect any other agent to give them any more weight?

The more qualified the buyers, the bigger the down payment and deposit they're bringing in, the better this works. A good sized deposit says you and your buyers are confident you can get it done, particularly if you'll waive one or more of the usual contingencies.

You do need both a good agent and a good loan officer to make it work. If the loan officer and agent are both the same person, that's even better, but this isn't happening with a discounter if the listing agent has more than an hour in the business, even if they're a discounter themselves (although I've never had a competitive bid situation happening with a discounter's listing. I don't wonder why, and you shouldn't either).

This pretty much can't work if you're in a Dual Agency situation. That agent counsels the owner to take the offer made where they get both halves of the listing commission, but the owner gets less money? Ten minutes in court or a regulatory hearing and that agent is toast. Yes, some agents are that stupid - but this is a mistake nobody makes twice, because once puts them out of the business. Not to mention that that owner is going to figure that the agent is out to line their own pocket at their client's expense.

For my buyer clients, I'm always looking for something valuable to the seller that isn't cash, or isn't purchase price cash. A high likelihood of the transaction closing is one of the best, because it doesn't cost my clients a darned thing, and yet it really is valuable to sellers. There are others, though.

Caveat Emptor

Original article here

I don't know how many people have told me the story of the Purchase Offer That Was Accepted But Couldn't Be Done. They come to me because they lost their deposit or are about to and they want some way to make it not happen.

But it's never happened to offers I write for my buyer clients. I doubt it ever will. There are many reasons why real estate agents need to know and understand loans. First off, to save their backside. Somebody defaults on a purchase money loan, the agent is an obvious target to drag in. E&O insurance plus fiduciary responsibility equals rewarding target for lawsuit. The second reason is even more important than that: Saving the client relationship. What could possibly be more damaging for a buyer's agent than losing a client's deposit? There really isn't much. When I write a purchase offer, the built in structure is always of a loan I know that I can do.

This is particularly important where there's less than 20% down payment being contemplated. For about ten years, there was pretty much always been a loan that could be done, no matter how poorly qualified someone was. Many real estate agents got used to that, writing (and accepting) purchase offers essentially "in the blind" as far as the loan went. That has now gone by the wayside. Stated Income and NINA loans are no longer available as I write this. For a while even full documentation loans seemed to add new curlicues every week as burned investors added more and more things they won't do to the list. Even if you make plenty of money, any loan over 80% loan to value ratio has far more stringent qualifications than a few years ago, and 90% or higher loan to value ratio is very difficult unless there's government insurance involved.

All government programs - VA loans, FHA Loans, Mortgage Credit Certificate, and locally based first time buyer assistance - every one of these has always required qualifying based upon full documentation of enough income to repay the loan.

Given this, you have to know if you can afford it before you make an offer. You're going to spend roughly $1000 to pay for an inspection and an appraisal as soon as you have an accepted offer, not to mention you're tying up a deposit of several thousand dollars in escrow - a deposit that's potentially "at risk" if you are unable to qualify for the loan that will allow you to purchase the property.

I know that I'm not very respectful of pre-approval, let alone pre-qualification. This is because there are no real standards for either one, and I've seen enough pieces of paper swearing a loan could be done when it in fact could not to make a fair sized bonfire. There are several reasons for this. There just isn't anything to gain personally, and everything to lose, for a loan officer to tell someone "Sorry, but you do not appear to qualify." So they issue the pre-qualification or pre-approval on hope and a prayer, because they might be able to get a loan done. You do not want this to happen to you. Even if they tell you truthfully that you need to reconsider your loan and your purchase, you are provably better off than if they string you along with messages like Think Happy Thoughts About Your Loan and you end up spending money for the appraisal, inspection, etc, and end up losing your deposit. Probably the best way to insure that this doesn't happen is to insist upon a frank discussion of what the qualification standards are, and what your limits are under those standards. If you're right at the edge of qualification standards, might I suggest you consider "pulling back" slightly? There are often bumps in the road and you don't want one bump to mean you cannot qualify.

You want to make the loan officer go over the numbers with you. Debt to Income ratio, Loan to Value ratio. Add up all of your other debt, add up the full payments for principal and interest, property taxes, and homeowner's insurance. What percentage of your verifiable monthly income (monthly average over the past two years) is that? How much do you have available to use in your bank and investment accounts? Does that cover the projected down payment and sufficient money above that for the closing costs you'll need to pay? If you need to buy the loan down with three points in order to qualify on debt to income ratio, is there still enough available to make the required down payment?

In some cases, writing the purchase offer correctly - structuring the transaction with the loan in mind - can make a difference between a loan and a purchase that can be done, and one that cannot. This is definitely the case if you are looking for a loan over eighty percent of property value. The only 100% financing available right now the the VA loan. It can be done, even in declining markets, but you have to be extremely careful to write that purchase offer in consideration of loan requirements.

If your real estate agent is a highly qualified loan officer, it's no sweat. I write every purchase offer with prospective loans in mind. If I don't know I can do the loan, I find another way to write the purchase contract so that it can be done.

The time of writing a purchase contract and worrying about the loan after acceptance is gone, and it may not return. Even for well qualified borrowers with plenty of income and down payment, it can't hurt to get a loan officer involved when making an offer. For those with marginal income and not much down payment, getting a loan officer involved before you write an offer (or accept a counter) can make the difference between a viable transaction, and one where everyone's wasting their time and money. Yes, you can potentially renegotiate a purchase contract later. Is there anyone who wants to tell me that's as good as getting it right in the first place? Do you think you might be opening the door to issues of trust between buyer and seller getting in the way on those re-negotiations? Do you think that the seller might demand fresh concessions, where if it had been negotiated correctly in the first place, you would have something that's essentially the same terms as the initial contract? Not to mention time lost, delays in closing, opportunities for the entire transaction to go south? Write your offers with loans that can and cannot be done firmly in mind, and you won't need to renegotiate for the sake of the loan.

Caveat Emptor

Original article here

Here was an idea I had: Pack a list of the most important things consumers need to know about buying real estate, as packed into the words I can say in sixty seconds without sounding like an over-clocked squirrel.

Here goes:

Spend some time making your property shine before you put it on the market. Doing work yourself is better than giving an allowance. Spend the effort to find a good listing agent, and sign a listing agreement at least a week before you want people to know your property is for sale. Consult the agent as to what can be done to make the property more attractive before anyone sees it. Agree to pay your listing agent for the good they do, and offer buyer's agents at least an average commission - you don't want them trying to sell someone else's instead property to the people who like yours.

The property is only worth what someone will pay. Price it correctly from day one. You'll end up with more money, faster, than if you start too high and reduce the price. Not all goods are in the form of cash - decide what's important to you, what's not, and how much money it's worth, before you have an offer.

Once the property hits the market, make the property as available for showing as you possibly can. If you don't show it when people want to see it, they might not come back. If you possibly can, don't be there when your prospective buyers are.

Negotiations are give and take. You shouldn't expect to get unless you're willing to give, and a stubborn attitude can sabotage your sale. Remember, you have a property and you want cash. There are lots of other properties out there

How's that?

Original article here

I've been saying this for a long time: Short sales are poison for buyers. I don't know why people encourage buyers to look at short sales, because there is no advantage for buyers that I am aware of. In fact, there are several decided disadvantages. I'd much rather make offers on lender owned property, or anything else for that matter. Short sales are the absolute bottom of the barrel as far as buyer desirability.

For those sellers who desperately need to sell, which is pretty much every short sale, I really am sorry. But I have a fiduciary responsibility to my buyer clients, who come to me wanting a better property for less money, and less hassle. The facts of life in short sales work against getting a bargain, while sabotaging our (mine and my clients) ability to control the transaction. Therefore, I advise against. Much better for buyers to look for lender-owned or other property.

The main issues lie with the lenders, who are in denial of the situation. I've never come across anyone in any lender's short sale department who didn't have their head stuck in cloud-cuckoo land. Instead of making a prompt approval or disapproval of an offer, they sit and delay and hope for a better one. When I originally wrote this, I would usually have the purchase financing ready to go in about two and a half weeks from the date of the purchase contract. For any other property, it's pretty trivial for the listing agent to be ready to close by then. We're done, and my client is happy.

For short sales, we usually won't get word as to what the lender is going to do for at least a month after that. I've literally never had an approval from a short sale lender within what used to be a normal escrow period of thirty days. This has implications for the buyer's loan. Mortgage Loan Rate Locks are more expensive for longer periods. Pulling a rate sheet at random, a 45 day rate lock adds a sixth of a point to the costs for a thirty day lock, while a sixty day lock adds four tenths of a point. On a $400,000 loan, this works out to roughly $667 and $1600, respectively. If you need an extension, a tenth of a point (roughly $400) buys five calendar days. Some lenders aren't extending locks at all for loans above the conforming limits. Or buyers can float the rate, leaving themselves at the mercy of the financial markets as to the loan they might eventually get. None of these is an optimal situation from a buyer's point of view.

When they do respond, the short sale lender will always try to squeeze more money out of the transaction. They're in denial about their loss, with the practical effect of making that loss worse. The property is only worth what it's worth. The first few days on the market are the best time to get the highest offer. If you didn't get an offer then, you're not likely to get more money later, as I said in How to Sell Your Home Quickly and For The Best Possible Price. But loss mitigation departments are congenitally clueless about this - and they will forget whatever you manage to teach them within 4.3 nanoseconds. They are structured towards shaking the most possible money out of the transaction, and seem completely unable to learn that all this does is result in a failed transaction, no matter how many times it happens. What's that definition of insanity again?

So what usually happens (after 45 to 60 days - weeks after my buyer clients could be living in any other property) is that the lender wants two things: A higher price out of my buyers, and a commission reduction on my part. I'm not going to say that I'm in love with commission reductions, but I'll agree in order to make clients happy. But the deal-killer is that they want the buyer to make a higher offer. Ladies and gentlemen, I went out and negotiated a good deal that my client is willing to accept with the seller, despite all of the delays and problems in short sales, and here's this third party essentially vetoing the purchase contract. If I did get a heck of a deal, it's now gone. In any case, my clients are going to be unhappy, being presented with what amounts to an ultimatum: Pay more money or lose the property. Show of hands, please: Is there anybody reading this that would be happy to get such an ultimatum? Unilaterally attempting to alter the purchase contract is forbidden with any other transaction. Why in the world would a rational buyer want to subject themselves to that? Why would any but the most clueless of agents not discourage them from doing so? I'm not going to say it's impossible to get a great bargain on a short sale, but it is highly unlikely.

I do consider my clients being willing to deal with a short sale to be worth some serious concessions in the purchase contract, as does every other buyer's agent with any experience in dealing with them. So it's not difficult to negotiate a pretty good bargain initially - but it's extremely difficult to keep that contract intact when the short sale lender gets involved, because their priority, the only thing that's on their radar screen, is shaking as much money as possible out of all the participants.

Nor is there anything I can do as a buyer's agent that's going to make the transaction fly faster, or prevent the short sale lender from sabotaging it. I can argue until I'm blue in the face. They're not going to listen to me. They might listen to the listing agent, but not the buyer's agent. I can help the other agent with what to say, but I'm still relying upon someone else to convince that short sale lender. Whatever they do, they're going to take their own sweet time responding, hoping for a better offer.

The cold hard statistics is over eighty percent of all short sales fall apart, and most often it doesn't even get as far as whether the buyer is qualified. The short sale lender wants more out of the buyer, wants the seller to come up with more money than they've got, the buyer gets tired of waiting and moves on - something. No matter what is is, my buyer isn't going to be happy. Quite often, I get the blame, at least in my client's mind, for the transaction failing - even after I warned them as to why this was a bad idea in the first place.

If you do get an approval from a short sale lender, quite often they're written on a ridiculously short deadline. Given all of the facts above, I'm not going to advise my buyer clients to spend their money on appraisal, inspector, etcetera until we do have an approval. That's just money thrown away if the short sale lender doesn't approve it. But waiting on them means it's likely to take more than a week to get the loan done once we do have an approval - and dealing with a one week deadline was an actual experience I had once. Not to mention the effects of waiting for such an approval on the buyer's due diligence period, and possible exposure to loss of my client's deposit (at the very least, it's sitting there tied up in escrow while everything gets sorted out).

Seller paid closing costs, integral to most transactions currently, are also extremely difficult to get approved. These are money out of the lender's pocket, and they're going to require a higher than what they consider "market" price in order to compensate them. This is intelligent and reasonable, but if you're looking for a bargain due to them not understanding their bottom line, it's not going to happen, and in fact, when one or both of these things are part of most transactions, the "market" is priced to include them. Result: The buyer who needs one or both of these is likely to have to pay more for a short sale than any other property they might fix their eye upon. And those buyers are wanting me to find them a better property, cheaper. Are you still in doubt as to why I advise buyers against short sales?

Since I originally wrote this article, another category of problems has become endemic as well. Listing agents are playing "bait and switch" on the price - advertising prices far lower than any offer the lender will likely accept. Such a sale isn't going to happen, and the agent knows it - but that's sure a good way to get prospective buyer clients to call, giving the listing agent an opportunity to gain a new buyer client! Furthermore, because there are so many of them and they are time intensive, many brokerages are delegating the negotiations with the lender and asking prospective buyers to pay for it.

It is far more fruitful for most buyers to focus on properties in other categories. For this particular property, better to wait until is is lender owned, at which point the bank is on the hook, paying money out of their pocket, and usually the money tied up in this non-performing asset costs that lender heavily in leverage on their working capital. Lender owned properties get turned over to different employees, with different performance incentives, with the instruction of getting that property off the lender's books! The money this costs the lender is their own management's fault.

For any lenders reading this and not liking it: The responsible party is you. If you don't want them to become lender owned and cost you much more money, get real about your short sales! Publicize your criteria so buyers and their agents will know they're not getting into a "black hole" situation, and respond in a timely and reasonable fashion without trying to leave people who weren't involved (the prospective buyer and both agents) holding the bag for your mistake. It will save you money by dealing with the situation before it goes to Trustee's Sale.

As far as writing this article goes, the only one I have any sympathy for is the current owner, who really does need to sell. No matter what past sins they may or may not have committed, that owner is currently trying to face reality and deal with it. As the buyer, however, unless you believe that seller's plight is worth wasting several tens of thousands of your dollars, there's nothing you can do. Buyers should avoid short sales. They're not likely to end up happy.

Caveat Emptor

Original article here

From an e-mail

I've been talking to agents lately and I ask them about the things I've learned about from your site. I thought I would say things like "I want to apply for a backup loan" and they would say "Good idea!" instead of "Why would you do that?" I try to answer the why and next thing you know none of my why's make sense anymore. Here is a summary of that conversation:

Me: Okay, so I need to get a "pre-approval" or "pre-whatever" from a lender so I can put an offer on this house . . . that sounds fair . . . but I want to shop my loan around and in fact, I want to get a backup loan.

Agent: Backup loan? What for?

Me: Because from what I understand what you are told at first isn't what gets delivered and you are at the mercy of the loan officer if you don't have a backup plan

Agent: They have to fill out the form and give you what they promise so you are protected.

Me: So it's the law that they deliver what they fill out on this form?

Agent: No, it's not the law but they wouldn't dare change the terms or I wouldn't recommend them.

Me: Well, most people don't know they're getting screwed until later and most of the ones that notice don't do anything about it.

Agent: Well, if you hire me to be your agent then you should trust my advice . . . otherwise why would you hire me?

A similar conversation ensued when I talked about a "exclusive" vs "non-exclusive" buyer's agent agreement. "There is no such thing as "non-exclusive"". What is the benefit to you? If I have multiple agents then they all work to find me the perfect house and the one that finds me the one I like is the one that get's rewarded. Nope! If you tell an agent you have other agents he won't work with you. Okay, well, I wouldn't tell the other agents. But any good agent is going to make you sign an exclusive agreement.

Anyway, the sales techniques here are right up there with car salesman.

Let me ask you about your experience with monopolies? Your electric provider, mass transit provider, cable provider - do they furnish top notch customer service? Do you think someone might be able to do better, cheaper? Quite likely, because monopoly situations encourage rent seeking behavior. Monopolies are the classic example of rent seeking - do business with them, or not at all, meaning you're stuck with whatever service they choose to give you at whatever price. Why in the world would you do that to yourself?

Only two possible reasons: You don't have a choice or you don't know any better. You do have a choice in real estate, no matter how much various people may choose to pretend you don't. I certainly haven't noticed any shortage of real estate agents or loan officers. There's something like 7500 licensees in San Diego County alone. That leaves you don't know any better. It doesn't matter whether it's through ignorance or not following through on the knowledge.

In fact, if you think about it, someone who insists upon exclusive rights to your business is telling you they're worried about comparisons to other professionals. They're telling you they're afraid they can't compete and they're not willing to try. Does this sound like someone who's likely to give you the best service? Someone who's not willing to compete?

Just because an exclusive agreement isn't in the consumer's interest doesn't mean that it isn't very desirable for agents. In fact, most agents take a lot of classes in learning how to lock your business up and cut out the competition before anyone else gets to the starting line - several times more training than the average agent ever takes in learning how to actually give good service and good value to their clients. Look at the average agent symposium sometime. There will be easily ten times more offerings in how to get clients and cut out the competition than there will be in how to get your clients the best value. If the average agent doesn't offer a non-exclusive buyer's agency contract, they can pretend such a thing doesn't exist. It does exist; it's available in every state. In California, it's form BBNE in WinForms, the standard computerized package. But if they can persuade you to sign an exclusive contract, they're guaranteed to get whatever buyer's agency commission is due - before they've done any real work, before they've demonstrated that they are really going to guard your interests at all. I've written about the drawbacks of an exclusive agreement before, and even given examples in shopping for an agent, and the games that get played with consumers by agents. If you've signed an exclusive agreement, you're stuck. If you don't, you're not - indeed you keep far more control in your own hands.

Some agents will try to sidetrack you with an exclusive agreement "but you can fire me any time you want!" The first question is where is that written into the agreement? Show me please. In fact, the standard exclusive contract is written to be very difficult to break for any reason. The second question is that even if it is written in, how is that not functionally equivalent to a non-exclusive contract? The answer to that is they've still got your business locked up until and unless they make an obvious blunder. As long as they don't make that obvious blunder, they're still in the driver's seat. But this doesn't mean that they're a good agent - you have no standards for comparison. Indeed, you are agreeing not to acquire any standards for comparison. Matter of fact, they can be the worst excuse for an agent ever and still not make any mistakes that most people are going to fire them for. Plead for one more chance, and most people will give it - dozens of times. The bottom line is that they still avoid any chance at having to compete.

Now just because your agreement is non-exclusive doesn't mean you have to go find other agents. At least half of my clients never talk to another agent. But they have the option of doing so, and that knowledge is one of the things that motivates me to do the best job I can for my clients, and why I keep the list of clients I'm working with at any time short enough so that I'm certain I can handle them all with no deterioration of service. If I don't, they can fire me and find another agent as easy as crossing the street. That motivation just isn't there if you give someone an exclusive agreement. Do you want the agent whose motivation is to concentrate on giving a few clients the best job they can possibly give, or do you want the agent who's a half-notch above getting fired, whose motivations are to lock up as many clients as possible, secure in the knowledge that none of those clients are likely to actually fire them? And if they're confident they can give you such a terrific job, why are they requiring an exclusive agreement? If they're really that good, they should be eager to compete. That's the best confirmation of their abilities possible - the fact that someone else tried and couldn't do it! As I've said, most of my clients see the job I do and never talk to another agent, and most of those who do end up telling me how much I shine by comparison. But it takes confidence in my own ability to offer that non-exclusive agreement. The ones who won't are telling you that they don't have that confidence. Do you think there might possibly be a reason for that lack of confidence?

Probably the largest number of agents and loan officers compete by being what I call "Social predators" Involved in Boy Scouts, Soccer, Little League, the church, PTA, whatever. They try to make those they come into contact feel obligated to do business with them, because they are after all, a good guy (or girl), they help the cause, etcetera. Surely such a person is worthy of trust? Surely they will treat you right? They lock up the business with an exclusive agreement or a large deposit, raising the barrier to competition as high as they can. This effectively sets you up for the kill. My personal experience leads me to believe that such agents and loan officers are responsible for a truly outsized proportion of the people who are losing their property to foreclosure in the current crisis. It seems like everyone I come across who's in the process of foreclosure has a "social predator" story to tell, although many of them don't realize it. Most of them have no clue what happened until I dissect the entire process and show them that their "little boy's wonderful scoutmaster" bent them over and took advantage. The thought process is natural, but the conclusion does not follow from the premise - a thing most people don't understand until how it bit them (past tense) is plainer than the nose on their face.

Ronald Reagan loved a very applicable phrase: Trust but Verify. It's not accident that this principle, which he applied as President, served him and the country very well. On a more personal level, you are willing to trust agents with your business (otherwise you wouldn't be talking to them), but you want to verify that they're earning it. You're not willing to take trust to the level of the spouse who's clueless about their spouse telling them they worked late when they come home at 3AM six nights in a row smelling like someone else's perfume or cologne. This is the best function of a non-exclusive buyer's agency agreement. This means you still have the right to go out and get the only valid standard of comparison: Another agent who has the same opportunity to do the same job as them.

In your situation, I'd be very blunt: "What you're telling me about requiring an exclusive contract makes me believe that you know very well you don't measure up to a good standard. In fact, the harder you argue for an exclusive agreement, the less willing I am to believe you are worthy of one. I'll willingly give you a chance to earn my business with a non-exclusive agreement, but I'm not going to sign any exclusive agreements with anyone. Since you're not willing to sign a non-exclusive agreement, I am wasting my time. Good-bye." They have as long as it takes you to get to the door to change their mind. Walk out and never look back - find someone else who will offer non-exclusive agreement.. In fact, taking this stand in your self defense is the first and most critical point of Shopping for a good buyer's agent. The standard non-exclusive contract is truly a bet you cannot lose as a consumer. There literally is no risk. Doesn't matter if they're a freshly minted licensee who's never done a transaction in their life (How often do you hear that from someone who actually has significant experience?). Go ahead and sign a non-exclusive agreement, and the worst that can happen is they don't get the job done. You're still free to use anyone else who does. You have lost exactly nothing - as a matter of fact, both you and that agent are mathematically, provably better off for having signed that non-exclusive contract! Hiring them thus can only increase the probability function in your favor! This improvement may be marginal or even zero, but so long as you do your due diligence it cannot be negative.

The same thing applies to the loan officer an agent recommends. The reason they're choosing that loan officer has nothing to do with the best choice for you and everything to do with the best choice for them. That's a loan officer they trust not to screw up the transaction by telling you, "You know, I'm not certain you can really afford this property." That's the loan officer they trust, by hook or by crook, to have a loan ready at the close of escrow, no matter what it takes, so that that agent can get paid - and if you're facing foreclosure six months down the line, hey, they got paid. Has nothing to do with how good that lender's loans are, how competitive they are, or any other advantage to you - only that they trust that loan officer to insure their paycheck. That's what the agent is really telling you. The loan officer may be really good, and very competitive on price. Then again, they may not, and the one thing I'd bet significant money on, sight unseen, is that they will never tell you that maybe you're stretching beyond your means - that agent will never send them another client if they do! The only agents I'm certain could tell the difference between good loans and loan officers and bad ones if it bit them are the ones who are also loan officers themselves.

If an agent is recommending a loan officer on the basis of "This person wouldn't dare cheat my clients!", ask them for a copy of the initial MLDS (California) or Good Faith Estimate (the other 49 states) and a copy of the final HUD 1 for that loan officer's last five transactions with their client. (sarcasm on) What, they don't have them? What a surprise (end sarcasm). But if they don't, how can they possibly know whether that loan officer does or does not quote accurately? You've just asked for the only possible evidence, and they don't have it! Nor does this cover how well they compete on price. As long as the terms are the same and the rate/cost tradeoff is better, a loan is a loan is a loan. I used to advise people to apply for more than one loan, but changes in the lending environment have put the kibosh on what was an easy and effective way of managing your loan thus. Now you need to have a real problem solving discussion with several potential loan officers and evaluate the solutions - a much more difficult task for a lay consumer, because neither I nor any other loan officer is doing back up loans any longer. Rate shopping on the phone doesn't cut it any more because loan officers can lie like rugs and low-ball worse than any remodeling contractor and now they can point to a federal form for false credibility

You're right that these sales techniques have a lot in common with used-car sales. Everybody in any sales business wants to avoid competing if they can - it means they don't have to work as hard, and get higher profit margins. Consumers, for their part, need to learn to understand what actions mean, and that actions are important, not words. That's part of the reason why I'm writing this article.

Sales persons, properly handled, are your best friends in the whole world. Nobody solves your problems as well as an expert with the motivation of getting paid for their trouble, and there always seem to be problems that lay people don't realize exist until they're bitten, which is almost always far too late to avoid all the damage that's coming down the pike. Kind of like having a Terminator after you. If you don't have your own very special protector, they're going to get you. I don't like having my clients bitten - not tomorrow, not next year, not ever. One bad transaction can ruin you as an agent or a loan officer, and I intend to be doing this for the rest of my life. So I'll do everything I can to keep it from happening before it happens, and you want someone just as dedicated working for you. The only way to be certain is to watch them in action over time. But if they're asking you to sign that Exclusive Agreement beforehand, how in the heck can you possibly have the knowledge of their business practices to give it to them?

Caveat Emptor

Original article here