Buying and Selling: August 2021 Archives

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

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

You are now intending to make money.

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

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

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

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

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

Caveat Emptor

Original here

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

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

Original article here

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

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

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

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

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

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

Caveat Emptor

Original article here

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

My husband and I are currently in escrow with the sale of our home in California. Our buyers have been " difficult" to say the least. The buyers appraisal of our property came in $6,000 below the selling price which won't make a difference to their lender because the buyers are putting 50% down. Of course, they started threatening us saying, "you need to issue us a $6,000 credit since the appraisal came back $6,000 below our agreed upon price." We paid for a second appraisal through a company that was lender approved. The second appraisal came back $3,000 above the purchase price. We have 2 questions:

Is their lender required to accept or at least consider this second appraisal or can they simply disregard it?

If the buyers try to use the appraisal clause against us to get out of the deal, can we keep their earnest money since we have a documented appraisal showing a value of $3,000 above the agreed upon price on the contract?

Thank you for your insight and expertise.

There are three things to consider here: The contract, potential scams, and what's really important.

The standard purchase contract has two clauses directly relating to this question. The first is the loan contingency, the second is the appraisal contingency. The first isn't really a factor in your case, but it often is, as a failure to appraise for the purchase price can torpedo the loan if the down payment isn't very much. If these buyers needed anything close to the maximum loan to value ratio, that would be a dead contract as it's written because the lender isn't going to fund that loan. The second, more relevant clause in your case is the appraisal contingency. It states that the transaction, as negotiated, is contingent upon the property appraising for the official purchase price or higher. There's an argument to be made that your appraisal is enough to cancel that contingency, but in practice, appraisals can be had for inflated amounts quite easily. If the seller being able to obtain an appraisal for the sale price was the relevant condition, I'm not sure there would ever be a property that would fail to appraise for the purchase price or more. Spend $400 for your own appraisal and keep a $5000 deposit. Nice work if you can get it. Acting as a buyer's agent, I would never accept a seller's appraisal under any circumstances. This may be news to all of those who put "Appraised for $X!" in the listing, but there are too many ways to get an inflated appraisal. Point of fact, it's usually someone trying to justify a higher asking price than the market will support. It's never a reason for me to consider a property, and can be a reason why I shouldn't.

The real bottom line in the current market is now Home Valuation Code of Conduct - the buyer's lender orders the appraisal, and that's the value the loan is stuck with. Doesn't matter if it comes in $100,000 too low because the appraiser chose absolute B.S. comps - that's the appraisal you're both stuck with, at least with that lender.

To be fair, buyers can get low appraisals too, which leads us into the second subject: potential scams. You're in California. There just aren't many properties I'm aware of in California where $9000 difference is a major percentage of the selling price. If you were somewhere where the average house sells for $40,000, this would be cause for concern. Flipping for an extra 22 percent profit! But when the average property sells for $400,000, it's just too small an amount over too much of a major stumbling block to be worth scamming someone over. Not that it's an amount to be sneezed at, or impossible, but I just can't see someone running a scam for only 2.25% of the sales price. If this was a scam, I'd expect $30,000 or more in difference. This is too small a difference to be a likely scam in the real world.

Speaking of the real world, what's really important is your market. How many sellers per buyer, how long properties like yours are sitting in your area, what they're selling for when they do sell. Note that I didn't say what the asking price is. Any twit can put an asking price that's 20% too high on a property, and quite a few do - it's a great way to get listings from owners who don't know any better. It's called "buying a listing." The important data have to do with actual sales. Not pending sales, not the pipe dreams of "For Sale By Owner" properties, not what the model match next door is asking, but what they are actually selling for. Coin of the realm passing out of the buyer's hands. A willing buyer is a necessary component of every sale, just as a willing seller is. If you just want to list your property, you don't care about a willing buyer. If you actually want to sell, you absolutely have to have one.

The good news is that you appear to have one. The bad news is that they don't want to pay the amount on the contract any longer. Well, buyer's remorse strikes a lot of folks, but the stronger their buyer's agent, the more they're going to get that out of their system before they make an offer. On the flip side of that for sellers is that the stronger the buyer's agent, the more focused they are on value.

Against this situation, you've got to ask how likely it is you're going to find a better buyer soon enough such that you net more money off the sale. If the property is vacant and your carrying costs are $3500 per month, this buyer now will still net you more money than a different buyer who pays the amount on your appraisal three months from now. I only know the San Diego market, and if you're here, why am I not involved in the transaction? But no matter which way you decide, you're taking a risk. Some people will just take the money and run because they're unlikely to have their face rubbed in the fact that they were wrong - the property is sold and future offers are a waste of everyone's time - but that's a putrid way to make a multi-thousand dollar decision. Actually, it's not just a multi-thousand dollar decision. It's potentially the full value of the property and your credit rating as well for years if you default. If you've had a Notice of Default recorded on the property or something worse, they're being a lot nicer than some folks to only mess with you for $9000.

My point is this: There are potential upsides and downsides to every possible decision you can make in this situation. Can I tell you which way to jump? Not without more information. Will I tell you which way to jump? I don't risk my license and my livelihood for free. It's your agent's job to do that. If you're representing yourself, you've just run smack into one of the lesser reasons not to.

Matter of fact, whomever your agent is, the information you've provided draws a pathetic picture of their competence. There could be exculpatory information out there, but this is all basic, "hit the ball with the bat" level stuff that anyone who's been in the business three weeks should be able to deal with, and if they're that new, their supervising broker should have explained it to them, if their supervising broker had a clue themselves. If this transaction falls apart, go find an agent who knows what they're doing. Nor am I impressed with the buyer's agent from the information provided. When something goes wrong, telling the other side "you have to" is a good way to kill a transaction that can usually be saved. You don't have to do anything. You could tell them to take a long walk off a short pier. How smart it is depends upon factors I can't see from here. But this is why negotiation is the biggest factor in the game of real estate. Some folks won't, some folks can't, some folks just don't know how. They're going to suffer unless their agent does. Because all the preparation and work I do is wasted if I don't negotiate effectively. Any twit can say, "No," and quite a few do. They're hosing themselves if it's the wrong answer. The opposing fact is that the transaction doesn't start until you have an agreement, and if the other side believes they've been hosed, they can usually get out of it if they really want to.

They can get out of this one if they want to, and while you can be stubborn about the deposit, you'll probably lose in court. They have an appraisal contingency in the contract, and the appraisal came in lower than the purchase price, giving them the option of bailing out. Personally, I find an appraisal contingency on top of a loan contingency to be the sign of a weak offer from a buyer who is going to bail out at the first issue with the property - and no matter how much you love your property, there is no such thing as a perfect property. When I'm representing buyers, my job is to work on their behalf, but I am very willing to counsel them to waive either the loan contingency or the appraisal contingency, because as long as we have one of the two in effect, we can live with it, and it's a sign to better listing agents of a stronger offer that's more likely to close from a committed buyer.

Caveat Emptor

Original article here

Hi, my name is DELETED, I need help. I bought a house (a few months ago) because my boyfriend persuaded me to. This was supposed to be a real estate investment between us. I put the house in my name and i was supposed to get $9000 and he was gonna keep the rest to do the repairs. I never received my money and he never did the repairs on the house and we ended up breaking up (about a week later). I started getting suspicious, (a few days ago) I found out that the appraiser lied on the appraisal. He lied and changed the square footage of one of the comparable houses to make around the same square footage of my house showing that it sold for the same price I brought my house. There is more to make me think he lied. I found out that the mortgage person, the seller, my ex and the appraiser all know each other I think it was a set up. I have a lawyer, but what can happened after the loan is already in my name. This house is not worth what I bought it for he appraised it around $50,000 more. Will the mortgage company have to buy the house back because they are supposed to check it. When I looked up the appraisal company that he had on the appraisal, it doesn't even exist. Please give me some advise, will I be stuck with this house?

Talk to your lawyer. It sounds like you've probably got a good case for a civil suit, and can make criminal complaints as well for fraud and conspiracy. However, you have title to the house and a Note that says, "I agree to pay..." and a Trust Deed securing said Note. Just because you are the victim of a scam does not relieve you of your obligations under said Note and Deed of Trust. Not living up to those obligations is one of the best ways I know to make a bad situation worse. It's going to take a while - probably years - before you recover anything of what you've been taken for, if you ever get it. The wheels of justice grind slowly, and require a lot of lubrication in the form of money. Just because you're the victim doesn't change the process. It's conceivable that your lawyer may even advise you to let it go, if in their judgment you're unlikely to recover enough to make it worth your while.

Before we get into the main issue, let me cover a special red flag that was ignored. When you are buying a house, you are not going to get cash back - not with the approval of the lender. As I went over in Real Estate Sellers Giving A Buyer Cash Back, concealing something material from the lender is fraud, in and of itself.

Lots of people get talked into cutting corners in their transaction or doing without an agent because "agents don't really do anything." However, there are so many scams out there that any time you cut corners you risk getting taken for the full amount of the transaction. Lots of folks discount the possibility - until it happens to them. And it does happen. Real estate is the largest dollar value most folks ever get involved in, and scamming a little extra is likely to be major money in and of itself. A certain percentage of all transactions have issues - and when someone tries to talk you into short-circuiting your protections, that's pretty much a red flag that this is one of those transactions to beware.

Not falling victim is worth a lot more than those protections cost you. As a buyer's agent, my goal is to make at least a ten percent difference in the quality of property, the price, or some combination. I haven't missed that mark yet; and in some markets my average is closer to 35 percent. But that's in addition to preventing things like what happened to you. Having an agent gives you someone responsible to you. Someone you can sue if something goes wrong, so they have incentive to guard your interests. Someone with insurance (deep pockets!) and a license and a broker supervisor who should have monitored the situation. Not to mention who should be able to prevent the situation happening in the first place.

Can you stop collusion between the appraiser, the loan officer, and the seller? No. Stopping collusion is difficult, as anyone who has ever studied accounting can tell you. A lot of the curriculum goes into the subject of controls, and separating functions so that it's only with multiple people cooperating that assets get embezzled. But with an agent who knows your market on your side and bound to you, it's a lot less likely they'll get away with it. How likely would you have been to buy the property for the price you did if an agent had said, "I can get you a better property for the same money" (or something like it for less)? Kind of likely to short-circuit the entire scam, eh?

Caveat Emptor

Original article here

On a forum I frequent, someone posted this advice for prospective property purchasers: At closing, at the title office or bank, when signing the title, contract for sale or any transfer instrument (use a single obliterating line) mark out the word "tenant" and write above it "landlord" or "buyer".

Better yet, require a free simple title to transfer ownership without the buyer identified as a "tenant".

I do not understand this "advice" and am turning to you for clarification. Thanks!

I only work in California, but the only times the word "tenant" should appear on a title transfer deed is if it's a leasehold, or to describe the manner in which two or more grantees hold title amongst themselves.

It is possible that someone might contend that a title granted as "tenant" was a leasehold or rental interest of some nature. I can't see it working in the face of a purchase contract, though, unless there's a whole lot of scamming going on, and everybody involved would basically lose their license and their livelihood, and be liable to the purchaser for what they should have gotten, and didn't. Be advised, however, that I'm not a lawyer, so consult one. With that said, however, such words shouldn't appear unless there's a reason for it.

Here in California, the deeds typically read "(A) grants (B) (type of title or interest) in (legal description of property). It doesn't say seller, buyer, or anything else along those lines. It simply transfers title from one group of holders holder to another. There can be commonality between the first group and the second - say a parent granting the property from themselves to themselves and their child. Spouses usually automatically join title by action of law, but it can be beneficial to have them officially on title of record in some cases. They can also be used to remove a particular party to the deed, by omitting them from the list of parties the property is being granted to, as in from W, X, Y and Z to W, X and Z.

There are two kinds of transfer deeds most people will see: A Grant Deed conveys any interest in the property, including interests that may accrue due to operation of law at a later time. A Quitclaim Deed conveys only what interests you many currently have. An actual purchase should use a Grant Deed, transfers within a given family most often use Quitclaims. There are others: Warranty Deeds and Special Warranty Deeds, the latter being mostly used in lender owned property. Both are insurable, marketable title, but there are differences and if you need to know, consult a licensed attorney. Sometimes people acquire title through court judgment, and the title being granted is as strong as anything else, if subject to appeal.

The holder or holders can be lots of different things. It can be a corporation, husband and wife, a single individual, a trust, an estate, a partnership, etcetera, or even a combination.

It also includes how the grantees are going to hold title: joint tenants, tenants in common, common property, etcetera. Each of these has legal implications, and those implications change from state to state. Consult a lawyer in your state for more. Joint tenants, also known as joint tenants with rights of survivorship (i.e. survivor gets the entire share of title), is the most common way for married couples to hold property, but there are many others. There can be layers of this - say a husband and wife hold their share of title as joint tenants, but they are only part owners in a tenancy in common. Any time there are two or more owners, the title deed has to say how they are going to hold title between them. Each of the possibilities has legal meanings and consequences. Single property owners can be and usually are described as "a single man/woman", "an unmarried man/woman" (not the same thing as single!), "a married man/woman as his/her sole and separate property" and many other things, but the word "tenant" does not appear in any of the possibilities I am aware of. Each of these implies things about the state of title as they hold it, but a full description is beyond the scope of this article and changes from state to state. Consult your attorney for details.

The interest being granted can be one of several things or a combination of interests. A "fee" is a piece of actual land. An "easement" is the right to use a particular piece of land in a particular way, but without the rights of ownership. The most common easement is access. The owner of parcel A gives the owner of parcel B the right to travel over a specified part of parcel A in order to get to their own parcel, or for other purposes. Utility easements are part and parcel of this, and the parcel owner granting an easement is giving up rights to do things with their property that conflict with that easement - for instance, building a garage or granny flat over the gas line. If conflict happens, the property owner is required to do what is necessary to give the easement owner their rights. Quite often, easements run with the ownership of a given property, in which case the title being granted is a fee and one or more easements. A leasehold is a time interest - for a specified period of time. Think of it as a rental interest to get the idea. Finally, there is a condominium interest, in which someone holds title to a share of an underlying property, which interest cannot be partitioned off, and usually comes with some rights of exclusive use to a portion of that property. In plain English, you own a defined share of the entire thing, and exclusive rights to your condominium unit, your assigned parking space, and anything else that may have gone with a particular unit under the Condominium Plan, but you have no rights to split yourself off from the common ownership interest. Just because you live in detached housing does not mean you don't live in property that is legally a Condominium. It irritates me no end to read "title being conveyed" in MLS being "fee simple" and then below read that are homeowners association dues on the property. These two things never go together. If there are association dues on the property, it isn't a fee simple.

Whether the person signing a title transfer deed had a right to grant the ownership interest conveyed (or all of the ownership interest conveyed) is a different story. I can grant my interest in a property on the moon to anyone else, but if I don't have any interest in the property granted it is meaningless - a wasted piece of paper. This is the strongest of many reasons for title insurance. People granting interests that they may not own or control happens all the time. Usually, it is to clear up a cloud on title, but fraud is a real and significant factor, and sometimes people legitimately may believe that they are (or were) the owner, but it turns out they weren't due to some unforeseeable or unknown factor. If someone sells you a property they don't own, and you don't have title insurance, you are out the money, still owe the money on any mortgage you may have taken out, and you don't own the property. Here is a not too untypical example: Owner A dies, and sibling apparently inherits. Sibling sells property to someone, who eventually sells it to you. But Owner A had a long forgotten marriage that was never dissolved, and that spouse had a child. Child discovers undissolved marriage, checks to see what property may have been left by Owner A, finds your property. Child sues for title and wins, as they've got the law on their side. It can happen to you, no matter your current situation. Back in the late nineties, an heir of Alonzo Horton (who laid out what is now downtown San Diego well over a century ago) got several million dollars out of an interest in land it turned out he had inherited but lots of people had been using the entire intervening time.

Words in title grants can be important. Unless I was buying a leasehold, I probably wouldn't accept a title deed granted to a "tenant" (unless it was "joint tenants" or "tenants in common" with any co-purchasers in the property), and I'd decline to pay the money until the seller furnished a correct deed. Why should I, when they haven't lived up to their end of the bargain? Why allow them to create a potential can of worms when you don't have to? Lenders, for their part, have also wisely instituted requirements to make the title deeds they are lending money upon conform to certain requirements before they will consummate the loan. They are in the business of making loans that are going to be repaid, not of repossessing property where the owners didn't, but they're not going to tolerate needless clouds on their title if they do need to take over the property. Bottom line: Be careful about wording on the title deed. Word order and even the presence or absence of commas can be important. If at all in doubt, consult your own lawyer.

Caveat Emptor

Original article here

The most common mistake in real estate (and every other aspect of financial planning, for that matter) is to assume the situation now is going to continue indefinitely. In the stock market, people chase last year's returns. They "wait for the market to bottom out". When things are going well, they assume that real estate is going to continue to gain twenty percent per year every year.

This is pernicious. Otherwise rational people just assume that whatever is going on right now is going to continue, and it can be extremely difficult to talk them out of it, as I can tell you from personal experience, having lost an awful lot of income trying unsuccessfully to persuade people to limit themselves to what they could actually afford, and missed out on just as much by trying to move people off the sidelines once things are primed for a recovery. But "Past Performance Does Not Guarantee Future Results" is not just a legal disclaimer. It amounts to natural law, just as strong as gravity or the Second Law of Thermodynamics.

People get caught up in mass psychology, doing things because everybody else is doing them. Mass psychology can move the market. In fact, the history of real estate is mass psychology moving the market. Masses of people believing that a property is worth $600,000, and therefore it is. They believe it's worth $600,000 today in part because they think it's going to be worth $650,000 tomorrow. Or $700,000, $800,000 do I hear $1,000,000? You get the idea.

This works even more strongly on the downslide. People are afraid that if they invest $400,000 in the property today, it'll only be worth $350,000 tomorrow. They don't want to lose money, even if it's only a temporary theoretical loss on paper. They want to wait until the market "bottoms out". Newsflash: Real Estate isn't liquid like stocks and bonds, and should not be purchased (or sold) as if it were, with all of the false conclusions that one assumption leads you to.

I'm now going to invoke one of the great and dirty non-secrets of investing: There is no predicting the top or the bottom. Why? Because it turns so strongly on mass psychology. Nobody can tell when mass psychology is going to change. Nobody can tell what it's going to grab onto, or completely ignore. Not Hollywood, not Madison Avenue, and certainly not your friendly neighborhood agent or loan officer. Mass psychology is the "noise" that disguises the true economic signal.

There is a real economic signal. Most things really do have some kind of intrinsic value to them. This value is determined by function, by supply and demand, and by ability to pay, as well as lesser factors. Real estate is no different than most other stuff in this regard. Shares of corporations have a value strictly determined by the value of future earnings per share. $1 per year of future earnings may be more valuable in a low inflation environment than it is in a high inflation environment. Longer potential earnings streams are more valuable than short term ones - $1 per year per share from a well-run insurance company is more valuable than the same earnings from a company with one technological trick that currently leads the market.

The noise often obscures the signal. A little history that leads to some useful concepts: Back in the first half of the second millennium, the assumption was that Earth was the center of the universe, and that planets (and the sun) traveled in circular orbits about Earth. This didn't fit the observed data (planets sometimes moved backwards against the celestial background), so astronomers postulated that planets moved in "epicycles", smaller circles about what was presumed to be the center path of their orbits, called the deferent. Before Copernicus and Keplerfinally brought the whole house of cards down, astronomers were postulating epicycles within epicycles within epicycles in an attempt to fit the observed data.

Unlike planets, economic variables are moved by more than just one force. The fact that planets and artificial satellites are moved by precisely one known force is why we can plot their orbits so precisely. But economics is a lot more complicated, and so the astronomical concepts of epicycles and deferents have some value in understanding them. Let's even use those terms. It's far more complicated than this, but if you think of mass psychology as the epicycle moving about the deferent of the underlying real value, you may begin to get a useful picture of what's going on. The epicycles can be very large and last for years, but markets always move about the deferent in the end. That's where the restorative economic forces trend - and the further away from the deferent things get carried by epicycles, the stronger those restorative economic forces are. Right near the deferent they're not very strong, but the further from the deferent that mass psychology and other epicycle creators move perception of value, the stronger the restorative forces get. Think of a large massive ball the size of the US economy rolling down a broad shallow valley where the sides get progressively steeper. Things can happen to the ball to move it out of the exact bottom of the valley quite easily, but at the moment it moves off the deferent, forces start acting upon it to move it back to the deferent. Small, almost unnoticed forces that build up, and build up more the further you get from the deferent.

Now what does all of this have to do with the price of tea in China, or more precisely, the price of real estate in your area? Everything. For over a decade, we had been pushing that ball up one side of the curve, as I detailed in Fear and Greed, or How Did The Housing Bubble Get So Big? (first published February 2006). We had mass psychology and political direction and the lenders competing for market share and profit with ever more aggressive loan products, and they all pushed the ball about as far off the deferent as it was possible to go. We had hundreds of millions of people pushing that ball just a little more uphill, assisted and wedged and leveraged and braced by all the machinery we could bring to bring to bear. We had it firmly in our minds that this was the "good" side of the valley, where we wanted the ball to be, and we wanted it as far up the "good" side of the valley as possible. We even started thinking of this so-called "good" side of the valley as the deferent, but the deferent pays no attention to what we think.

Now let me ask you: When that 17 trillion dollars per year ball finally breaks loose and starts rolling down the hillside, building up momentum all the while as the restorative forces add more and more to that momentum all the way down, and keep adding more and more momentum (although the amounts being added get smaller) all the way to the center, do you think it's going to suddenly and magically stop right on the deferent?

Not in this world or any other. It's got all the momentum that a 17 trillion dollar ball powered by 320 million people can build up, and guess what? It crosses right over that deferent like it wasn't even there and keeps on going. By this time it's got mass psychology behind it just as much as it ever did on the way up, pushing it ever harder as well. In an economic analog to the gravity assist (aka slingshot effect), it is very easy to push it much further to the "bad" side of the deferent than ever we had it to the "good" side, particularly as the government meddling intending to slow the ball's rolling is in fact making it worse and worse and worse and worse and worse, because the government is not paying attention to the Law of Unintended Consequences. However, none of this changes the fact that the restorative forces pushing the market back towards equilibrium are always in effect, and never quit.

What's the practical upshot? Well, other than the fact that any disturbance from the deferent distorts the markets and makes for future oscillations, and that anything we can do to the market generates just as many losers as winners, what is the practical upshot for individuals? Nobody can directly control the market actions of others, so how can we as individuals best deal with all of this?

The way we deal with all of this is quite simple. First we have to get as true a picture of where the deferent really is as we possibly can, or at least where we are in relation to the deferent. What is the supply of housing like in your market, and how easy is it to add more? What is the demand for housing like in your market? Do people want to live there? Are we talking San Diego and Honolulu, or are we talking Detroit and Cleveland? Next, we have to ask "what is the ability to pay?" How much do people make relative to the basic necessities of living? How strong and how varied is the area economy? Is it a hub for multiple industries like San Diego and Boston, where if one industry tanks the market is likely to be supported by others, or is it a one industry (like Silicon Valley was twenty years ago) or one company town (like Seattle used to be)?

At any one point in time, the value of a particular property is a function of the value of comparable properties around it. If model matches in the neighborhood are selling for $300,000 right now, the property is likely to be worth about $300,000 right now. The only way to tell for sure, of course, is to put it on the market and see if anyone buys it for that. The trend is a function of supply and demand - how many properties are for sale right now and how many people want to buy them - as well as mass psychology. Finding the deferent precisely is incredibly tough, but finding which side of it we're on is usually much easier, if you will ignore mass psychology and what is happening right now and look at the underlying economic factors of a particular housing market.

I performed such a study a while ago; a study I stand by the results of (if anything, more strongly today than then). The study assumed an underlying interest rate of six and a half percent as that was what was available for about one point then; rates are much lower than that today. Mass psychology - a temporary phenomenon of millions of Chicken Littles screaming that the sky is falling - obscured the underlying basics just as much on the way down as it ever did on the way up. Add in that the party in power in the government is doing its dead level best to kill the loan market and the economy, and things get depressing. But governments change and mass psychology does too.

Obviously, the way to profit is different now than it was back when the market was going full gangbusters the other direction. Then, you could buy any damned property you like, pretend to fix it up a bit, and the rising tidal bore of the market and mass psychology would ensure you could make a profit. But the economics of relying upon flipping a property for quick profit are chancy; market sentiment can turn any time.

Longer term investing gives less spectacular results but more certain ones. The deferent for real estate values does rise over time, with population and economic prosperity and the fact that the amount of land available in an area is fixed, and the trend seems to be tying up more and more of that land in reserves of one sort or another: Open space, limited development zones, historical landmarks, etcetera, not to mention legal terrorism relating to property that may not be within a given reserve but that someone wants to prevent the development of. All of this makes property more valuable as time goes by, population rises, and that same population becomes more affluent. If there are 100,000 properties in your area and 150,000 families, the price will be whatever the top 100,000 bidders are willing and able to pay. If the 100,000th buyer is willing and able to pay $200,000 for a property, that becomes the price. Now suppose there are suddenly twice as many prospective buyers. Does the price go up or down? For the mentally challenged, the answer is "up". It's still the top 100,000 bidders who get the properties - but there are now 300,000 competitors. Bidders are going to have to do more in order to be successful buyers - and the ones who aren't willing or able to do more will go without, just like any other good. But housing isn't like concierge service or spa visits - The alternative is not to do without, but rather to do with a lesser substitute for what we really want. Even if it's underneath a bridge or in their car, people have got to have a place to live. This tends to make for more inelasticity rather than less in the demand curve, or to put it in everyday English, if the price of housing goes up, people tend more strongly to do without other things instead of cutting back on housing. Most people don't have a need for a six bedroom 3000 square foot home no matter how badly they want it - but most people would agree that the minimum acceptable substitute for a family is somewhere between a 2 bedroom rented apartment and a three bedroom1200 square foot PUD, rather than the inside of a drainage culvert. The strongly supported conclusion of all of this is that there is a level that housing values will trend back towards, and that deferent (at least in San Diego) is well above current values.

(Note to renters: The demand for rentals is increasing even more because of all the people who lost property and can't get a loan right now. The vacancy factor in San Diego is already a microscopic 2%. Nor can landlords skate on make-believe loans like so many of them were doing, planning to make money off a rising market. What do you think this is going to do to the rental price, particularly of non-apartment units? If you haven't shopped for a new rental lately, be prepared for a some sticker shock when you or your landlord terminate your current tenancy, and in the meantime be prepared for significantly increased rents as landlords discover they can get more)

So how to you make a profit in this sort of situation? First, put any thought of a quick flip out of your mind. The odds against it are so long as to equate to "Not gonna happen", at least not profitably. This is an investor's market. You buy with the idea that you're going to hold the property a minimum number of years. I would advise three at a minimum, and plan for at least five. Make sure you've got a loan that you're going to be happy with that entire time. It's a lot more expensive to refinance investment property than it is your primary residence, and the constraints on doing so are far more telling. If you're putting enough down, a commercial loan becomes a real possibility, simply because the qualifications are easier right now and the rates are competitive. You need a positive cash flow out of the property - which means most likely you're looking a larger down payment rather than a smaller.

Planning to rent the property out is always a winner. If you can get a positive cash flow out of renting it, the only viable economic model of ownership does not depend upon the location of your job in relation to the property. If you need to move hundreds of miles away and renting it out is not an option, you are at the mercy of the current market and whatever phase the mass psychology epicycle may be in. This is one thing that bit an awful lot of people in the last couple years. Just because renting it out is economically viable doesn't mean you can't choose to live in it yourself, but life throws curves. Having the ability to make your property into a viable rental is a pretty effective trump card for most risks of housing. Even if you can't live there because your new job is on the other side of the continent, someone will want to. Especially in San Diego.

Make it habitable, bring the maintenance up to date and keep it that way, but with that said, I would hesitate about upgrading a rental before the actual time comes to sell it. Renters can't ruin your new remodel if you haven't done it yet. Granite countertops, maple cabinets and travertine floors still need to be taken care of. Furthermore, they do got old and less attractive looking. When you go to sell, you want them to be brand spanking new to sucker in buyers without a good agent, one of those bits of detail that sells a property that has already appreciated for a noteworthy premium. Upgrading isn't what makes the property more valuable; the market has already done that. Just like most long term investors, you really made your money when you bought - you're just waiting for the market to formalize what you know is going to happen. You've already made a profit by buying when prices were cheap - you're just not sure when the check for the profit is going to get here. Warren Buffett (among many others) has made most of his billions of dollars the same way.

There are precisely two times in the history of holding a property when the price counts: When you buy it and when you sell it. In between, the market value can be thirty-nine cents for all you care. If you don't sell it then, it's not important. If you know that market is going to revert to something higher in a few years, you know you've already made a profit, you're just waiting for the check to roll in. In the meantime, you're living in it (gaining the valuable benefit of shelter) or making a little money every month from the rental.

People think they're going to outsmart all of this by waiting for the market to "bottom out" or turn around, just like they think buying property when the market is rising is a "can't miss" proposition, and for precisely the same same fallacious reason. First, nobody can predict exactly when the market will turn. Second, when it does turn, it takes a while for it sink in to the public consciousness. Mass psychology, remember - it takes a lot for things to penetrate. Third, when it does manage to get people's attention, it's because you've already missed the best window. The way you figure out that the market is going up is by missing the first ten or twenty or fifty percent of increase, if not more. Fourth, mass psychology is fickle. It's difficult turn the market back around short of what I've been calling the deferent point, but it can happen, has happened, and will happen again. Fifth, as I have said previously, what I've been calling the deferent can be very hard to discern exactly. Suppose the market is already past that by the time you wake up and smell the coffee? That's how bubbles happen, and how people get caught up in them and metaphorically lose their shirts. How many bubbles of one sort or another have we had in the last ten years? Betting on making money because of another bubble like the one we had anytime soon strikes me as a bad bet such that everybody that makes it is likely to lose. So don't make it. But the psychology of "waiting for the bottom" encourages precisely this kind of thinking.

You can always find a good investment if you've got the patience. But right now, properties that are going to make someone an awful lot of money when the market normalizes are so thick on the ground that you can't hardly avoid tripping on them. Furthermore, mortgage rates are near all time lows. The interest cost if you need a loan, or want one so that you can put leverage on your side, is even lower than the base cost in dollars. The time to make a bet that you're likely to win is when the odds are on your side - while the market is below long term trends. You know it's going to come back eventually, and as long as you can afford the property, you're just waiting for the check to arrive.

Caveat Emptor

Original article here

The vast majority of the population out there wants single family detached housing. The virtues and benefits of the single family residence have been extolled ad nauseum, and the drawbacks of the alternatives are the stuff of urban legend.

Unfortunately, in San Diego and many of the other densely populated urban areas of the country, the price of single family detached housing has gone beyond what the average person can easily afford. Even if they fall further from this point, in many areas, San Diego among them, the price of a single family residence isn't going to fall to what the average single worker can afford. The supply is too low, and the demand is too high. When you consider economic reality, the evidence is overwhelming that the real estate market in San Diego at least was beginning a very turnaround before the government spooked everyone, and even in other areas where prices still have further to fall, there's a limit to how far they're going to go.

So for people earning average wages, the choice becomes purchasing one of those alternative forms of housing, saving until they can afford it, or being a renter for the rest of their life. I went over how little saving for a down payment helps most folks, and how a strategy of buying what you can afford now helps more and faster than saving for a down payment. One further option exists, of course: Move to a less expensive market, but that requires finding a job there. There's a reason that all of the highly demanded urban markets are in high demand: That's where the jobs are!

Still, people will tell me they don't want to buy until and unless they can afford a single family detached house, with no association. That's fine if they're going about the process of saving. Most of them would be better off buying the lesser property and using the appreciation to leverage their savings, but it's okay to decide to take an alternative route to getting what you want. It's a free country.

However, in my experience, it's really rather rare to find people who are actually putting the money aside. It's great if you want a house and are putting the money aside to make it happen. I just helped a couple that could afford a beautiful house in a great area because they both worked hard and saved something like five years of their combined earnings for a down payment, but they're the rare exception. I know a lot more people that have been planning to buy a house for twenty years and have nothing saved at all, than I do people like that couple.

The cold hard fact of the matter is that if you're making fifteen or twenty dollars per hour, you can't afford the payments on such a single family detached house unless you've got a huge down payment. That's not likely to change unless we start being a whole lot friendlier to development, and in places like San Diego, there isn't room to do so even if we wanted to. There's too many people who want that sort of housing, and not enough land and not enough houses to go around. High demand, limited supply. Remember your first economics class. What does that do to price?

People will tell me in one breath that they don't want to deal with home owner's associations, then turn around and tell me they'd rather continue dealing with landlords. Landlords have more power than HOAs, and are less subject to moderating influence. If you're an owner, you have a vote and a voice in the HOA, and you can even run for the board yourself. If you're renting and don't want to follow the rules, the landlord will evict you and find someone who will. They have all the power they need in a vacancy under 3%!

There is always going to be a wider market further down the socio-economic pyramid. There are more folks making fifteen or twenty dollars per hour than forty. Even those making more have the option of buying cheaper housing, and there are those who do so, while those who attempt tricks to afford more house than they can afford regret it pretty much universally. If you buy the property, you owe the money and are paying the interest. Tricks like negative amortization, that make it look like you can afford more property than you really can, will come back around to bite you, with so few exceptions as to be statistically a non-event.

In California, townhomes and PUD developments are most often legally condominiums as far as title goes. It's just the physical set up that differs. Condominiums are multiply layered, stacked one on top of another all in the same building. Townhomes are typically only one unit high. They may be multiple floors and have shared walls, but no upstairs or downstairs neighbors. This improves the privacy situation, but it also increases the price, because land is what costs the most money, and there's only one unit on any given piece of land. PUDs are one further step up the line: They may be individual completely detached structures, but they share a common lot, so maintenance and such is usually shared, and you usually have to match the neighbor's decor. There may not be much space between units in a PUD, as I've said before, but there is usually some. All three usually have some sort of shared recreational facilities, as well, but not necessarily. This can be a very good thing. Lots of people who want a pool can't really afford the cost and the maintenance on their own, but spread it out between twenty or fifty or a hundred owners, and it becomes an entirely different issue. Lots of folks really like the community facilities offered by an HOA that they couldn't afford on their own.

There are ways to do each sort right and wrong. The sin most developers commit with PUDs and townhomes is trying so hard to cram as many as possible onto a given piece of land, that each unit has effectively no privacy. With pure straight condominiums, the main sin committed is failing to insulate each unit sufficiently from noise in the neighboring units. Doing it right isn't cheap, and cuts into the profit margin. This also happens with townhomes and some PUDs, but to a far lesser extent. A complex where the developer did it right will be a little more expensive per square foot, but will be a much better investment. Granite counters and travertine floors get old, get dirty, and eventually do need to be replaced. The fact that you and your significant other aren't entertaining the neighbors every time you get intimate, that you can have friends over without disturbing the neighbors, or even that you have a private little back yard to barbecue in, won't.

If you're careful in your initial purchase, you can be happy and private in a condo, townhome, or PUD for many years. If you fall for a bad unit with nice surfaces now, you're going to suffer. If you pick a good unit, the way that leverage works will quite likely leave you very happy with your investment. If you pick a bad one, not so much. If you pick a good one and decide to stay, you'll likely find that your cost of housing becomes a low fraction of what rent would cost before too many years have passed.

If you can't afford the payments on a more expensive property, it's not a good idea to buy it. But if you don't buy anything at all, the economic prognosis for lifelong renters isn't good. This means that if you can't afford the property you really want, it's still a good idea to buy something your family can live in. Condos, townhomes, and PUDs may not be as great as single family detached housing, but they're a long way better than renting, and you can use the leverage inherent in the way property values has worked for the last century or so to help you get where you really want to be more quickly and more easily. Even if you never move up, you have placed your costs of housing permanently under your own control, given yourself a voice and a vote in how things are run, and the odds are overwhelming that you'll end up in a much stronger economic position.

Caveat Emptor

Original article here

Lots of properties have some kind of problem with them. Maybe you bought in full recognizance because of something else about the property, but probably not. Mostly it's directly a result of not spending the effort to find a good buyer's agent. But whatever the cause, you're stuck with the property, and you've decided to sell it, but just like everyone else you want to get the best possible price.

Welcome to Bigger Fool Real Estate. That property is your problem. You want it to become someone else's problem. I'm speaking now as a listing agent, responsible to get the best bargain for the sellers. Getting a good bargain for the buyers is not the listing agent's responsibility. I have to tell the truth, but my responsibility is to get the property sold on the best possible terms. If I was your buyer's agent, things would be different, but right now I am postulating that I am not. (I don't do dual agency. Ever.)

I'm going to write about property with problems, but this is equally true of the property that doesn't have upgrades that competing properties do. People don't understand that upgrades get old, the same as the rest of the house, and they are attracted to them and will often pay outrageous prices for them. You need to discuss ways to effectively compete for buyers with your listing agent. A good agent is the difference between making it happen for you on favorable terms and not at all, but you've got to be willing and able to help with the necessary steps.

The first thing is to know is that you're definitely going to have to disclose the issue, and where and when you have to disclose it. Plan for it. It's amazing how often handling the disclosure right can gloss right over what might otherwise be a deal killer. People won't spend the utterly trivial amount of effort to find the good buyer's agent who will save them because they don't understand it's important. This can work to your advantage. This is one of several reasons you need a sharp listing agent.

If you've got an issue that might drive off buyers, you need more prospective buyers than otherwise, because you're going to lose a larger than normal percentage of them. As any buyer's agent knows, people aren't looking for a reason to buy your property, they are looking for a reason not to buy your property. Every property loses a percentage of prospective buyers, and even if they can't put their finger on why, properties with issues lose more prospective buyers. The way to even this out is an asking price just enough lower to draw extra interest. Most buyers are silly about low asking prices, and the more people who view your property, the more chances you have to get a buyer who doesn't care, or who thinks the lower asking price is enough compensation. If you don't price the property thusly, it'll sit on the market and you'll end up getting even less for it, if it sells at all. If you do price appropriately lower, a good percentage of the time you're even going to get two or more prospective buyers bidding the price back up a small amount. A good agent can advise you on this - what is enough to work and what's too much. It is not a matter of cut and try - you've got to get it right in the first place if want optimum results. In the situation we're talking about, you want and need lots of people looking at your property.

Clean and declutter the property. Make it shine as much as you can otherwise. Visual appeal $ell$. The situation you're looking for is a buyer who doesn't realize the problem exists, and good visual appeal can distract them from reasons not to buy your property. Avoid turning people off when you don't have to. Equally important, make seeing the property as easy as you possibly can. This is always important, but in a situation like this, it's critical. Moving out is an especially good idea in this case, if you can afford to do so, particularly if you've got children or pets.

Take good pictures for MLS and the advertising. People, particularly ones with weak or no buyer's agent, are silly about attractive pictures. Even otherwise perfectly rational ones who are aware of trick photography and Photoshop. Sometimes, they'll make up their mind they want the property before they actually see it, just from the pictures. They'll still want to look, but they're not careful. Lots of turkeys get sold this way. I don't advise trick photography or Photoshop, by the way - people will realize you were attempting to play them. But picking your shots and vantage points carefully can show even awful properties to good advantage.

De-emphasize anything that may point out your undesirable features or call attention to them. Don't try to hide it, but you don't want to call attention to it, either. Most people have holes in their perceptive ability big enough to sail multiple ocean liners abreast, particularly when it comes to looking at property. If one buyer spots it, the next one or the one after won't. This is why you want more people looking at your property than the absolutely perfect property next door.

Make sure the property is advertised where it will draw attention. You need a quick sale. You don't want people wondering why it's got a large number of days on the market - then they go looking for reasons why nobody else bought. Lots of people aren't interested in anything that's been on the market over thirty days, as in they won't even look at the listing online. If you fool yourself about property value for even a short period of time, or aren't willing to do what is necessary to begin with, you can cost yourself literally thousands of dollars for every dollar you think you're saving.

Know what kind of buyer are you looking for - unrepresented ones without agents, or ones where their agent is just trying to crank a transaction. Make certain they're able to qualify for any necessary loan before accepting their offer, however, because a large percentage of these can't, meaning you are wasting your time. The competently advised buyer who is ready to deal with your issue is a distinct second choice, because they're not going to offer as much, and they're going to walk away if you try to insist they pay what the property isn't worth.

The worst of all possible worlds is someone who insists upon perfection who suddenly realizes the property isn't perfect partway through the transaction - because they're going to bail out, and you may not get any compensation for them wasting your time and running your time on market counter.

To the maximum extent possible, just ignore whatever problem issues your property may have. Don't lie, and if someone directly asks, don't pretend it isn't there, but don't bring anybody's attention to it, and don't act like it's important, and you'd be amazed how often prospective buyers will pay attention to your attitude rather than anything else. You would be amazed how often unrepresented buyers, and buyers whose agents are trying to crank a transaction, never notice something that should be a deal killer, or don't pay proper attention to it. Actually you shouldn't - because that's probably what happened to you.

If you're in the position of needing to sell to a Bigger Fool, it's not an impossible task, but it is one where you've got to get it right the first time, and you need a sharp agent who knows what they're doing. A discounter or someone who just hangs out a sign in the yard is going to cost you more than you could possibly save over the more expensive agent who actually makes it happen on good terms.

If you're a buyer, none of these techniques are in any way a secret. They are in widespread use. If this bothers you, the best way to prevent it from happening to you is get someone who is going to point these issues out and compare them to other properties. In other words, Get yourself a good buyer's agent before you start looking. And if they won't point out these sort of issues, they're not a good buyer's agent and you should stop working with them and find another agent who will. These folks are trying to unload their problems, and you don't want to be their Bigger Fool.

Caveat Emptor

I hear people complain that they've never had a good buyer's agent, that they can't find one, or that they one they had hosed them (Sometimes, they're wrong about that, by the way). I also regularly get email from people claiming they did fine without one, often despite evidence in their own email that says they didn't.

Finding a good buyer's agent is trivial. Literally as easy as moving your eyes and turning your head to look around. Open your phone book. Run a search engine. You get the idea. At last resort, stick your head out the window and yell. Seems you can't swing a dead cat without hitting a real estate agent.

The one thing to understand, and you need to understand it before you start looking, is that for every good buyer's agent out there, there's at least one not so good one. The best way to handle this is by giving every agent who wants one a chance to work with you. You have literally nothing to lose beyond a little bit of your time. But while you shouldn't give anyone an exclusive agreement, there is no reason whatsoever not to sign a non-exclusive representation agreement. A non-exclusive buyer's agency agreement is quite literally a bet that consumers cannot lose. And here's the rub: The agents who won't work without an exclusive contract are the ones that can't really compete. The agents who will work on a non-exclusive basis are the ones that know they're good. I don't care whether someone is working with just me, or has ten other agents on the line. I am willing to make the bet that in heads up competition, I can beat anyone else. If I'm wrong, then I get the important benefit of knowing I need to improve. And the agents who are not willing to make that bet are among the ones you should avoid at all costs. Nor does the mere fact you have an agreement mean you must continue to work with them. On the contrary, all of the good agents maintain something close to a "fire me at any time!" policy - it's implicitly part of the non-exclusive agreements I advocate.

There are only two reasons why you didn't get a good buyer's agent: ignorance and not trying. Ignorance as in you don't know that a listing agent is working to get the best deal for the seller. That is their contractual and fiduciary duty. A seller wants the highest price, quickest sale, with the fewest problems possible, and it is the listing agent's responsibility to see that they get it. If you bought when there was a better property cheaper, if the seller would have negotiated a better deal, if you don't understand that the disclosure they bury in the middle of 425 other pieces of paper is really important, that's not the listing agent's problem. Ignorance as in you don't know how critically important it is to get expert help in the biggest transaction of your life. Ignorance as in you didn't do the tiny bit of research that lets you know not to sign an exclusive agency agreement. Ignorance as in you don't know how much you don't know about putting all of the information in the proper context, whether something is trivial or whether it really is a deal killer - information you have no hope of knowing unless you make a habit of buying and selling real estate in this area. Ignorance as in you don't know that the number one set up for buyers who spend too much to buy properties they should not have considered purchasing at all is that they don't have an expert on their side.

Not trying explains itself. You just didn't try, whether because you thought it wasn't important (there's that ignorance factor again), or because you thought you could save yourself money by not having one (ignorance yet again). Go ahead and tell that to a roomful of agents sometime. Buyer's agents or listing agents or both, it makes no difference. The good ones will all laugh because no matter how often they hear it, they've learned enough that it's still funny, and we're always encountering examples. If it isn't the funniest thing I've ever heard, it's a real contender. When I try to explain what they did wrong to people who ask, they say something like, "You're blowing the tiny details way out of proportion!", usually in quite a defensive manner. Ladies and Gentlemen, real estate is all about the details - lots and lots of details. Details ad nauseum, and even small details can make a difference of tens of thousands of dollars in the value of a property. Furthermore, it is precisely those details upon which your agent will be judged. It doesn't do yourself any favors to pretend you didn't cost yourself four or five times or more what you saved. If your agent was yourself, look in the mirror for the person to blame. There is no one else. If the ego thing is more important to you than the money, that's fine, but you need to admit it to yourself at least and quit pretending you saved yourself money. Otherwise, get a buyer's agent before you start looking. A good buyer's agent is far more important than a listing agent. There is no other factor that even compares for predicting how well you will do in real estate. Get more than one if you like. As long as you don't sign any exclusive agreements, you can always hire more and fire the bad ones you already have.

The big thing to evaluate agents on is not experience, but attitude. Not have they been doing transactions for eighty-three years, but are they going to tell you about the problems and issues they see with this property? I would work with a brand new agent with the ink still wet on their license who will bring your attention to issues over the most experienced agent in the world who won't. Heck, I'd advise still working with the newbie even if the more experienced agent also will. In my personal experience, an agent who says "I've been doing real estate for 57 years!" is most likely about to tell you what they've been doing wrong for all those years. Experience doesn't make it right, particularly in the face of the complexity of real estate and the fact that most state regulators don't know any more than beginning consumers, and it can be almost impossible to prosecute for some of the worst abuses there are (e.g. buying listings)

It may take some cut and try for find a good agent, but firing a bad one takes no effort and shouldn't require a confrontation - if you signed the right agreement in the first place. You just stop working with them. Whereas if you sign an exclusive buyer's agency agreement, firing a bad one takes a formal release, and you can't force them to do it. It's bad business, but probably the majority of brokerages won't sign such a release. What they'll do is talk like they will, in order to get you into the office, but if they can't get you calmed down or substitute another agent, they refuse to actually sign. If you sign a non-exclusive agency agreement, on the other hand, you just stop working with them. If there was something they showed you that you liked enough to buy, you would have already made an offer. Furthermore, you probably wouldn't want to fire them. Therefore, you just leave that agreement in place and stop working with them, and your problem is solved. Pretty neat, huh?

Caveat Emptor

Original article here

When I'm doing my initial automated search for properties for my buyer clients, I always pay close attention to listings represented by agents out of the immediate area. Why? Because an agent from fifteen or twenty miles away probably has no understanding of that neighborhood, and it's rare that they have done the necessary research of viewing the competing properties.

There are exceptions, of course. Agents who habitually work Santee despite the fact that their office is in downtown or La Jolla. Agents who habitually work La Jolla despite the fact their office is in Penasquitos. And there are always agents, who have a prospect that motivates them to do the necessary work outside of their usual area. I just finished one set of clients I was looking for in Clairemont, and I'm working with another set even further away. I've been out working for these people most of the last month, getting an understanding of what their market is really like in their price range, and I'm not showing them any property until next week.

Even a lot of agents don't understand how local markets really are. I just helped some folks buy a property right in the middle of my usual area. But they're looking to turn around and sell a property they have a partial interest twenty miles outside my usual area. I told them I would be happy to help them, of course, but that I'll need some time to do my research as to how to price the property, and while I'm doing that, I'll also have to figure out what the effective advertising venues are in the area. One of their siblings talked to an agent at the other end of San Diego County, and this clown told them, "no problem," and gave them a price - sight unseen - that was appropriate for the high cost area where that agent works, a place where everything is basically completely different. Lifestyle, demographics, commute. I couldn't say for certain yet, but the preliminary work I did indicates that this agent missed an appropriate price by at least ten percent - probably more like twenty-five.

Missing an appropriate price is a recipe for problems, whether it's over or under. If you're over-pricing the property, it's not going to sell - and you will almost certainly end up selling for less money than you could have gotten if you priced it correctly in the first place. If you're under-pricing it, you're getting less money than you could have gotten. If you offer too much, not only are you making the seller extra money but it is very likely the appraisal won't come in, making the whole thing a waste of everyone's time. If you offer too little, the seller is unlikely to accept your offer or even counter.

It took some time to sink through my head when I started acting as an agent, myself. But unlike mortgage information, where the information is good for the entire state of California with only minor changes from some lenders for differing counties, and I can stay abreast of the entire state's lender market for about the same effort it takes to stay current anywhere, real estate is hyper-local. If an agent wants to work outside of their usual area, they're going to have to do some serious extra work. Even within my usual stomping grounds, La Mesa is different from El Cajon is different from Santee is different from the adjacent areas of the City of San Diego. Each of them has neighborhoods and developments of different design and character and things going on, and there are only so many you can keep track of, because there are only so many hours in the day.

It is to be admitted that a lot of agents don't understand this. I've met a lot of them who won't do the work to stay current in their specialty areas, let alone outside. Prices move, neighborhoods become hot and cool off, and time of year is a variable as well. Major projects happen. The market you knew cold six months ago has changed, and you don't know it at all today unless you have kept up or caught up.

My point is this: When you choose an agent who doesn't make a habit or working the neighborhood, if they're being honest with you, they'll tell you it's going to take some time for them to learn enough of the market. If you're a buyer, chances are that you've got plenty of time, but if you're a seller with a deadline, the time it takes that agent to figure out the market can take a large bite out of your sale time. The alternative is to take a chance on pricing from an agent who really doesn't know your market, and marketing from an agent who may not know how to get your property sold effectively here and now. Far better to insist on evidence that the agent knows your particular market today

Caveat Emptor

Original article here

One of the best ways I have of telling how good a listing agent is is whether they get the counter to me before the offer has expired. Not that someone who gets the counter back to me quickly is necessarily wonder-agent, but that someone who doesn't is definitely among the dregs.

The whole idea of the purchase contract is that it becomes a legally enforceable contract when accepted. But if you're missing the "little detail" of timeliness, the contract hasn't been accepted, indeed it becomes impossible for it to be accepted unless someone is capable of time travel.

Missing offer deadlines has become common of late, with sellers hoping for better offers, so they sit on this one until too much time has passed, thus hurting their case further.

The other side missing the detail of timeliness gives my clients power. Now my clients can choose to accept what has become a counter-offer rather than an acceptance, because even if the other side intended to give a full acceptance, they haven't. There's this not so little niggling detail of the fact that the original offer has expired. It's dead. It's an ex-offer.

The other side missing deadline gives me information. When they respond after the deadline, I'm pretty certain there aren't any other offers going on, no matter what the other agent says. If there are other offers, they're not good offers. If there were other good offers, better than mine, why are they countering me so late? When I have multiple offers on one of my listings, I get each counter out there as quick as I can, and the proviso that another offer is not previously accepted is on every single one of them.

This means that my client is in a stronger position than they were in initially. Not infinitely stronger, but noticeably stronger. Particularly in the buyer's market we have locally and in most of the rest of the country. Even in a seller's market, it tells me that no one else wants this property at that price. It may be grounds to counter even lower.

This means that an agent who sits on an offer (or counter-offer) is weakening their clients bargaining position, i.e. violation of fiduciary duty. Unless it's the client who just can't respond, that agent has now incurred the possibility of action. Even if the client has been told of the offer, I always need to tell them that most offers have expirations, and the sooner they counter, the stronger their perceived bargaining position.

It's no better for a prospective buyer to miss a counter than it is for a prospective seller. There must have been something about that property that was attractive to you. Properties for sale never last longer than the first person who does what is necessary to get the seller to agree to terms. Once it's in escrow with someone else, it's too late to decide you want it. Unless it falls out of escrow - something not under your control - you are out of luck. Being a back up offer is basically a sucker's proposition.

This doesn't mean I make a habit of demanding responses within 24 hours. That's overplaying your hand in most situations. But a deadline of three to four business days is quite reasonable, and situations where it may be to your advantage to delay are rare. If you can't respond to an offer or counter-offer in that amount of time, something is wrong.

Caveat Emptor

Original article here

Not too long ago on a property I was selling I called an agent up on the day a transaction was supposed to close. He asked me the question, "Well who says it has to close today?"

"The contract that both of our clients agreed to," I told him, "I'll be bringing over a notice to perform later today."

He got all huffy and defensive and tried to talk me out of it, of course. His client was having difficulty finalizing the loan. He offered to fax me over a loan commitment, and it wasn't even in compliance with the purchase contract. The other agent didn't have a clue, being unwilling to take the few minutes to figure out what it said. Buyer's market or no buyer's market, he got the notice to perform as fast as I could take it to him. I didn't fax it; that could have been claimed to go astray. I hand carried it over. My client kept the deposit.

Now had the loan commitment been in compliance with the contract, I would have been considerably more forgiving, and counseled my client to be the same - but that doesn't mean I would have ignored the fact they had blown the time issue. Sometimes things go over for no fault of the loan officer or buyer's agent. When I originally wrote this, I had just finished a transaction where escrow took over three weeks of a thirty day contract to get me escrow information I had to have for the loan (I want a minimum 60 day escrow now due to loans taking longer). Add that to the logjam for loan underwriting we had, and thirty-nine days was what it took. Had the seller been hardcore about it, not only would they have lost the transaction, but it would have taken an absolute minimum of four or five weeks longer to get the property sold. The seller was quite properly due some consideration for the extension, but it is in their interest to stay in the transaction.

The issue at stake, most critical to sellers, but important for buyers also as well as costly to borrowers, is time. That seller can only have one escrow transaction on their property in the works at one time. If this buyer cannot perform in a timely fashion, they are spending money they would not otherwise have spent because of it. In most cases they are paying for an extra place to live while this joker of a buyer, or more precisely their bozo agent or loan officer, bumbles about and wastes time. Around here, that's usually thousands of dollars per month. It has gotten to the point where one of the options I always consider is asking for an explicit "per day" escrow extension penalty for my client right in the purchase contract. That way, the buyer had better know right up front there is a deadline and will not treat it in some lackadaisical fashion, and if their agent does, well that's between them. Of course, in a buyer's market, it scares a lot of buyers away, so discretion is advised.

Another way to cut unnecessary expense to my listing clients is a leaseback clause. What this means is that they can stay in the property, paying only appropriate daily rental on an equivalent property, for 30 to 60 days after the transaction records. That way, they don't have to arrange for new housing ahead of time; they can wait until the transaction is actually finalized, and then make arrangements. Of course, this means the buyer doesn't get possession right away, which many of them don't like, to say the least. They've gone to all this trouble to qualify for the property, scrimped and saved and now they're paying a mortgage and don't have possession of the property yet. Nonetheless, it's a viable alternative to penalty clauses and sits a lot better at the beginning of the process when many of them are nervous about qualifying. As one final note to this idea, in order to get "owner occupied" loan rates as opposed to higher "investment property" rates, most lenders have a requirement to move in within 30 days, and this can, theoretically, create a conflict for the buyer.

On the flip side, suppose the seller is unable to perform? Cannot deliver good title, cannot get the clearances and inspections done, cannot get their lender to approve a Short Payoff, any one of a number of issues? Now the buyer is sitting here with an approved loan, and the clock is ticking on their rate lock. The days of always having a rate lock that will cover the entire contracted escrow period are gone, but it doesn't mean the seller can dawdle, and once the rate is locked extensions cost money. So now the contracted escrow period is up and my client's loan is ready to go and the documents have been signed and it's ready to fund and for the entire transaction to record, but the seller is sitting over there with their thumb metaphorically you-know-where and the rate extensions are costing my client a tenth of a point for five days or a quarter point for fifteen (depending upon the lender), always charged in full on the first day of the extension. On a $500,000 loan, a tenth of a point is about $500, and a quarter is about $1250. In a buyer's market, it may be a good idea to pre-negotiate a "seller unable to perform" penalty to pay these extensions.

Of course, in most transactions, it's not the buyer and seller who are really at fault. It's the agent or the loan officer. They are getting paid for getting it done on time, among other things, and they are dropping the ball, either due to a "manana mindset" or because they are responsible for too many transactions or because they don't want to tell their client they have to spend some money, or because they're just an incompetent flake.

For loan officers, add "they promised a loan they couldn't deliver" to the list. It happens disturbingly often, as the incentives are in place to promise the moon in order to get potential borrowers to sign up, then play the "wait and hope" game of waiting and hoping the market drops far enough that they can deliver something that at least looks similar to what they promised. There are no loan extension fees in this case, or at least there shouldn't be, because to lock your loan would defeat the entire purpose of "wait and hope." On the other hand, in those situations the market has a distinct tendency to rise, and when it does, you pay the new rates that are even higher than what was really available at the time and that you could have had if you has listened to the guy who told you that rate really wasn't available at that cost. If the rate is locked and the rates go up, I don't care and neither does my client. If the rate is locked and the rates go down, renegotiation isn't a given but it is certainly possible. If the rate isn't locked, you are stuck with whatever happens in the market. Period.

The point of this article is that it is likely to save you money to get everything done right away, and even if the other side in the transaction doesn't, it puts you in a much stronger position from the point of view of negotiating, or from the a legal perspective if the whole transaction goes down in flames. Yes, an appraisal is somewhere between $350 and $500. Yes, a building inspection is about the same. Yes, the other reports run into some significant money, as well. But delaying will cost you more, which may be measured in terms of small percentages of the overall transaction, but when you do the math, it works out to thousands of dollars, not mere hundreds.

Don't wait for the deadlines. Definitely don't wait until after the deadlines. Deadlines are there for a reason, and missing them will cost you money. Get it done right now, and if your agent or loan provider will not or can not, document it. Loan providers you can drop any time until you sign the documents and often afterward, but you typically are stuck with agents once the transaction begins, at least until it finishes. Nonetheless, wouldn't you really rather that agent (or their insurance) was liable to cover your losses plus the cost of recovery? Document their failures to indemnify yourself.

Caveat Emptor

Original here

The last few years, real estate agents and brokerages have begun charging a transaction coordination fee in addition to whatever their share of the sales commission was. The purpose of this is to pay a transaction coordinator, so your agent doesn't have to do work you've already paid them to do, and can go earn more in commissions.

Is this a racket or what? Imagine if you paid an appliance repair service, and they did part of the job, then hired someone to come and do the rest. Someone who isn't a qualified appliance repair person, who doesn't necessarily understand the repairs that went into the job. Suppose the repair service billed you a "service fee" on top of their ordinary rates to pay for this other worker. Would that make you all warm and fuzzy inside? But real estate agents and brokerages get away with it because they bury it inside the accounting of one of the most complicated transactions most people will ever do.

The work that a transaction coordinator does is all included in the work required by a standard listing contract or buyer's agency agreement. That work doesn't get done, the agency or brokerage hasn't really earned that commission check. So they peel off the agent and substitute the transaction coordinator. So far, all is well and good - assuming the transaction coordinator knows at least as much as they need to. But if the agent wants you to pay for the transaction coordinator on top of their fee, which includes agreeing to do the work the transaction coordinator does, I think you should refuse.

Properly used, a transaction coordinator is of some benefit to the consumer. Another set of eyes watching the paperwork. Many agents do not use them correctly. They essentially hand the keys of the transaction to that coordinator, and expect the coordinator to bring them a paycheck without the agent being involved any longer. Sometimes, it's as soon as they've got a listing contract, as if that listing contract is what the agent is being paid for! I've also seen Transaction Coordinators quite commonly used to facilitate steering and other violations of the law by the simple expedient of saying "I am not allowed to contact the agent and their instructions are to do this" The simple way to frustrate that is to point out that RESPA prohibits steering, so there will be a complaint against their license if they persist. They're also likely to lose the transaction if they won't negotiate even the items that aren't actual legal violations, because the reason my clients asked for whatever they asked for is because it's important to them.

Many agencies and brokerages treat the agent job as pure sales, so once the listing contract or purchase contract is in place, the agent vanishes to be replaced by the transaction coordinator. This is the sign of a bad agent and a crappy broker allegedly supervising them. When a good agent signs a contract, listing or buyer's agency, they provide the service and work that the contract calls for. If they don't, any claim to be a good agent who can do the job faster, better or anything else is so much advertising hype, and if they were honest they would replace their name on all that advertising with the transaction coordinator's name. Before you sign a contract (listing or buyer's agency) ask to talk to an existing or former client. Ask that client how involved the agent stayed throughout the transaction. Did they talk to the agent about issues that popped up, or to someone else? If the answer is "someone else" that's a red flag to take your business elsewhere.

In my opinion, it's better to find an agency where the agent doesn't vanish as soon as there is a purchase contract (and in some cases, before). The company may require me to use a transaction coordinator to ensure compliance, but I make it plain that coordinator is not permitted to contact my clients. They need something from my clients, they ask me. This (among other steps) keeps me involved in the full transaction, whether I'm doing the loan or not. It also encourages repeat and referral business. The clients keep talking to me, not some office worker they don't know or call center employee three states away who may be completely clueless about California. There is no doubt in the client's mind that I'm still in control of the transaction. There is no specter of doubt that maybe the transaction isn't important, that maybe I don't really care. And because it's all work that the contract requires me to do anyway, I never charge a client a transaction coordinator fee.

Agent disengagement is also another way in which perfectly good transactions get screwed up - because transaction coordinators who don't know any better do something that messes it up. I've worked with some transaction coordinators who were a lot sharper than the agents, and saved the theoretically more qualified agent from incredible screw-ups. But I've also worked with ones who were, to be charitable, completely adrift upon the sea of regulation and what obligations there were in the contract and the law for that agent and their principal. I don't mean missing a required signature on a document - that happens to everyone, is easily fixable, and is no big deal in most cases unless clueless people make it into one. Stuff like that is something transaction coordinators are good for. I mean basic obligations, like safety and habitability and things that were agreed to in the contract, and little details like whether the laws are adhered to.

Transaction coordinators are to relieve the agent of some of the routine work of the transaction - so that agent can go out and make more money. How is it not a violation of good business ethics to charge a consumer again for what we've already agreed to do, so that we can go out and earn more commission money and charge another transaction coordinator fee? The only justification I can see for charging a transaction coordinator fee is pure unbridled greed, and a client who doesn't know any better. Except that's not a justification - it's a rationalization. An "I can get away with it!", not "It's the right thing to do." It isn't the right thing to do.

Transaction coordinator fees are relatively small on the scale of agent commissions - $450 is about the cheapest I've seen recently, and I've seen them as high as $750 of late, but that's a fraction of the agency commission on even a cheap condo around here. Sometimes it's used it to give a nice bonus to someone who works for the brokerage, sometimes to pay a third party fee for the service, and sometimes they just use it to pay the transaction coordinator's regular hourly wages. Whichever it is, I have no objection to that person earning that money. But it shouldn't be a separate charge to the consumer - it needs to be paid out of what the agents and brokerages make. It's work we're required to do, that we have agreed to do in the contract, be it listing or buyer's agency. How is it good business to make clients pay again for the same work we've already agreed to do, for the money they've agreed to pay us?

For consumers, a transaction coordination fee is probably not the difference between being able to afford the property and not. If you end up paying it, however, you are effectively paying twice for the same service, and generally less competently performed and with more chances of a screw up, either because of communication issues or because the transaction coordinator may not understand everything the agent did. Most so-called "junk" fees aren't, but paying for a transaction coordinator is a junk fee. There isn't a good reason why consumers should pay for the same thing twice. So ask prospective agents right up front whether they charge a separate transaction coordination fee or not. A good agent who doesn't won't have any problems saying that they don't, and even putting it in writing that their agency commission is the gross amount their company makes, and any fees to a transaction coordinator come out of what they're already being paid. And ask, also, if the agent is always going to be involved in the transaction or not, and what steps to insure their involvement they take. If they're planning to disappear as soon as there's a fully negotiated purchase contract, they're not really going to be involved in the whole transaction, are they? And you'd be amazed how often things go preventably wrong in the later stages of a sale or purchase, because the agent who should understand the entire contract from start to finish doesn't, or they disappeared with the work they agreed to do unfinished, leaving it to a transaction coordinator who has no choice but to do exactly the same thing every time, because that's what they've been instructed to do.

Caveat Emptor

Original article here