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Dear Mr. Melson:

My husband and I are great fans of your Searchlight Crusade essays. Excellent work!

In today's mortgage-mess market, will lenders reject loan applications from average buyers (not investors) wanting to purchase acreage with a teardown outside the city limits, with the intent of building a new home? Obviously, preservationists and neighborhood associations who might object to interference with the "character" of the area wouldn't be a major factor in this kind of decision.

Would the mortgage needed for such a purchase have to be a combo "jumbo" loan, or what? We are in DELETED and would be using a VA loan.

Okay, let's deal with the peripheral stuff quickly. The "jumbo" and "conforming" labels don't apply to VA loans. They're for conventional A paper financing only, and VA loans having a government guarantee attached as well as the ability to go up to 103% of purchase price with no PMI, there's no need to split the loan amount or to pay PMI at all with a VA loan. I know of at least one lender who'll do VA loans up to $1.5 million.

Now as to the main question: Buying teardown property.

All residential real estate loans require two things: 1) an interest in land, and 2) a permanently attached residence where people can live. Condos and PUDs qualify, because they do have an interest in land held in common, as well as the residence itself. But bare land does not qualify for standard residential financing, because it has no residence.

So the essential question here is: Is the building actually condemned? If it is, what you have isn't a residence at all, but bare land that it's going to cost you money to scrape clean. If you hear an agent talking about "land less demolition and haul away", this is the type of situation you're in. You can't get a residential loan on it because you can't live there. You have to go to one of the other loan types, which means higher down payment and usually higher rates, as well. You've still got the utility hook ups, and you might be able to use the original foundation, so you're not starting from nothing, but property with a condemned building on it is generally less valuable than bare land, because you've got the expense of getting rid of the condemned building. Condemned buildings also have the virtue of short-circuiting most concerns of historical preservation - not always, but most of the time. If the City of Philadelphia were to condemn Liberty Hall as unsafe, I'm pretty certain that wouldn't be the end of the matter. On the other end of the scale, there's a house on the same block I grew up designated historical because it was built in 1895 and by the time anyone in the City of La Mesa looked around, it was one of the oldest buildings remaining in the City. But it wasn't really anything special at the time, so if it was ever certified unsafe, I imagine there wouldn't be much fuss about actually tearing it down.

If the building is not actually condemned, however, you do have the ability to get a residential loan on the property, but you also have to be careful it's not designated historical in any way, shape or form - and that there's no one with any interest in designating it so. Once designated historical, it's like the labors of Sisyphus to try and get permission to get rid of it, and even the attempt to designate it as historical (whatever that attempt may be motivated by) can cost years and many thousands of dollars in expenses. Just because it's outside city limits doesn't mean that nobody has an axe to grind.

People do want to tear down existing buildings for other reasons than condemnation. They want to do something else with the land, or they just don't like what's there. In the meantime, they can still buy with a regular residential loan, until they're actually ready to tear it down. In such a situation, your lender would probably have the right to call the loan, so your destruction and construction financing should take cognizance of this fact. Even if your state law and loan contract do not give the lender the right to call the loan, one should be very careful that you're not misrepresenting your intentions in any way. In other words, if you're buying with intent to demolish, don't hide it from the lender. That's FRAUD. If you refinance out of the loan before destruction begins, it shouldn't be a problem. But if you sign loan documents today, and tomorrow the bulldozers start flattening, a reasonable person is going to see it as deception.

There are also the permits to consider. No matter where it is or what you want to do, it's going to require building permits. This is often a paper trail for preservationists of whatever stripe, as well as for the lender who wants to show fraud. You told the lender by signing the loan documents that everything was hunky-dory on the 15th, but you had applied for demolition and construction permits on the 14th. That's what is called a "smoking gun." Permits for single residence construction are both costly and byzantine, and often so contorted that the only practical way to get them is to commit an illegality. (sarcasm alert!) Poor civil servants, how else are they going to live in ten bedroom mansions and take a dozen foreign trips yearly?

There are a couple of commonly used alternatives. The first is to leave one or more walls standing. When you do that, it's not new construction, it's reconstruction - the same as after a fire or earthquake - and the permit process is far more streamlined, but you're still going to watch it as far as the original financing goes. Check with experts in your particular area as to the ins and outs. The other is to retain the old residence while you build a new one, then demolish the original structure after you've moved into the new. The advantage there is you can definitely keep the original financing in place during construction and only worry about the money you need for actual construction, but the disadvantage is that you've got to deal with zoning issues, as well as being unable to use the original site for the replacement residence - so you have to pour a new foundation and clone the utility hookups, and quite often, the lot is just too small to have a second site available that meets setback requirements, etcetera.

Destruction of an existing building and construction of a new one are both difficult tasks, fraught with landmines, if you want to do it legally. One of the things many folks just never quite understand is that those costly hurdles and roadblocks they want to throw in the way of "commercial developers" apply just as strongly to the individual property owner as they do to that corporation. In fact, what the corporation may accept as a cost of doing business, thereby passing that cost along to its customers, as well as economies of scale and everything else, that corporation is much more likely to be able to afford to navigate the process than any but the wealthiest of individual homeowners. Furthermore, by artificially limiting the supply of housing, this has the effect of raising the point at which supply and demand are in equilibrium (i.e. market price) quite significantly. I've seen recent estimates for San Diego County that this cost of getting permits raises the cost of single family detached housing by anywhere from $130,000 to $200,000 over what it would otherwise be. Incidentally, for the developer who goes through the process for several hundred units, the economies of scale reduce the price of the permits to roughly $20,000 per unit. They make a profit off the situation, while the poor guy who wants to build their own property may end up spending hundreds of thousands of dollars just to get the little pieces of paper that say it's okay for them to actually start construction. So be careful, and plan ahead, and make certain that it's going to be possible within your means in the area you want to buy before you sign on any dotted lines.

Caveat Emptor

Original article here

When I'm driving, and get to busy main streets, I hate turning left onto major streets unless there's a light there. Traffic is coming hard both ways, usually at high speeds, and with only intermittent breaks in each direction. If you're turning left, you've got to wait for those intermittent breaks to happen from both directions simultaneously. So for at least the past twenty years, I've employed an alternate tactic. Instead of sitting there waiting to turn left, hoping the deities of traffic are kind, or being a jerk and risking an accident by pulling into traffic and stopping, I'll turn right instead, go down a block, and shoot a U turn. At least nine times out of ten, the person who was there ahead of me waiting to turn left will still be sitting there when I go by, already on my way despite having gotten there later than him.

Real estate can be a lot like that. Sometimes the best way to get what you really want isn't the direct and obvious one. Sometimes, taking what looks like a detour can help you.

This can take various forms. Every once in a while, a question hits my site like "Lenders who do 100% financing with a 520 credit score." Three words: Not. Gonna. Happen. But there are alternatives. Raising your credit score and Seller carry-back are the first two that come to mind. Given the market right now, a seller carry-back can be the little detour that gets both of you to where you want to be, if the seller has the option of doing it, which a good agent can find out. You'll pay a more than you might have with a good credit score and down payment, but it can be done. Raising your credit score is also surprisingly easy in many cases. I've gotten people's credit score up to 660 or even 680 in a couple of months. Pay your bills on time, know how to get rid of old derogatory items, a few other tricks. It takes some time and a surprisingly small amount of cash.

Those are comparatively easy. There's a much harder hurdle: "I can't afford anything I want!" The obvious - and deadly wrong - solution is an unsustainable loan like a Negative Amortization Loan or another unsustainable loan. What those have in common is that they are short term patches to a longer term problem. There are several better alternatives.

You can make your stuff last longer. No $600 car payments or $400 per month credit card obligations means that you can afford more for a house. Pay them off and keep the cars running and don't charge up any more. Assuming a 45% debt to income ratio, I've just added back as much into your housing budget as getting a $2250 per month raise - $27,000 per year. People who keep buying SUVs as opposed to compacts must want them more than they do a better dwelling place - and if they do want to drive an new SUV instead of an older compact more than they want to own a house, they are making the correct choice. But I'd rather buy an appreciating asset than a depreciating one.

First time buyer programs such as the Mortgage Credit Certificate and Locally based loan assistance can help you stretch what you can afford. Between the two, it can make a difference of as much as twenty or possibly even twenty-five percent of your budget. They cost a little money and you have to jump through their hoops, which can include where and when you buy, but they make about the same real difference as choosing some of the more dangerous loans - and instead of a risky gamble, they turn it into something sustainable when combined with a more sensible loan.

You can find a partner. Sure, you can only afford $275,000 by yourself. Put two people who can afford $275,000 together, though, and that's a $550,000 house. That's an above average 4 bedroom house with money to spare in a lot of areas. Put three of you together, and you've got an $825,000 mini mansion big enough for the three of you to rattle around in. It takes some legal preparation to protect the partnership from a bad partner, but it's not that difficult or that expensive. And it needn't be permanent. Let's say two of you buy that $550,000 house with zero down payment (possible when I originally wrote this, but not, alas, now), instead of saving for a down payment at $500 per month each. If you were to save that money, earning 10% tax free for five years, you'd each have just over $40,000 each, or about $81,000 grand total. If the house appreciates at 5% per year (low for this area by historical averages) and you make regular amortized payments, the home is worth $702,000, you owe $515,000 if you never paid an extra cent, and net of the cost of selling, you're splitting $137,000 two ways, or not quite $69,000 each. That $425,000 3 bedroom house you really wanted to yourself has appreciated to about $542,500, but now you have a $70,000 down payment. Assuming you got annual salary increases of 3%, it's 7% more affordable now, instead of only 1% - equivalent to boosting your monthly savings to $850 - and it's unlikely you'll make 10% tax free, which that assumes. If you last ten years in the partnership, you come away with $183,000 each instead of $112,000 by investing your $500 per month tax free at 10% and the house you really want is seventeen percent more affordable instead of only five.

Another way of putting leverage to work for you is to buy what you can afford, now. If you can only afford a two bedroom condominium, better you should buy that and the kids have to share a bedroom in a property you can afford, than that you buy something you cannot afford. My uncle raised a family of four in an 762 square foot two bedroom place - and he had my grandmother living there also when his daughters were teenagers (By the way, the living frugally allowed him to purchase a large home on 400 acres and retire in his fifties from a blue collar job). Most two bedroom condos are bigger than that now. If he could do it for twenty years, you can do it for five. This is why, for example, certain Asian and African immigrants are doing very well despite being only a few years from having nothing and living in an apartment. It certainly beats the alternative. $69,000 and change net proceeds from the sale in five years, and once again you've got that 7% affordability increase after five years, and seventeen after ten - without saving one extra penny.

When you buy with a sustainable loan, you place your cost of housing forever under your own control. You step off the escalator of rising rents, and rising housing costs. The math in my examples assumes marriage, but it's more strongly in favor of ownership if you are single because the standard federal tax deduction is lower.

You can rent a storage closet for the stuff you don't use every day.

You can drive a couple miles further.

You can rent out a room.

You can take a second job, and use the difference to save money. It'll also leave you less likely to buy stuff you don't need.

You can invest some time and money and effort in improving your value to prospective employers.

What may be most difficult, you can adjust your expectations. In San Diego and other high demand areas, the price just isn't going to come down any further.

I am well aware that "settling" is not attractive to most folks. I'm also aware that some neighborhoods are less desirable, and others are considerably more so, some living conditions less desirable and others more. We live in a culture accustomed to instant total gratification. Nonetheless, if by accepting some delays and some costs you get what you want and end up in a better situation, isn't that something to consider, as opposed to crying that you can't have everything you want right now and so you're not going to do anything?

Doing nothing means that you miss out completely because the situation isn't perfect. How does that help the situation improve? Do you just wait and hope that housing values crash further? What is likely to cause such an event? Interest rates rising drastically is the only thing I can think of, but then the loans and their payments get commensurately more expensive. Instead of being unable to afford it when it costs $425,000, now you can't afford it even though it only costs $225,000. It also leaves your future subject to factors beyond your control. Suppose housing prices don't crash? Already the lenders have removed the "declining market" label. Lest you be unaware, this is a trailing indicator, not leading. We're almost thirty percent down, locally, depending upon the neighborhood. Suppose that's all the further down prices go? We've got an ongoing and increasing scarcity problem - not building enough new housing to cover the population increase. Even if rational growth policies took over all the planning commissions and departments tomorrow, do you think the environmentalists and NIMBYs are just going to roll over and play dead in court? I can hope, but that's not the way to bet.

I hope this gives all of you some you some useful alternatives to consider. There is usually more than one way to get something that you want. Sometimes it means that you have to go a bit out of your way, or do something that isn't quite as satisfying for a while. And if you're not willing to do a little bit extra, but expect it handed to you, then either you don't want it very badly, or you are extremely likely to get burned by people who put you into a situation that you were trying to avoid. I know people who've been wanting to buy real estate, waiting for affordability to increase, since the mid 1980s. It's gotten much less affordable since then, and it's not likely to get better than where it is today. You can take steps to make it happen, or you can sit on the sidelines and dream that affordability will some day be there. Which do you think is more likely to get you where you want to be, and more quickly than most people probably think?

You can usually get what you want. Sometimes it just takes intelligent planning, and a step or two in between.

Caveat Emptor

Original here

A while ago, another agent in my office got an offer and brought it to me for feedback. The listing was range priced over a $30k range, and priced correctly, so there was a lot of activity on it. The offer was for $30k beneath the bottom of the range, with a note saying that this was for a single dad with three kids, and that was all they could afford, but they really loved the property, and were so excited that that they were each going to get their own room, and so on, gushing for several paragraphs.

In logic circles, this is called the appeal to pity. "Please take pity on me." However, we had every reason to believe that we would be seeing better offers on the property very soon - it hadn't even hit its first weekend on the market, and there had been roughly 15 viewings and six phone calls from agents whose clients had seen the property.

I advised them to counter hard at the high end of the range pricing. It's no concern of current owners what that buyer can and cannot afford. The first two things that ran through my mind were the large amount of activity at an early date, and the likelihood that this was a low-ball flipper's offer. It's not like there's any criminal penalties for creative fiction accompanying an offer. The next two thoughts were if they like the property that much, come talk to me about ways to stretch what you can afford. Two ideas: Mortgage Credit Certificate and Municipality based assistance programs, and both could have been applied to this property, as in it was eligible, there was available money in the program budgets, and each of them stretched the buyer's ability to pay by at least enough, let alone if applied for together. If both were already accounted for, bid on something less expensive; it's not like there is any shortage of properties for sale. Maybe somebody has to share a room; maybe there are fewer amenities, maybe they just don't love it quite as much. None of these is the current owner's problem.

Yes, I'm always looking for hidden bargains, but this time I was on the side of the owner, or rather, the owner's agent, and furthermore, the property was correctly priced and seeing strong activity. Neither of those are characteristic of hidden bargains - when I am the buyer's agent I counsel my clients to avoid such properties if they are looking for a bargain (although there are exceptions, such as buyers with few properties that meet their needs). Furthermore, appeal to pity is a bad negotiating tool.

So here's the situation: Somebody comes up to you and asks you to sell your property for far less than you can get, because they are so deserving, and you want this underdog to succeed against the odds. "Help me, I'm really in need." The appeal is no different at the root than a pan-handler's pitch.

I've given money to panhandlers in my time, too, and doubtless will again. I'm a complete sucker for the ones with kids. But that's maybe $5 or $10, possibly even $20 at the most. Panhandlers are not effectively asking for $40,000 or so out of my pocket, much less my client's pocket. My client has neither a Red Cross nor a Salvation Army Shield on their door. They are not obligated to settle for much less than they could get for a valuable property. In this case, the difference was for something like 70% of their actual net equity, and it is a violation of the fiduciary trust that my client has placed in me, and I have accepted, not to point this out. If it were several months on, and this was looking like it might be the best offer the property would get, that would be one thing. But it was a brand new listing with strong enough activity that there was even hope of a little bit of a bidding war in the strongest buyer's market of the last two decades. It's not like the prospective buyer was homeless, and even if they were, there are more logical things to do first than buy a four bedroom detached home, not to mention it would be tough getting verification of rent, which all lenders are going to want.

But I also counseled the other agent not to reject the offer completely, and not to counter until the third day. The high counter signals, in no uncertain terms, that the owner's bargaining position is very strong. It's even a good idea to explain why it's very strong. But in this market, especially, you get buyers looking for a bargain because they might be able to get one. My buyers do it (although I won't pass on untruthful claims). Why not others? By the third day, there might be another offer on the table. Not that the absence of other offers stops some agents from pretending that there are other offers, but I've always found that the best policy is not to lie when the truth will do, and the truth will always do, because you should tailor your response to what the truth is. This may sound strange coming from a member of the profession that describes condemned buildings as "needing a little TLC", but if you want to do well in negotiations, never overplay your hand (and tell the buyer that the building is condemned if it is, especially since condemnation is a recorded instrument, so it's not like you can plead ignorance). Real estate is almost entirely public information. If there is a dissonance between how you act, what you say, and what the public information says, good agents will pick up on it. This is not poker, and bluffing is unlikely to result in a consummated transaction. The other side can see most of your cards, and has the option of getting up and walking away from the table at any time, and good agents will counsel their clients to do exactly that if the situation calls for it. The idea is a willing buyer and a willing seller coming to a mutually beneficial arrangement.

So the other agent took the offer to the client, and jointly they decided to mostly follow my advice. The prospective buyer walked away, they got two more offers before the third day. And a couple days later, well, remember that first group of two thoughts I had? Well, we found out that that particular prospective buyer was buying with intent to flip; he had flipped at least four properties in the previous year or so. His low offer and all the histrionics surrounding it was simply a ploy for more profit. You'd be amazed how often that happens. And had the owners reached an agreement with the person, they would have been bound by it even if they discovered the misrepresentation before consummation of the sale, as none of that is part of the contract.

Caveat Emptor

Original here

(Note: This is a repeat and 100% financing is not currently available unless you are one of those with a VA loan available to you - but the article is still valid for those who have the required down payment of 3.5 to 5 percent or more. Furthermore, rates are lower now)

A while ago, I got an email asking Save For A Down Payment or Buy Now?, and I wrote a two part article on the subject. Part 2 of Save For A Down Payment or Buy Now? gave an alternative strategy to make affordability accelerate faster. But there was an obvious, related concern that I let go because it was a very complex calculation, and that was, "What's the effect of waiting to buy on my financial situation later in life?"

This wasn't an easy problem to program, even in a spreadsheet. I'm decent with spreadsheets, but for a lot of the calculations I had to do it by brute force repetition, as the calculations are what mathematicians call a convolution (really). Had I been able to do certain functions on spreadsheets that I used to do with matrices back in the really dim times, it would have been far easier, but the area I ended up using was three sheets totaling about 60,000 cells. Most of it was change one thing, copy and paste a row or column segment, then change another. It wasn't that hard mentally, but the finished product certainly makes a microprocessor work for a living!

I also had to make some simplifications to the problem. In order to make the problem manageable, I had to assume that you hold onto your home, once you have bought, at least until the end of the scenario, and also that you never refinance. I had to program it with smooth inflation, smooth appreciation, smooth increases in federal income tax standard deductions, and smooth increases in auxiliary prices. Anyone over the age of thirty ought to know how ridiculous those assumptions are. But in the long-term statistical aggregate, it's a reasonable approximation, and adding those random elements made the problem beyond the scope of what I could realistically do. I also had to postulate no major changes in income or property tax law, and I had to ignore the effects of state income taxes. Besides, the idea was to isolate the effects of the variable under consideration, how waiting to buy a home influences your financial situation down the line. I also had to choose a set period to terminate at, and arbitrarily chose 30 years. It's not that the benefits (or costs) stop accruing at that point, it's just that I did not have the time to make the simulation open-ended.

Actually, this is two discrete problems when you really look at it, and they really are disjoint, and no matter how much the folks who sell Reverse Annuity Mortgages might try to link them, they are separate cases. What happens if you keep living there at simulation end, versus what happens if you decide to sell and move somewhere else when you retire.

Nonetheless, the following simulations are all as representative as I can make them. Except for the effects of state income tax, they are in line with current and historical California computations. Actually, they are considerably less rewarding than actual historical figures to people who buy property earlier rather than later, as even with the bubble pop we're still looking at more than seven percent per year long term historical rise in values over the previous forty years, as opposed to the lower programmed assumptions.

Example 1: Suppose you're talking about a San Diego Condo. $300,000 present purchase price, no down payment but you can save $500 per month for a down payment in the future if you don't buy now, and this amount increases proportional to salary increases. The property continues to appreciate at 4.5% whether you buy or not, association dues are $250 per month and general inflation is 4%, and you can get 7.2% return, net of taxes (10% minus an assumed marginal tax rate of 28%), on the money you save for a down payment. Whenever you buy, you can get a 6% first mortgage, and a 9% second if you need it. I'm also going to assume that in order to see any financial benefit, you're going to have to sell at a cost of seven percent of value. Furthermore, you're stable in your profession, seeing a 3% compounded annual raise in income, and equivalent rent is $1400 per month currently.



Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
purchase price
$300,000.00
$313,500.00
$327,607.50
$342,349.84
$357,755.58
$373,854.58
$390,678.04
$408,258.55
$426,630.18
$445,828.54
$465,890.83
$486,855.91
$508,764.43
$531,658.83
$555,583.48
$580,584.73
$606,711.05
$634,013.04
$662,543.63
$692,358.09
$723,514.21
$756,072.35
$790,095.60
$825,649.90
$862,804.15
$901,630.34
$942,203.70
$984,602.87
$1,028,910.00
$1,075,210.95
$1,123,595.44
still owe
*
$24,489.73
$46,429.89
$67,745.37
$88,445.34
$108,534.07
$128,010.82
$146,869.63
$165,099.15
$182,682.37
$200,029.06
$217,296.63
$233,893.12
$249,747.93
$264,783.31
$278,913.68
$292,045.12
$304,074.62
$314,889.39
$324,366.10
$332,370.01
$338,754.10
$343,358.06
$346,007.30
$346,511.78
$344,664.85
$340,241.87
$332,998.90
$322,671.15
$308,971.35
$291,299.48
housing*
$1,354.26
$1,514.40
$1,659.59
$1,801.37
$1,939.80
$2,074.91
$2,206.72
$2,335.19
$2,460.26
$2,581.85
$2,702.41
$2,822.91
$2,939.80
$3,052.67
$3,161.06
$3,264.47
$3,362.35
$3,454.09
$3,539.04
$3,616.45
$3,685.54
$3,745.43
$3,795.18
$3,833.75
$3,860.02
$3,872.76
$3,870.64
$3,852.21
$3,815.90
$3,760.00
$3,680.93
waiting
$0.00
$160.15
$305.33
$447.11
$585.54
$720.66
$852.46
$980.93
$1,106.01
$1,227.59
$1,348.16
$1,468.65
$1,585.54
$1,698.41
$1,806.80
$1,910.21
$2,008.09
$2,099.84
$2,184.78
$2,262.19
$2,331.28
$2,391.17
$2,440.92
$2,479.49
$2,505.76
$2,518.50
$2,516.39
$2,497.96
$2,461.65
$2,405.75
$2,326.67
savings*
$3,186.50
$3,026.35
$2,881.16
$2,739.39
$2,600.96
$2,465.84
$2,334.04
$2,205.57
$2,080.49
$1,958.91
$1,838.34
$1,717.85
$1,600.96
$1,488.09
$1,379.70
$1,276.29
$1,178.41
$1,086.66
$1,001.72
$924.31
$855.22
$795.33
$745.58
$707.01
$680.74
$667.99
$670.11
$688.54
$724.85
$780.75
$859.82

*Still owe 1 final payment after thirty years if you buy today. "Housing" is how much your costs of housing will be in 30 years if you bought at the indicated time is, and assumes you refinance for zero cost into the same rate you have now. Waiting cost is as opposed to buying now. Finally, the savings column has to do with how much you are saving per month over what the equivalent rent will be in 30 years, namely $4540.76 in this case.

Please keep in mind that the table is the net result 30 years out; the only time variable in the equation is precisely when you bought the exact same condo. Now there is some mildly strange stuff that goes on. For instance, starting 25 years out, there's a period where, under the stated assumptions, your saving for a down payment actually starts to increase in value faster than the property. This is mostly due to the nature of the simulation - I had to choose a set ending period in order to program it. But by that point, you've missed the optimum time to buy by, well, 25 years. Keep in mind that money will be worth less than a third of what it is today in thirty years ($1 then will be worth 30.8 cents now under stated assumptions), but you are still saving significant amounts of money on your future housing payments by buying as soon as practical.

Now let's look at the situation if you decide to sell your home at the end of the simulation and go live somewhere else:



Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
purchase price
$300,000.00
$313,500.00
$327,607.50
$342,349.84
$357,755.58
$373,854.58
$390,678.04
$408,258.55
$426,630.18
$445,828.54
$465,890.83
$486,855.91
$508,764.43
$531,658.83
$555,583.48
$580,584.73
$606,711.05
$634,013.04
$662,543.63
$692,358.09
$723,514.21
$756,072.35
$790,095.60
$825,649.90
$862,804.15
$901,630.34
$942,203.70
$984,602.87
$1,028,910.00
$1,075,210.95
$1,123,595.44
net equity
$1,043,032.82
$1,020,454.03
$998,513.87
$977,198.39
$956,498.42
$936,409.69
$916,932.94
$898,074.13
$879,844.61
$862,261.39
$844,914.70
$827,647.13
$811,050.64
$795,195.83
$780,160.45
$766,030.08
$752,898.64
$740,869.14
$730,054.37
$720,577.66
$712,573.75
$706,189.66
$701,585.70
$698,936.46
$698,431.98
$700,278.91
$704,701.89
$711,944.85
$722,272.61
$735,972.41
$753,644.28
liquidation
$7,079.98
$6,926.72
$6,777.79
$6,633.11
$6,492.60
$6,356.24
$6,224.03
$6,096.02
$5,972.28
$5,852.93
$5,735.18
$5,617.97
$5,505.32
$5,397.70
$5,295.64
$5,199.72
$5,110.59
$5,028.93
$4,955.52
$4,891.20
$4,836.87
$4,793.53
$4,762.28
$4,744.30
$4,740.87
$4,753.41
$4,783.43
$4,832.60
$4,902.70
$4,995.69
$5,115.65
net benefit
$594,459.84
$531,782.24
$526,736.25
$495,140.59
$448,046.96
$435,547.19
$407,644.83
$380,733.08
$354,624.01
$329,944.53
$301,836.93
$269,957.25
$239,420.18
$210,196.49
$182,428.96
$155,944.29
$130,741.38
$106,921.94
$84,296.01
$63,087.55
$43,073.74
$24,442.68
$7,100.56
($8,932.23)
($23,548.85)
($36,736.02)
($48,455.14)
($58,627.44)
($67,101.14)
($73,746.48)
($78,651.68)
waiting cost
$0.00
$22,578.79
$44,518.95
$65,834.43
$86,534.39
$106,623.13
$126,099.88
$144,958.69
$163,188.21
$180,771.43
$198,118.12
$215,385.69
$231,982.17
$247,836.99
$262,872.36
$277,002.74
$290,134.18
$302,163.67
$312,978.45
$322,455.16
$330,459.07
$336,843.15
$341,447.12
$344,096.36
$344,600.84
$342,753.90
$338,330.93
$331,087.96
$320,760.21
$307,060.41
$289,388.54

Net equity is what you have left after 7% costs of selling, liquidation assumes that you are taking out 360 equal monthly payments based upon the same return I assumed your money could earn before you bought. Net benefit is the number of dollars difference it makes to your financial position in the future 30 years from now if you buy at the indicated time. Notice that starting 25 years out, it actually hurts you to buy from then on out, as opposed to just letting the investments you were saving for a down payment run. Waiting cost is how much it hurt your future financial position to delay purchase by that much, so if you wait five years, you end up with over $100,000 less in your pocket.

Now let's do a second example: Still in San Diego, but you're going to buy a single family residence that would cost $450,000 today. Nudge assumed appreciation up to 5.5%, cut association dues out but raise property taxes and insurance costs appropriately. Oh, and the equivalent rent now starts at $2000, and general inflation I'm going to assume to be 3.5%. Actually, based upon the past seventy years, everything that has happened has been, over time, more favorable to home ownership than this.

Once again, let's look at the situation if you keep living in the property after 30 years first.



Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
purchase price
$450,000.00
$474,750.00
$500,861.25
$528,408.62
$557,471.09
$588,132.00
$620,479.26
$654,605.62
$690,608.93
$728,592.42
$768,665.01
$810,941.58
$855,543.37
$902,598.25
$952,241.16
$1,004,614.42
$1,059,868.21
$1,118,160.97
$1,179,659.82
$1,244,541.11
$1,312,990.87
$1,385,205.37
$1,461,391.66
$1,541,768.21
$1,626,565.46
$1,716,026.56
$1,810,408.02
$1,909,980.46
$2,015,029.38
$2,125,856.00
$2,242,778.08
still owe
*
$37,403.63
$72,247.27
$107,464.64
$143,121.84
$179,283.73
$216,014.10
$253,375.62
$291,429.94
$330,237.68
$369,858.41
$410,350.66
$451,771.89
$494,178.40
$537,625.32
$582,166.43
$627,908.86
$675,787.71
$724,872.44
$775,183.89
$826,740.19
$879,556.33
$933,643.75
$989,009.82
$1,045,657.39
$1,103,584.13
$1,162,781.95
$1,223,236.28
$1,284,925.33
$1,347,819.27
$1,410,482.12
monthly
$1,151.93
$1,404.15
$1,641.99
$1,883.05
$2,127.79
$2,376.60
$2,629.93
$2,888.18
$3,151.75
$3,421.06
$3,696.50
$3,978.46
$4,267.34
$4,563.52
$4,867.37
$5,179.28
$5,499.92
$5,834.96
$6,178.89
$6,531.86
$6,894.07
$7,265.65
$7,646.73
$8,037.44
$8,437.84
$8,847.99
$9,267.92
$9,697.62
$10,137.03
$10,586.05
$11,036.15
Wait cost
$0.00
$252.22
$490.06
$731.13
$975.86
$1,224.68
$1,478.00
$1,736.25
$1,973.99
$2,178.71
$2,388.07
$2,602.37
$2,821.91
$3,046.98
$3,277.86
$3,514.85
$3,758.46
$4,013.04
$4,274.35
$4,542.51
$4,817.67
$5,099.93
$5,389.39
$5,686.13
$5,990.21
$6,301.66
$6,620.52
$6,946.75
$7,280.32
$7,621.14
$7,962.68
savings
$4,461.66
$4,209.44
$3,971.60
$3,730.53
$3,485.80
$3,236.98
$2,983.66
$2,725.41
$2,461.84
$2,192.53
$1,917.09
$1,635.12
$1,346.24
$1,050.07
$746.21
$434.31
$113.67
($221.38)
($565.30)
($918.28)
($1,280.48)
($1,652.06)
($2,033.15)
($2,423.85)
($2,824.25)
($3,234.40)
($3,654.34)
($4,084.03)
($4,523.44)
($4,972.46)
($5,422.56)

Equivalent rent would be $5613.59. Once again, the last three columns are all monthly streams, and they do have a steady worsening the entire time, mostly because your saving for a down payment does not start to catch up to the increase in property values during the simulation period. In other words, the longer you wait, the worse it gets. Indeed, affordability is monotonically decreasing the entire time. That's math geek for "Quit waiting, it only gets worse." Even though a dollar then is only worth 35.6 cents now, wouldn't you like as many 35.6 cents in your pocket as possible?

Now let's examine if you decide to sell this starter home in retirement, and go live somewhere else.



Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
purchase price
$450,000.00
$474,750.00
$500,861.25
$528,408.62
$557,471.09
$588,132.00
$620,479.26
$654,605.62
$690,608.93
$728,592.42
$768,665.01
$810,941.58
$855,543.37
$902,598.25
$952,241.16
$1,004,614.42
$1,059,868.21
$1,118,160.97
$1,179,659.82
$1,244,541.11
$1,312,990.87
$1,385,205.37
$1,461,391.66
$1,541,768.21
$1,626,565.46
$1,716,026.56
$1,810,408.02
$1,909,980.46
$2,015,029.38
$2,125,856.00
$2,242,778.08
net equity
$2,082,917.20
$2,048,379.98
$2,013,536.35
$1,978,318.97
$1,942,661.78
$1,906,499.88
$1,869,769.52
$1,832,407.99
$1,794,353.67
$1,755,545.93
$1,715,925.21
$1,675,432.96
$1,634,011.73
$1,591,605.21
$1,548,158.29
$1,503,617.18
$1,457,874.75
$1,409,995.90
$1,360,911.17
$1,310,599.72
$1,259,043.42
$1,206,227.28
$1,152,139.87
$1,096,773.79
$1,040,126.22
$982,199.48
$923,001.67
$862,547.34
$800,858.28
$737,964.35
$675,301.50
liquidation
$14,138.60
$13,904.16
$13,667.65
$13,428.60
$13,186.56
$12,941.10
$12,691.78
$12,438.17
$12,179.86
$11,916.44
$11,647.50
$11,372.64
$11,091.48
$10,803.63
$10,508.72
$10,206.38
$9,895.88
$9,570.89
$9,237.70
$8,896.20
$8,546.24
$8,187.73
$7,820.59
$7,444.77
$7,060.25
$6,667.05
$6,265.23
$5,854.87
$5,436.13
$5,009.21
$4,583.87
net benefit
$1,681,408.70
$1,527,603.06
$1,482,514.85
$1,390,228.98
$1,262,990.98
$1,218,788.65
$1,139,516.49
$1,064,002.28
$991,242.90
$921,953.98
$854,914.46
$790,327.87
$728,045.15
$667,919.78
$609,807.59
$553,566.46
$498,733.07
$440,202.91
$383,770.99
$329,344.94
$276,837.21
$226,165.09
$177,250.78
$130,021.48
$84,409.45
$40,352.17
($2,207.48)
($43,321.12)
($83,034.61)
($121,387.80)
($156,994.47)
wait cost
$0.00
$34,537.22
$69,380.85
$104,598.23
$140,255.42
$176,417.32
$213,147.68
$250,509.21
$288,563.53
$327,371.27
$366,991.99
$407,484.25
$448,905.47
$491,311.99
$534,758.91
$579,300.02
$625,042.45
$672,921.30
$722,006.03
$772,317.48
$823,873.78
$876,689.92
$930,777.33
$986,143.41
$1,042,790.98
$1,100,717.72
$1,159,915.53
$1,220,369.86
$1,282,058.92
$1,344,952.85
$1,407,615.70

Now it is to be noted, as we saw under the first table, a point in time exists starting 26 years out where you will be better off just keeping your down payment money socked away in alternative investments, as opposed to actually using it to buy your home. Once again, this is mostly due to the closed end definite endpoint way I had to program this.

I'm planning to start using this sheet with prospects, under assumptions they can set - If they think inflation is going to average 7%, or appreciation only 3%, the sheet can accommodate that. I've played with the sheet over a few dozen simulations, and due to leverage, the numbers appear quite powerfully in favor of buying the best home that you can actually afford, right now. Interestingly enough, however, these number also strongly suggest that as close to 100% financing as you can manage initially will outperform larger down payments, and that's something that seems quite counter-intuitive to the usual run of financial planning. Instead of using it for your down payment, financing 100% of your purchase if you can seems to make your money work harder. Well, I can put a lot of caveats on that, because metaphorical bumps in the road happen, and nobody knows exactly when or how these disasters will strike. If you do, you can plan for it, and could you please drop me an email in warning? When you're just looking at the raw numbers, however, the advice they give is quite strongly to buy the best property you can afford as soon as you can, putting down as little of a down payment as you can, and making the minimum payments while salting away the rest for a rainy day. But be very careful not to stretch too far, because one thing you can count on, even in Southern California, is that it will rain sometimes.

These numbers represent middle of the road, statistical average type results, given the assumptions listed in each problem. In point of historical fact, in neither of the two problems did I choose assumptions as favorable to the property owner as the historical numbers we in California have experienced. Furthermore, with the market driven well below historical average pricing trends in terms of affordability, those who buy before everybody realizes the market has turned are likely to eventually realize quite a significant adjustment due to the market returning to long term levels of macroeconomic affordability.

Caveat Emptor

Original here

And I mean that literally. Do it all yourself with no begging for free property advice, free help, free negotiations help, free real estate location services, free answers to "how do I deal with this problem?" and not least of these, nobody to blame but yourself and nobody to sue when something goes wrong because you didn't understand something important.

One of the things I do to generate business is talk about bargain properties I've found that current clients aren't interested in, for whatever reason. Maybe it's a bit too much of a fixer. Maybe the location just doesn't work for them. Maybe it just looked so interesting I checked it out despite not having a current client it may be right for. It's not like a listing agent or owner with any kind of clue is going to object to having somebody else think their property is worth a closer look!

This is one e-mail exchange I went through recently. It's not at all uncommon.

Please tell me the address of this property in La Mesa so I could drive by and I will use you as a buyers agent.

This was my reply

Good to hear from you and I look forward to meeting with you!

Here's what we do: We get together, and we both sign a standard CAR non-exclusive agency agreement, which says precisely what you just typed. If you don't buy the property, no obligation is incurred. Neither of us has anything to lose by signing such an agreement. In fact, the only way I gain is by finding properties for you that really are better values than anything else - enough so that you want to buy them.

You don't like the property, you have no obligation whatsoever. This way, neither one of us is risking anything, and if you don't like my work, you can terminate the relationship at any time.

The reply is illuminating. This is the entirety:

I sign nothing but my paycheck

Note that he still has not so much as told me his full name. No phone number either. And when I note that being able to find and recognize this sort of property might be a valuable skill, and doesn't he think that someone who 1) recognizes a valuable commodity that no one else has, 2) points it out to you and 3) enables you to get an all around better bargain deserves some compensation, this was the reply:

Just what I need another low life realtor. You guys are a dime a dozen. YOu mean years of ripping people off for every nickle that you can squeeze out of them. Get a real job I have one. Don't bother responding your trash.

Aside from his desperate need to repeat eighth grade or invest in a better word processor, the charitable interpretation of this reveals an all too common mindset: that of unconscious incompetence. Less charitable but happens constantly: This person is trying to make use of my ability to find and recognize bargains without paying the price for that expertise: Using me as a buyer's agent. And make no mistake - in either case, this person is trying to prove that agents are worthless by getting me to provide one of the major reasons you need an agent, free of charge. Suppose I asked you to work for a week without pay, or your employer volunteered you for a week of unpaid work? That's the equivalent situation. And to accuse real estate agents of being lowlifes because they won't do this is different because...?

A good buyer's agent will save you more than they ever cost by a factor of at least 3 (more likely 10 or higher), and that's not including all the hidden savings from keeping you out of properties that will not appreciate, that will suck your wallet dry, or that have other issues deadly to your financial future. It took me a while to decide to share it, but here's my own story of buying without an agent, years before I became one. I didn't make several of the more common and costly errors, and I still would have been demonstrably several times better off with a buyer's agent.

If you don't think finding and recognizing such a property is a skill - and a valuable skill at that - do it yourself. The fact is that if you could, you wouldn't be asking me to do it for you. The times when I search places other than the publicly available MLS to find real bargains are vanishingly rare. I can find bargains there because 1) I know the market and can recognize what is and isn't value 2) I know what to look for, 3) I know what to avoid, 4) I am very good at spotting problems, and 5) When I don't spot any big problems, I've got a reasonable basis to believe that this really is a bargain. If this describes you, you might not need me. Mind you, any number of people who don't need a full service agent still prefer to use one due to time and liability concerns, but if you know everything a conscientious agent does about property and negotiating and the law and the market you are looking in, why haven't you got a license of your own? That you haven't taken the test is a "fooling yourself" answer - California's test doesn't cover ten percent of what a good agent or loan officer needs to know, and is one of the harder ones. The fact is that it is much easier to get licensed than to actually know what you're doing, so if you're not licensed, how could you possibly know what you're doing? In logic, this is called necessary but not sufficient. In other words, you don't know what you're doing. if you were on a game show, you'd be being told, "Thank you for playing," as they ushered you off camera in favor of the new contestant. (Many of my articles are aimed at helping you defeat the necessary but not sufficient condition of a licensee who doesn't know what they are doing, or won't do it despite knowing).

How offering a skill for sale makes me - or anyone else - a lowlife is beyond me. If you don't need the skill, don't buy it. But if you need the skill, you are expected to pay the price. This is called commerce, and the fact that you may think it is a worthless skill does not make it so, especially as you try to trick the person into performing it for free based upon a false promise. This person, and many others, has tried to get me and other agents to perform it for free under false pretenses. Does this sound like a worthless skill when it is so apparently valuable that people try to scam you out of it? Actually, I'm not certain there is such a thing as a worthless skill, but there are skills that aren't worth anything to me. I don't need anyone to make candles by hand, and am definitely not willing to pay anything for it. This doesn't mean there aren't quite sane people willing to pay a high premium for hand-made candles, but you don't find me among them, trying to get hand-made candles for free. If you really don't think what agents do is valuable, don't try and scam them into doing it for free. Do it yourself.

I do have some small element of understanding for some of these people. The NAR and various state realtor organizations have positioned the profession as a bottleneck or a tollbooth upon a highway. Trying to make people pay the toll because it appears they don't have any choice. Guess what? People have a choice. There is no legal requirement whatsoever to use an agent at all in any state I'm aware of. I can't make you pay me and I certainly won't even try to force you, but neither will I work for free. I have to feed my family somehow, and if I can't make money being an agent, I'll go do something else - but I certainly won't work as an agent for free in my spare time! I will give you reasons why I'm worth a lot more than I make in terms of the client's bottom line, and I will certainly put myself forward as being a particularly good example of an agent and loan officer. Not only is it objectively true in my case, that's how businesses succeed. But if you don't want to pay for my expertise, that's fine. I'll keep looking for those who are willing. But don't accuse me or anyone else of being a lowlife because we won't work for free.

Here are some cold hard facts: if this guy was finding this sort of bargain on his own, he wouldn't be emailing me. He'd be in escrow, if not already moved in to the property of his dreams. If what I was offering wasn't more attractive to him than what he has found on his own, he would never consider emailing me. If he was able to recognize bargains like I can, he wouldn't be looking where I advertised. In short, everything about his response and the fact that he did respond shouts out that he does consider what I do valuable. So which is correct: The cheap ego shot when I won't give him what he wants for free, or his desire for the results of that skill? Is the skill worthless and am I a lowlife, or is the skill valuable, do his actions tell the world that he considers it to be valuable, and is his response when he can't get it for free entirely too much like Aesop's "Fox and the Grapes"?

If you really don't believe you need an agent and that you can do it on your own, you shouldn't be looking for an agent willing to work for free like this. And like any other situation where someone is pretending an answer is different from the real answer, pretending doesn't make the answer any different, political spinmeisters notwithstanding. All pretending otherwise does is give the pretense needless opportunity to damage you and everyone around you. In the case of a real estate transaction for half a million dollars or more, that's quite a bit of damage indeed.

There are those who would have you believe agents don't do anything, or don't do anything valuable enough to warrant what we make. Some of them are themselves sharks that agents protect you from. Some of them have competing products of their own to sell. Some of them just look at the raw number of dollars and don't understand what anyone could do to earn that sort of money or don't understand how much a good agent who wants to stay in business needs to do. You're welcome to believe any of them. But if you do believe them, go do it yourself. Don't try to get agents to work for free - all that says is that you do recognize the value, but are unwilling to pay for value received. And don't get upset when anyone with more than an hour or so in the business recognizes the game you're playing for what it is - a scam intended to defraud them. Finally, if you're tired of playing this game because all it does is cause frustration, stop playing it and start working honestly with one or more agents. The good ones who know what they're doing are more than willing to bet their skills and their time that they will get the job accomplished, with no upfront cost to you and no obligation if they can't.

There are lots of things that any intelligent agent will happily do for free, on speculation of eventually landing a client. I certainly do. But there comes a point where there is real skill and real time and real liability on the line, and if you're not willing to sign up with them at that point, any agent with more than about an hour in the business is going to realize what you're up to.

Caveat Emptor

Original article here

I just went out doing some general market scouting. Looked at ten properties, and at least three were of a sort that I've started calling "vampire properties." Vampire properties are one more reason you want a good buyer's agent, and maybe even the strongest.

Like a mythical vampire, these properties are very charming on the surface, luring in the innocent victims with brand new flooring, new roof tiles, and new paint. All the relatively cheap stuff that inexperienced buyers love. There might even be a new spa in the back yard. They call the listing agent and fall in love with the property. They put in an offer, which is quickly accepted, buy the property and move in.

Then the troubles start. Those brand new roofing tiles get ripped off the rotten substructure the first time a good wind comes up. The new owners notice that the travertine floor tiles are separating, and eventually, when one comes loose, find that there's a widening crack in the foundation that runs the width of the house. That beautiful new tile in the bathroom has to come out because they discover the green board is rotten, and the framing boards have mold as well.

It'd be better if the property was sucking your blood. At least that's covered by health insurance if you've got it. But it's got its fangs permanently embedded in your bank account, instead. None of this stuff is covered by home owner's insurance, new home warranties, or anything else. Your home owner's insurance might replace the roof tiles (pulled off by wind, which is usually a covered peril), but the rotten structure underneath is your problem, caused by the normal wear of time.

In most cases, I find it hard to believe that the previous owners didn't know about this stuff. That's what the brand new facade is about. They figured a quick surface fix - the home owner's equivalent of a cheap paint job over a rusted car body - and they unload the lemon on some unsuspecting chump and walk away. Quickly.

For any of those sort of people reading this, I've got to tell you that the lawyers will find you. But for the buyers in the situation, the lawsuit - which will take years, even assuming that they win and if the judgment is paid and that it's enough after legal fees to cover expenses - is a poor substitute for not getting into the property in the first place. Particularly if, as seems to be the usual case, the buyers stretched to the extreme limit of their budget or beyond in order to afford the property.

It is far preferable, to all parties, to have the issues dealt with before the sale is consummated.

Most buyer's agents aren't licensed inspectors, and I'm not one of the few. You still want an full-on building inspection. That doesn't mean agents can't spot stuff before you have a purchase contract, come up with a deposit, and spend hundreds for an inspection. All of this is called "buy in," and works off of a phenomenon psychologists call cognitive dissonance. You've said you want it, you work really hard and jump through all of these hoops to get it, and when you find out how bad it really is, you keep going because you are so mentally committed, because you've done all this stuff. If it's something I can spot, wouldn't you rather find out before you all of this happens and before you've spent that money?

The listing agent certainly won't tell you. They'll have you sign a standard disclaimer advising you to get an inspection. Yes, they have to help fill out the disclosures, but if they're not licensed inspectors, they can't be blamed for not knowing, can they? Their responsibility is to get the best possible deal for the sellers. They have little responsibility to the buyer. You can't blame listing agents for doing their job. You can blame them for lying about things they actually do know, but that's about it Good luck trying to prove that they knew.

It's almost inevitable that the owners of vampire properties price the property like something out of Big Al's Discount Used Car Lot. "Cream puff, baby! One owner, a little old lady who only lived in it on Sundays." They want top dollar and then some. I understand, but I'm not going along and neither are my clients if I can help it. I saw one today where the list price was $40,000 more than it should have been if it wasn't a vampire. The agents should know better, assuming they are not deliberately "buying a listing." Price it to market if you want to move, and that includes a hefty discount for not being the one who has to hassle with fixing it. If you want that money in your pocket yourself, fix the problem yourself. You'll also interest a better grade of potential buyer, not to mention more buyers than just the simpleton who happened to win the lottery.

I'd rather deal with a property where the issues are out in the open. I also found one property today that has a crack across the living room floor, out in the open due the aftermath of an obvious flood, but I can find buyers who know how to deal with that (If the lot is level, it's not such a big deal, and can often be fixed surprisingly cheap). You don't have a listing agent pretending to drool over beautiful flooring that is going to have to be replaced anyway. Furthermore, it indicates that the listing agent, at least, doesn't have their head stuck in the Land of Wishful Thinking, so if I take a client who is interested despite the flaws out to the view the property, we're all pretty much on the same page as to what's going on with the property, and we have the makings of a reasonable negotiation. If the listing agent is in the Land of Wishful Thinking, I'm wasting my time to look and the client's also if I show it to them.

Vampire properties are out there. In markets such as this one, they are both increasingly common and deadly to your financial future. You want somebody whose job it is to look past the beautiful surface to the very real issues beneath. If you buy a vampire, it's worse than a disastrous marriage, because the financial consequences are likely to follow you long after you've shed that financially abusive partner..

Caveat Emptor

Original here

What's negotiable on a purchase?

The short answer is everything.

There may be standards and traditions in your area, whether they're the same in your area as there are in mine or quite different. That doesn't mean they are not subject to amendment by specific negotiation. Once you get outside legal requirements, anything is subject to negotiation. As long as it's legal and both (or all) parties concerned agree to it, that's the way it's going to be.

This is not to say that some things aren't better left alone. For example, if I was buying a property and the seller didn't want to pay for the policy of title insurance, as is traditional, I'd certainly think long and hard before continuing with the transaction. Furthermore, such behavior would certainly cause the price I'd be willing to pay to drop dramatically. If I'm helping clients, the same applies even more strongly. I'm going to tell them that this may mean the seller may know they're not be able to deliver clear title. Without clear title, I certainly don't want my clients to pay half a million dollars or so for a property they may not really own!

This is also not to say that there may not be consequences as the result. For example, if I or my client is selling the property, and a prospective buyer asks for a $10,000 credit towards closing costs, the lowest offer I'd accept would be at least $10,000 higher, probably $11,000, maybe more. Why? Because commissions and transaction costs are based upon the official sales price, not the sales price less that rebate to the buyer. The bottom line is that it costs the seller more than $10,000 to rebate $10,000 thusly. A $400,000 offer that requires $10,000 in rebates isn't a $400,000 offer. It's a $390,000 offer at best.

In order for it to be a valid contract, the two parties have to agree in every particular. If there is not complete, total, 100 percent written agreement as to what is going to happen, there is no contract. Two parties haggling over whether one light bulb gets replaced do not have a valid contract any more than two parties $300,000 apart on the price.

Nonetheless, except for those very few things mandated in law, it's all negotiable. Specific negotiation can change anything that's not legally mandated, and most things with defaults specified in law. If you've got a gold bathroom faucet that you want to keep, a normal sales contract says that it stays by implication (it's a furnishing attached to the property and required for the property to function normally). But you can change this by specifying that you have the right to remove it in the contract. Now if they buyer is only buying the home because of that gold faucet, they can walk away or counter offer that it stays. Let's say you eventually agree that it will be replaced by another gold faucet. That's specific negotiation. The replacement will be required to be installed, equal in functionality and free of defects - unless you change this by more specific negotiation.

I've seen negotiation for personal property to remain, furnishings to leave, the disposition of existing tenants, allowing leasebacks to the prior owners, and just about everything else under the sun. If there's something about the standard contract you don't like, or something specific to your situation or this property, specific negotiation is how you deal with the issue. Furthermore, even if you don't want to change anything, the other side might. More properties have further negotiations due to problems or issues raised by inspections than don't. Something is revealed to be not quite right, and the seller either has to make it right or negotiate with the buyer for acceptance in the current state. Providing they still want the transaction to proceed, of course.

This is not to say that as long as the transaction records the seller is golden, by the way. If the buyer can show reasonable evidence that the seller knew of the issue but failed to disclose it, that's a bone for the lawyers to fight over whenever it's discovered. Some sellers fight a losing battle over issues like this for years - and it ends up costing them far more money in the longer term. The buyer finds out something you should have told them after the transaction, that's a bad situation for a seller to be in. Better to disclose right away and be done with it. When the seller can prove the buyer knew the full extent of the issue and bought anyway, that's much better protection.

So make sure that if there's some issue you want resolved, the purchase contract resolves it completely and unambiguously. That contract details how the transaction is going to happen - how all the possible conflicts are going to be resolved so that there is no dispute. If it's not there, you're at the mercy of the other party. They might see it your way. Then again, they might not. More often than not, they're going to require some compensation in order to do it your way, where if you had just negotiated it in the first place, it quite likely would have been no problem, or insignificant enough to ignore in light of other factors. Incidentally, failing to negotiate complete terms in the first place is one of the big mistakes people acting without a real estate agent on their side make, and it quite often costs them a lot more than any commission they would have paid.

Caveat Emptor

Original here

RESPA (Real Estate Settlement Procedures Act) prohibits an agent from requiring you to have other services performed by specified outside companies, or by a particular associated company either. RESPA also prohibits an agent from accepting payment (kickbacks) from third party service providers. Nonetheless, these are major problems in the real estate world.

It is an unfortunate fact that many agents care far more about the little bit of extra they get from third party service providers than they do about their fiduciary responsibility to the client who helps put potentially many thousands of dollars in their pocket.

For instance, never take a real estate agent's unsupported word about a loan officer. It happens on a routine basis that I talk to people in other parts of California where I'm not set up to be their real estate agent (kind of hard for me to show someone a property in Redding when I'm in San Diego), but thanks to the modern age, I am perfectly capable and set up to be their loan officer. Approximately one real estate agent in three completely refuses to cooperate with me as a loan officer, despite the fact that I'm getting their client a better loan than the loan officer this person wants them to use. I can have written authority for the information, and they won't give it to me. Okay, so I go through the escrow company - no big deal in most cases.

I can understand and sympathize with this attitude, if what they were worried about was my ability to do the loan at all. After all, if the loan isn't ready at the end of the escrow period, this transaction they've spent so much effort on falls apart.

So I tell them this: Have your friend do the back up loan, if you're so certain I'm full of it. If they were worried about a client's best interest, they'd sign off on that in a heartbeat. If I deliver, your client is better off. If I don't, they are no worse. Either way, the client is very happy and has gotten a better loan and their interests have been served.

There is only one motivation that I can think of for what happens consistently: the agent keeps carping at my client to cancel the loan with me. Let's consider what this means.

No matter how unlikely the agent thinks it is that I'll deliver exactly that loan, with cancellation, the probability I can deliver it goes to zero. So I can now guarantee that this client to whom he has a fiduciary responsibility doesn't get the lower rate loan I was working on. Greatest possible benefit to client: zero. Downside: higher payments, higher costs, worse loan, zero leverage on other loan officer to deliver the loan he said he would.

Furthermore, no matter how good a loan officer, there's always a chance something goes astray, and for whatever reason the loan doesn't get approved. He's now exposing his client to the possibility that his friend, the loan officer, won't have a loan ready to go. If this happens, client loses house, deposit and other time and money invested. Possible benefit to client: Not paying for a second appraisal (when I originally wrote this it was only a $100 retyping fee for the appraisal saved, but Home Valuation Code of Conduct was not written for the benefit of the consumer, but rather that of appraisal management companies and their contributions to the political coffers of one certain politician). Possible downsides to client: no house, lose deposit, fees for appraiser, inspectors, etcetera wasted. Furthermore, the agent loses his prospective commission - several thousand dollars.

So what could cause an agent to want his client to cancel my loan? The only thing I can think of that explains the whole shenanigan is that this agent is in line for a payoff. Can I prove it? Absolutely not. Have I tried to think of alternative explanations that make sense? Many times, with no success. Maybe I'm missing something here (if so, email it to me), but I sure can't see any other possible benefit to the client or the agent.

Here's another thing. Title and escrow companies. There are a variety of services escrow companies are supposed to provide the transaction - but title companies are actually the ones set up to provide many of these services. So the title company charges a sub escrow fee, messenger fees, etcetera for performing those services. But, they will waive those fees (not charge them) IF the escrow company in the transaction happens to be one they own.

Hey, I think, a pretty nifty way I can save my clients several hundred dollars! Makes me more valuable to them! And since kickbacks from title and escrow are illegal as well as unethical (according to RESPA and the Code of Conduct as well as good business practice, respectively) I certainly can't see a benefit to me for urging them to choose otherwise.

(And I am truly sorry to anyone reading this who works at an independent escrow company. As far as I can determine, you're just as competent as the title company escrows, and no more intrinsically expensive. But it's really hard for your company to compete when choosing your competition saves my client money that's usually about equal to the base escrow cost. Plus the fact is that it's a violation of my fiduciary duty if I don't tell them this)

You wouldn't believe the resistance I get from agents who obviously want their client to choose one particular escrow company, and one particular title company that aren't affiliated. The sellers do have the right to choose title and escrow companies, or at least to negotiate them. But that's the seller's right, not the seller's agents. And a failure to inform them of obvious ways to save money by choosing an escrow company that will save your clients this money is a violation of fiduciary duty.

I just finished fighting one not too long ago where the seller supposedly wanted to choose an escrow company whose name just happened to be the same as the name of the real estate office that the seller's agent worked for (I.e. X Real Estate and X Escrow company). Now it may be possible that they are unaffiliated with that real estate office, and it may be possible that they are set up to handle all of the duties that cause the title company to charge those extra fees. So my client's counter-offer included the following phrase:

"Since the seller has chosen title and escrow companies unaffiliated with each other, seller is to be solely responsible for all sub escrow, messenger, and additional fees assessed by the title company above the cost of the title policy."

It even gives them an out - if the escrow company is set up to handle these services that are supposedly their responsibility, and does so that the title company doesn't charge for them, it makes no difference to either client.

The other agent didn't want to present the counter to his client. He specifically asked me to drop that wording. I knew exactly what this meant, particularly in the case of the escrow company that just happened to share the name of his real estate brokerage. No evidence admissible in court, of course. But I had to threaten to have my broker call his broker with the clear intimation that my next call would be to Department of Real Estate in order just to get him to present the offer to his client. Do you think it's possible he failed to inform his client about this trivial way to save money? How likely do you think it that there was some kind of payment going on off the books? All of this is illegal.

There are two companies that provide the vast majority of all home warranties, at least in this area. I can't even name another home warranty company off the top of my head. Each of them is affiliated with a particular title company. The policies are the same, as far as I can tell. Somebody wants to know the differences, I tell them to consult an insurance expert (The expert I consulted concurred with my opinion). But one of these insurance carriers is more expensive. If I'm representing the buyer, I don't care - his coverage is going to be pretty much the same. If I'm representing the seller, I'll tell them to please consult a licensed casualty insurance agent, but B is less expensive as far as I can tell. Why then, do I keep seeing sellers who are volunteering A? I can't believe a fully informed client is volunteering to spend more money for the buyer's benefit in order to buy coverage that looks to be the same.

The long and the short of this post is that just because it's illegal under the law doesn't mean it doesn't happen. Just because that agent has a fiduciary responsibility to you under the law doesn't mean they take it seriously.

What can you do?

Well, choose an escrow company that's affiliated with your title company, or an escrow company that's affiliated with a title company, and choose that title company too. On refinances as well, do not allow your loan provider to choose title and escrow who are unaffiliated with one another (to be honest, I haven't helped buy or sell property outside of California, so have no idea how this works in an attorney state). Look for something like "X Land Title" and "X Escrow." This will save you hundreds of dollars. They'll try to sell you on benefits like "Having escrow right here is very convenient," or "I know this escrow officer won't mess up the transaction." There are poor escrow officers, to be certain, but there are lots of good ones. Make it clear to your agent that you are unwilling to pay subescrow fees. If they want to choose escrow and title such that subescrow is going to happen, make the agent agree to pay them.

Ask not just your real estate agent, but also your insurance agent about home warranty policies. Or look in the Yellow pages under Home Warranty Coverage and call around if you're selling a property. Do this before you have an offer.

And above all, don't just go with your agent's recommendation on a service provider. It's unethical, illegal, and just plain bad business practice, but that doesn't stop a certain number from having their hand out behind your back. And it's just as likely to be the highly accredited agents at Big Name Brokerages with loads of brand awareness who are doing this. More likely, actually, as the reasons people go to that type of practitioner is to pretend they don't have to worry about details.

Caveat Emptor

Original here

There are two main sources of bargain properties. The obvious one that everyone knows about is properties fresh on the market where the owner doesn't realize what they've got. This is the largest single reason why potential buyers obsess over days on market: They think they're going to find something nobody else has, yet. Unfortunately for this mindset, everyone else has precisely the same idea. Everyone else wants to look at that fresh on the market property, hungry for the bargain nobody else has discovered yet. As a result, this sort of property is where you get bidding wars as everyone else jumps on the same bandwagon, making the owner and the listing agent both very happy.

The "It's so beautiful!" property is not where you get a bargain, especially when it's fresh on the market. Actually, it's only a potential bargain when they're overpriced and the owner won't listen to reason that they get to the point where they aren't fresh on the market. People go to great lengths to make properties beautiful precisely because they will then command premium prices, especially when they're fresh on the market. This is another one of those trade-offs: You can buy a beautiful turn-key property, or you can get a bargain. Choose one or the other - you cannot have both. Choose wisely, by what is important to you. There is no sin or mistake in choosing to spend more money for a property where the work has been done. You are essentially saying that it's worth the extra money to you, and that's fine. This mistake is choosing the fixer when it's worth the money to you to have the turn-key, or in choosing the turn-key when would rather have the money (or can't afford the beautiful property where all the work has been done!)

The second, superior source of bargain properties is usually properties that have been on the market a while. They're not beautiful, so Mrs. Average Buyer does not swoon with delight at the thought of that kitchen and that bathroom. It specifically doesn't grab prospective buyers by the throat and say, "Buy me or you'll never be happy again!" If it did that, it wouldn't have gotten to this stage; it would have been bought when it was fresh on the market.

It may be old, it may be filthy, it may be cluttered, or all three. But the basic construction is still solid. This is not a Vampire Property, it just hasn't been updated in a while. There are no cracks in the foundation, no rot in the wood, no leaks in the pipes. There's nothing really wrong with it; it's just not beautiful right now. As a result, buyers will pass it by. They're too busy looking at the surfaces, looking for brand new granite counters and travertine floors that they don't notice that's what is there is quite serviceable and usually pretty easy to update.

Buyers don't swarm these properties simply because they don't know what to look for. They see fifty year old now. They're looking at what the property looks like now, not what it will look like after some very simple renovations that cost a lot less than the difference in cost between this property and the brand new rehab that's just been put on the market down the block. Some people think they know what they're looking for in a bargain, but most of them are wrong. This is one of the many places a good Buyer's Agent comes into the process. I've been around this particular block a few times, and I do know what I'm looking for and what it looks like. Lots of buyers will tell you they're looking for a bargain, but when the time comes to make an offer on one they just won't move off the dime. They're still hoping to find something for the same price with the work already (and freshly!) done. That's not going to happen. The reason the owners did that work was to be able to get more money for the property. You can pay the extra money (and the interest on it if you're getting a loan!), or you can go shopping for properties where the work is waiting for you. The folks who just remodeled in order to sell are likely to be disappointed anyway, but until they face reality, you're wasting your time.

Don't get emotionally attached to any property, especially if you don't own it yet. I tell people that if they're going to get emotionally attached, the best time is as I'm handing them the keys when the transaction has closed. Until the transaction is done, be willing to walk if it's called for. You're making an investment of several hundred thousand dollars. If that investment is going to be a problem or the owners don't want to let it go on reasonable terms, leave it to be their problem. They're trying to sell it; that's a representation they don't want it any more. If they make life too difficult for people who want to buy, that property is still their problem unless and until that transaction closes. I'd rather find my clients something else that's not going to be that kind of problem. Go through the purchase process with the mindset of, "I think I'd like to live here." Make the offer, reach the contract, apply for the loan, do the investigations, and go through subsequent negotiations and everything else with the idea that you think you'd like to live there - and be prepared for something to change your mind. many sellers, listing agents and loan officers all take advantage of people who aren't prepared to change their minds - and not a few buyer's agents as well.

The ideal bargain property is the same one it's worthwhile to remodel: Old, unfashionable surfaces with poor lighting. Most folks won't even consider such properties, which is another reason why they go for attractive prices. Nor do a lot of sellers want to deal with the updates - putting cash out of their wallet for someone else's enjoyment. I'd say inherited property is probably the quintessential example of this. The heirs just want money; they don't want to come up with the cash that enables them to get a better price. This makes it a high supply, low demand situation. You're not going to be the envy of all your friends at the housewarming party the weekend after it closes, but you are going to have a mortgage that leaves you a lot more room to afford other things, and a couple years down the line people will be asking how you got such a steal.

Caveat Emptor

Original article here

(click for Part 1 of Save For A Down Payment or Buy Now?, which deals with the basic question of how well saving for a down payment increases affordability)

As an alternative strategy, suppose that instead of waiting to buy that $400,000 house because you can't afford the payments now, you buy a $250,000 condo (or whatever you can afford) now - and then sell it for your down payment later. In other words, you buy what you can afford right now instead of waiting and saving until you can have the home of your dreams. Then at some later time you sell the condo for the down payment on the home you really want.

Let's look at the trade-offs for the condo. I'm going to assume that the condo's equity is the sum total of the saving you are doing, and I'm going to manipulate rents until I get $833 per month cash flow difference (your $10,000 per year savings from Part I). This yields a monthly rent of $977.46. You can't rent $250,000 condos around here for $1000 per month, but we'll stick with the situation I figured even though the argument in favor of buying the condo is far stronger. Let's also assume it costs 7% of the value to sell the property, make allowances for property taxes, HOA fees, etcetera. It'd be a bear if I didn't already have the spreadsheet done, but here are the results:



Year
0
1
2
3
4
5
6
7
8
9
10
Value
$250,000.00
$262,500.00
$275,625.00
$289,406.25
$303,876.56
$319,070.39
$335,023.91
$351,775.11
$369,363.86
$387,832.05
$407,223.66
Monthly Rent
$977.46
$1,016.56
$1,057.22
$1,099.51
$1,143.49
$1,189.23
$1,236.80
$1,286.27
$1,337.72
$1,391.23
$1,446.88
Equity
0.00
15,431.56
31,674.53
48,772.18
66,770.15
85,716.58
105,662.21
126,660.56
148,768.08
172,044.30
196,552.03
Net Benefit
-17,500.00
-13,443.41
-9,518.73
-5,769.20
-2,244.10
1,000.56
3,901.27
6,386.11
8,373.86
9,772.91
10,480.08

Now, I have to admit this seems marginal. You've only got an extra $10,000 in your pocket after 10 years. So you sell the condo and buy your house, and plugging these numbers into the affordability spreadsheet improves the affordability of the house you really want by 8% in only 8 years. Nonetheless, this is 2.5 times the affordability increase afforded by investing the money.

Now let's consider the situation as it really exists. That $250,000 condo rents for about $1300, which makes a big difference to what you save. It's like taking the previous situation, and adding $322 per month to your investments as well. Here's the numbers for the condo, adding the investment, and coming up with a total.



Year
0
1
2
3
4
5
6
7
8
9
10
Value
$250,000.00
$262,500.00
$275,625.00
$289,406.25
$303,876.56
$319,070.39
$335,023.91
$351,775.11
$369,363.86
$387,832.05
$407,223.66
Rent
$1,300.00
$1,352.00
$1,406.08
$1,462.32
$1,520.82
$1,581.65
$1,644.91
$1,710.71
$1,779.14
$1,850.31
$1,924.32
Equity
0.00
15,431.56
31,674.53
48,772.18
66,770.15
85,716.58
105,662.21
126,660.56
148,768.08
172,044.30
196,552.03
Savings
$0
$4046.11
$8515.91
$13453.74
$18908.64
$24934.73
$31591.84
$38946.03
$47070.31
$56045.30
$65,960.08
eq+sav
$0.00
$19,477.67
$40,190.44
$62,225.92
$85,678.79
$110,651.31
$137,254.05
$165,606.59
$195,838.39
$228,089.60
$262,512.11

Now let's paste these last numbers into the affordability sheet and see what we get:



Year
0
1
2
3
4
5
6
7
8
9
10
available
$0.00
$19,477.67
$40,190.44
$62,225.92
$85,678.79
$110,651.31
$137,254.05
$165,606.59
$195,838.39
$228,089.60
$262,512.11
price of house
$500,000.00
$525,000.00
$551,250.00
$578,812.50
$607,753.13
$638,140.78
$670,047.82
$703,550.21
$738,727.72
$775,664.11
$814,447.31
payments
$3,631.97
$3,670.64
$3,709.34
$3,747.86
$3,786.00
$3,823.49
$3,864.42
$3,928.79
$3,993.62
$4,058.65
$4,123.58
affordability
1.00
1.02
1.04
1.06
1.08
1.10
1.12
1.14
1.15
1.17
1.18

So we see that this strategy has increased the affordability of the house you really want by 12% over only 6 years, holding background assumptions constant. This is twice again the affordability increase rate from the last example (2%/year as opposed to 1), and so almost five times the affordability increase rate of just saving for a down payment. Furthermore, those payments on your condo are mandatory, and the increases in value happen of their own accord, whereas most saving programs run by individuals falter a bit over time, nor is there any such thing as a 10% return per year tax free. In short, I'm comparing a real world real estate investment with a hopelessly idealized other investment, and buying the less expensive property in the real world beats the idealized other investment. Saving for a down payment makes comparatively little sense unless you are not yet in a position to buy anything, either due to stability, insufficient income to buy anything, or because your situation does not permit financing for the down payment you have.

Taken all together, this forms a powerful argument for not waiting until you can afford your dream house, but buying what you can afford as soon as you are in a position to do so with the intention of trading up later. Delaying means you cut the later years off of the results, not the earlier. The benefits to real estate don't start until you put your foot on the ladder. If I had known this when I was in my twenties, I'd be millions of dollars better off today. So plan ahead, and start working towards your goals now. You can never go back in time with what your figure out later, or with the effort you expend later.

Caveat Emptor

Original here

An email asked a question I should have thought to answer a long time ago, and the answer may surprise a lot of folks. I've been vaguely aware of this for a couple of years, but I was amazed how strongly the numbers solidified my views!


My wife and I aren't ready to buy a property yet, but we are trying to plan how much to save for our down payment. You've mentioned that there's a spectrum from nothing down to 20+% down broken down by 5% increments, but how do you choose where to be on that spectrum? I can see that there are tradeoffs between the amount you have to save, the cost of your mortgage and the like, but I don't have a good way of thinking about those tradeoffs. And, since we're in the DELETED area, 20% down could easily get into the six figures, so it can be quite intimidating.

Given the way leverage works in even a slightly appreciating market, it is generally to your advantage to buy as soon as 1) You are sufficiently stable in your employment and expect that you're going to be in the area at least another three to five years, 2) You have enough of a reserve that the first minor bump in the road will not lead to disaster, and 3) You make enough to afford the payments. However, what usually happens is that people get a raise, a promotion, or a new job, or more often, they get married or have a baby and that is what sets their thinking on the road to buying a home.

(Note: When I originally wrote this, loans available were different than they are now. But the situation will go back to that eventually, and there are ways to make a minimal down payment work, even today, and the basic ideas I'm presenting are, if anything, more valid than when I originally wrote this)

Let's consider a $500,000 property and an 80% first trust deed with an appropriate piggyback 30 due in 15 second if needed, since that is generally returning more favorable rates than a Home Equity Line of Credit right now. When I originally wrote this, I had 5.875 for about 9/10 of a point plus closing costs, or about $7100 total cost. But there are potential adjusters - and relevant to this situation, having subordinate financing for 100% CLTV added one full discount point ($4000 in this case) to the first mortgage, or you can drop down to 6.25 for the same cost. 95% financing only adds 1/4 of a point in the same situation, or you can get a 6% even for the same cost. At or below 90% CLTV, there was no add to the first mortgage. If we're at 80% with a $100,000 (20%) down payment, the 5.875 first is all there is. Taking dead average credit scores (720) with this same lender, the closing costs are $500 (flat) when you do the second concurrently. 85% CLTV would be an 8% second on $25,000 for a down payment of $75,000 (15%) plus closing costs. 90% CLTV would be $50,000 down payment (10%) and leave you with a $50,000 second at 7.375%, benefiting from a bump down in rate for hitting a certain dollar value. 95% CLTV requires a $25,000 down payment and leaves you with a $75,000 second at 7.75%. 100% CLTV (no down payment) leaves you with a $100,000 second at 8%. It would be 8.25, but you've hit another economy of scale break point.

Here's a table:





CLTV

80

85

90

95

95

100

100

1st TD

5.875

5.875

5.875

5.875

6.000

5.875

6.25

2nd TD

n/a

8.00

7.375

7.75

7.75

8.00

8.00

Cost

$7100

$7600

$7600

$8600

$7600

$11600

$7600

1st pay

$2366.16

$2366.16

$2366.16

$2366.16

$2398.21

$2366.16

$2462.87

2nd pay

$0

$183.45

$345.34

$537.31

$537.31

$733.77

$733.77

interest

$1958.33

$2125.00

$2265.63

$2442.71

$2484.38

$2625.00

$2750.00


So you see that having a down payment is a very good thing. This is for a fairly ideal situation. If you were in a stated income situation (when we had stated income loans, which nobody does any longer), the rates were slightly higher and step somewhat more steeply. If your credit is significantly below average, the rates start higher and step up more steeply still. It gets rough if both apply.

However, this doesn't take place in a vacuum. Let's say you can save $10,000 per year, and earn 10% tax free on what you save. But while you do, housing prices are still going up in the aggregate (at least when the economy is healthy, and if the economy doesn't get healthy soon we'll have worse things to worry about then whether to buy real estate). Let's assume 5% per year on average. We will also assume that you can get a 6% loan for the first and 8% for the second whenever you buy, and taxes at 1.2% of value per year, here's the projected situation:



Year
0
1
2
3
4
5
6
7
8
9
10
down
$0.00
$10,500.00
$22,050.00
$34,755.00
$48,730.50
$64,103.55
$81,013.91
$99,615.30
$120,076.83
$142,584.51
$167,342.96
price
$500,000.00
$525,000.00
$551,250.00
$578,812.50
$607,753.13
$638,140.78
$670,047.82
$703,550.21
$738,727.72
$775,664.11
$814,447.31
CLTV
100.00%
100.00%
100.00%
95.00%
95.00%
90.00%
90.00%
90.00%
85.00%
85.00%
80.00%
payments
$3,631.97
$3,736.52
$3,842.45
$3,949.44
$4,057.11
$4,165.04
$4,272.73
$4,379.60
$4,484.99
$4,588.14
$4,694.16

Where payments is the total of mortgage and monthly tax payment pro-rated when you buy. Examining that column, we see that this is an argument against waiting. In fact, assuming a 3% (compounded) raise per year, the property is only 4% more affordable in year 10 with a $167,000 down payment! This neglects rises in rents and other costs of living!

I should mention that smooth raises are not the way any market works over a 10 or 20 year period. Up, down, flat, crash, skyrocket, all happen due to unforeseeable factors, as well as ones you'd have to be a politician to not see. The basic ideas remain sound as a general principle, although the actions of politicians can certainly influence them - upwards or downwards. But in general, over the long term, markets have population increases and increased demands on the land available. Real estate prices increase in the long term, whatever may happen in any individual year (or few years). leverage makes the effects of that increase have spectacular financial effects.

At this update, the only 100% financing that is generally available is if you are eligible for a VA loan, but the principles remain the same. Once you have enough to make a down payment acceptable to lenders, the numbers are very strongly in favor of buying instead of waiting for a larger down payment. FHA loans require only 3.5% down, and are available to basically everyone who hasn't defrauded the federal government.

Original here

(Here is Part 2 of Save For A Down Payment or Buy Now?, which tells one way to increase affordability more and faster)

A while ago a reader gave me a heads up that Illinois HB 4050 was hurting residents of certain poverty stricken Illinois Zip Codes. Now I have to pick on my own state:

California law generally requires special handling of sales transactions to protect homeowners in foreclosure. This law, called the Home Equity Sales Contract Act, generally applies to transactions that meet all of the following four conditions: the property is one-to-four family dwelling units; the owner occupies one of the units as his or her principal place of residence; there is an outstanding notice of default recorded; and the buyer will not use the property as a personal residence. The Home Equity Sales Contract Act does not apply if one of these four conditions is unmet. If, for example, a seller occupies a property in foreclosure, but the buyer will be occupying the property as his or her personal residence, the home equity sales law does not apply.

If all four conditions are met, however, the buyer must use a home equity sales contract, such as the C.A.R. standard form "Notice of Default Purchase Agreement" and attachments. This agreement gives the seller, among other things, a five-day right to rescind the contract. Furthermore, the home equity purchaser cannot be represented by an agent. More accurately stated, the law requires a buyer's agent to be bonded by an admitted surety insurer, but C.A.R. is unaware of any insurer currently offering the bond.

Actual Code Here

This is so brain damaged it has to be the idea of some clueless idiots out to save the world without first stopping to consider the Hippocratic Injunction to "First, do no harm." But then we are talking about the California Legislature.

Now, in the business, the term "equity sale" or "equity purchase" is most commonly used in conjunction with a sale subject to existing trust deeds. So this is a significantly different meaning to a similar phrase. Keep in mind that there are four conditions that need to be met:

1. Residential property (1-4 units)
2. Owner occupies one unit
3. Notice of default recorded
4. Buyer does not intend to occupy.

But what happens with such properties? Who buys them? Investors, that's who. Not people looking for a primary residence. Guess what? The owners want them sold - need them sold! What happens if they don't sell? They go to auction, and the owner basically gets nothing, whether the property sells at auction or it doesn't, in which case the lender now owns it.

Furthermore, they're requiring that the buyer's agent have a bond that is not available, and has not been for years. So if whether they're working with a shark or with an investor who is actually going to give the people a decent price, the buyer's agent cannot be compensated. So what are most buyer's agents going to do? Answer: Wait until after the trustee's sale! As the buyer's agent, they have no fiduciary responsibility to that seller, and no ability to get paid. But the owner wants to sell before the trustee's sale. The chances of them getting anything from a trustee's sale or afterwards are about equal to one my grandfathers giving birth to triplets. Furthermore, this creates openings for unscrupulous listing agents to set up lowball offers on the property, or buy it themselves, with even less constraint than usual.

Now, this does theoretically create an opportunity for certain people who might be willing to live in the property to buy for lower prices, since investors are (mostly) out of the picture. So we are robbing Peter (the current owners) to pay Paul (in search of new housing). There are also some truly outstanding issues. What happens if my buyer client is lying to me about whether they intend to live there? The contract is already written, the terms of the transaction set, and the buyer's agent can't back out at the last minute when the buyers change their mind about whether they're going to live there. Also, what happens if everything is fine when the contract is written, but the lender drops a Notice of Default on the sellers the day we're set to close?

In the current market, most of the folks in default do not have large amounts of equity. Matter of fact, the typical seller who is delinquent is really hoping that the lender will sign off on a Short Payoff. This is not shark investors swooping in and buying granny's $500,000 property for $80,000. With the number of people there are pushing Reverse Annuity Mortgages, that's not going to be the case any time in the foreseeable future. Granny can get a RAM, after which she can last long enough to sell for a good price. Instead, what's going on is that the properties are going to foreclosure, costing the lenders more money, adding to the fees the owners pay, and lengthening the odds against the current owners coming out of the situation with anything. They want buyer's agents on the job, finding these bargains for their clients so that the sale gets made before the trustee's sale. Keep in mind that the seller is always allowed an agent, and the seller can always say "no," to the offer. Which is preferable: Not getting as much as you might have gotten for a sale under ideal conditions, or getting nothing?

Henry David Thoreau had some words on this situation:

If I knew for a certainty that a man was coming to my house with the conscious design of doing me good, I should run for my life, as from that dry and parching wind of the African deserts called the simoom, which fills the mouth and nose and ears and eyes with dust till you are suffocated, for fear that I should get some of his good done to me -- some of its virus mingled with my blood. No -- in this case I would rather suffer evil the natural way.

As is always the case, the California legislature was determined to do good, and ended up hurting the people they were allegedly trying to help. There are very few exceptions to Thoreau's rule.

Caveat Emptor

Original here

This is something that often happens with highly appreciated properties where the owner can no longer keep up the payments, they get hit with a notice of default, and along comes Joe or Jane seemingly riding to the rescue on a noble white steed, offering to buy the owner out of the property "subject to" existing deeds of trust.

This is a terrific position for the buyer to be in, and a rotten position for the seller. Nor are the prices usually very good for the seller - that white knight usually ends up looking a lot more like a thief. So why does it happen? Why does the seller agree to it?

Here they are sitting on this highly appreciated asset, with loads of theoretical equity, and they cannot make the payments. If they go through the foreclosure process, chances are better of flying to the moon by flapping your arms than of getting any of the equity back out. Yes, in California it's got to sell for at least 90% of appraised value or it doesn't sell at auction, in which case the lender owns it. But those appraisals are intentionally low, because the lenders don't want to own them. Furthermore, all of the payments that weren't made, and the interest on them, all gets piled into the loan, as do fees for the default process and the trustees sale. If you have a mortgage loan, read your contract. Sight unseen, I'll bet you a penny there's a clause in there saying they can sock you for "reasonable" fees in the event of default or foreclosure.

So you have a $450,000 property which you paid $120,000 for and owe $320,000 on, but something has happened and now you can't make the payments. You put it on the market for $450,000 and don't get any takers. Then along comes someone and says, "I'll take over your payments and pay you $20,000 if you sign the property over to me."

This is certainly a gray area, legally. The loans have "due on sale" clauses, and the lender can call the notes as due in full in such situations. The buyer basically tells them, "tough", knowing that if they foreclose, the lender ends up in the situation they didn't want to be in in the first place, of owing the property, not to mention that the person who bought "subject to" can cost them a lot more money by delaying it in court, and there's a good chance they can win the case. Meanwhile, if they don't act quite so hard-nosed, this new owner is making the payments. They have the option of refusing the payments, but then we're dealing with the foreclosure process, and in the meantime, the checks for payment are there every month. What do you think most lenders will do? They will accept the payments!

Notice, however, that I didn't say the payments get there on time. This is the second raw deal that the seller has to swallow. The buyer's cash flow is a little tight, and the payment gets there 40 days late on a consistent basis. Who gets marked late? Whose credit gets dinged every time this happens? Not the buyer's. That buyer never applied for a loan with that lender on that property, the lender doesn't have their signature on a contract that says, "I agree to pay..." It's the seller's credit that gets hit. Kind of a nice situation to be in, no? Make a late payment any time you feel like it and your credit doesn't suffer! Not only that, but since the loan is still in the seller's name, the payments don't hit the buyer's debt to income ratio, allowing them to qualify for more loans, with larger payments, than they really should. Trying to leverage their investments like that is one reason why the folks who make a habit of "subject to" deals usually have tight cash flow. They don't want to let the property go into default, but as long as they don't get to the stage of being 120 days late (90 in some places), they have the best of all possible worlds!

Suppose, for whatever reason, the property becomes a short sale? Well, since the seller is the one that violated the loan contract, there will be recourse on them, not the buyer. Many times the buyer makes side deals for "pay me" type stuff and manages to make money, or at least get their money back, even though the property doesn't sell for enough to pay off the existing liens.

If you are getting the idea that agreeing to a "subject to" deal isn't the smartest thing in the world, why do buyers agree to them?

Desperation and Panic. They listened to the agent that told them that they could get more money than was likely by market conditions, or they listed with the cheap bump on a log agency that really doesn't do anything to market the property, or they just sat in denial until far too late. Nothing happens instantly in real estate; it always takes several weeks at a minimum to get a property sold, even if you get a fantastic offer on the very first day. When I first wrote this, If I had to I could get a loan done in one or two days, but that's not a situation you want to be in, because I don't know anyone who won't charge more in such a situation, and all of the usual loan caveats apply. But for whatever reason, the owners let the situation go too long, let themselves get behind the power curve, and suddenly realize that they are not going to catch up. They are looking at losing the property and getting nothing, so they panic. This is only one of the many reasons why staying ahead of the situation in real estate is so important. At the point where you're looking foreclosure square in the face ten days from now, there's not much else that can be done. I can offer you entire supertankers full of sympathy, and it won't make any difference. So if you're in this kind of situation, get the property on the market quick, price it attractively, and find an agent who will market it effectively, so that you avoid getting into the situation where the shark's offer is the best one you're going to get.

There is a scam that goes with this, that tells people, we'll keep you in your property. Even though you won't get to stay in your property, people sign it over and don't understand the gotcha! until they've already been had.

Caveat Emptor

Original here

The original appeared in April 2006, but has been updated for changes

I am hoping to buy in the (city) area and am reviewing the possibilities. While I fear that the local market may be peaking, I intend to live in the home for at least ten years, so I am not trying to time the market.

My questions have to do with the down payment. I expect to shop for a property in the $450,000 range, and currently have $60,000 available for a down payment. I make a decent salary and receive an annual bonus of $35,000 - $40,000 each February. The bonus, while not guaranteed, is very dependable. After taxes and deductions, I should realize about $20,000 - $25,000 from it.

Do you think I would be wise to wait until February, by which time I will be able to make a down payment of $90,000 and perhaps avoid PMI and pay less interest over the life of the loan, or seek to buy now and lessen the taxes on the bonus? (I itemize, am single and am in the 28% bracket). Will the greater down payment help me to capture a better interest rate on the loan? (My credit scores are right around 800). Also, if I buy now, is it possible that I will be able to negotiate a mortgage in such a way that I can pay my realized bonus in February as a lump sum towards the remaining principal without incurring penalties? Ideally, i would like to use my bonus each year to pay down principal, as I can afford to balance my budget, including regular mortgage payments, without touching the bonus.

While on the subject of credit scores, I am reminded of another question - does an 800 score do me any good as contrasted with, a 740 or 750? Thank you again for your consideration. Your writings have been invaluable to my education.


I needed some more information, so got a subsequent email

I would expect the property taxes to run about $5,000 annually and association dues to be another $350 monthly. As I don't have a car, parking fees will be inapplicable. My closing costs should be somewhat reduced as I work for a bank (parent company) and they offer employees favorable mortgage rates with no points and no origination fees. Of course if I go elsewhere for the loan that would not apply, but I would only expect to do so if I received even more favorable terms.

As for an equivalent property, the market would price the rent at about $2,200 a month, although I am only paying $1,520 now (for a less desirable place than what I am shopping for).

First things first. You are easily A paper. When I first wrote this, A paper was A paper - someone who just staggered over the line got the same rates as King Midas. That has now changed and there are cost differentials between people who just make it and people whose credit really shines. That said, focus on the bottom line to you, not how much of a differential you get over lesser customers. Which is really more important: getting a better price on the loan - better rate at a lower cost, or paying less than a prospective lender's next customer? It's not important that they give you a quarter point incentive if their basic tradeoffs were more than that above the competition. Look for a loan based upon the bottom line to you, not a little tweak that says you get treated a little better than the next guy.

A paper does differentiate between credit scores now, where they did not formerly - but much less so above 740 credit scores. Someone with a credit score below 720 who still qualifies A paper can expect a discount point surcharge on a lender's basic rates. At high loan to value ratios, this can be two points of difference - $5000 on a $250,000 loan, $10,000 on a $500,000 loan more than the higher credit score pays. Anyone reading this think $5000 isn't important? On the plus side, it's way better than going subprime (if you can even find a subprime lender that will take you with as tight as standards have gotten). One thing never changes about loans: shop by the bottom line to you.

Second, split your loan into two pieces to avoid PMI if you can. Current market conditions at this update are that second mortgages won't go over 90% of total value loaned, so you will probably have to pay PMI if you can't come up with 10% down. One first loan for 80% of the value, and a second for the remainder, whatever that is. The second will be at a higher rate, but better that than paying PMI on the whole balance. It's likely to save you a lot of money this way. If you intend to pay it down, be very certain that there will be no prepayment penalty.

Now, let's look at now versus basically a year from now. One thing I'm going to look at is whether your location may be above sustainable levels. My rule of thumb is that if a 20% down payment won't break even on rental cash flow, your area is likely to be overpriced. With current rates (6.25% for a thirty year fixed rate loan at par for the first, something like 9% for a 10% second), payment on $360,000 runs about $2215, plus taxes of $420 per month plus association dues of $350 plus an allowance of $50 per month for insurance. Total $3035 per month. As opposed to $2200 rent. An investor would be down $835 per month even if the place was never vacant and never needed repairs. Prices would need to drop $100,000 at least to cover that. I'm also going to assume you need $10,000 for closing costs out of your own pocket, reducing your down payment to $50,000. Now, I'm going to look 10 years out based upon this situation.



Year
0
1
2
3
4
5
6
7
8
9
10
Value
$450,000.00
$374,500.00
$400,715.00
$428,765.05
$458,778.60
$490,893.11
$525,255.62
$562,023.52
$601,365.16
$643,460.72
$688,502.98
Monthly Rent
$2,200.00
$2,288.00
$2,379.52
$2,474.70
$2,573.69
$2,676.64
$2,783.70
$2,895.05
$3,010.85
$3,131.29
$3,256.54
Equity
50,000.00
21,008.26
9,995.46
43,151.06
78,608.20
116,526.98
157,078.65
200,446.41
246,826.23
296,427.77
349,475.31
Net Benefit
31,500.00
-108,625.29
-91,384.89
-72,677.63
-52,395.49
-30,423.16
-6,637.55
19,092.60
46,907.31
76,955.83
109,397.24

Now, let's look at suppose prices have come down that same $100,000 in a year, but rents have gone up by inflation - roughly 4%. However, rates are a bit higher - let's say 7 percent (actually, they are slightly lower now). Furthermore, you have $90,000 less $10,000 for closing costs leaves $80,000 down payment. I'm assuming property taxes are based upon purchase price, as they are here in California, but if they don't go down when prices go down, that's going to make a difference of about $100 per month to start and more later on. Let's look 9 years out for an equivalent time frame.





Year

0

1

2

3

4

5

6

7

8

9

Value

$350,000.00

$374,500.00

$400,715.00

$428,765.05

$458,778.60

$490,893.11

$525,255.62

$562,023.52

$601,365.16

$643,460.72

Monthly Rent

$2,288.00

$2,379.52

$2,474.70

$2,573.69

$2,676.64

$2,783.70

$2,895.05

$3,010.85

$3,131.29

$3,256.54

Equity

80,000.00

107,242.69

136,398.64

167,602.25

200,997.33

236,737.81

274,988.43

315,925.50

359,737.71

406,627.01

Net Benefit

24,500.00

4,200.10

18,090.11

42,543.32

69,346.64

98,702.88

130,831.85

165,971.77

204,380.83

246,338.88

When I first wrote this, the picture looked much better by waiting a year for the market to get rational. If it hadn't, all you've done is taken that last year of benefits off the first chart, or worse, as perhaps the prices continue to rise for another year. Nor have I assumed that you paid extra on the loan. Quite frankly, once you've paid off that second trust deed, leverage is your friend, and you are better off investing the difference.

When I originally wrote this, the question was "When is Wile E. Coyote going to look down?" Okay, not all that funny, but it has applicability to the situation, and at this point it has happened, as you are aware unless you've been living as a hunted animal in a cave. As long as everyone was in denial, and there was a market of folks willing to pay those prices, the market could defy gravity. When people wised up, that ended. When prospective buyers "looked down", and they didn't like what they saw. There is no convincing reason why highly paid jobs have to be even more highly paid so that they can afford local housing here, whereas a large proportion of the jobs in certain cities like Washington DC or New York don't really have the option of leaving, as they are where they have to be. The government isn't leaving Washington DC unless it gets nuked, and the big guns of the financial industry aren't leaving New York unless every other big gun does so. You know better than I to where your city lies on that spectrum. My impression is that where you are is closer to the inelastic employment point. Nonetheless, if the rest of the country "looks down," so will those places that are relatively insulated.

If a 20 percent down payment doesn't pencil out as an investment property, as it doesn't in your case, the question is not likely to be "if?" the market is going to adjust, but "when?" and "how?" Here locally, you could almost hear the "pop!" If things are relatively inelastic, employer- and jobs-wise, a long slow deflation may be what occurs. You may even keep current prices while inflation makes things catch up, or keep going up but at a lower rate, taking longer to adjust. It's hard to say when I'm not as familiar with your city's economic engine as I am with my own, but here's what happens if prices stay stable for ten years:





Year

0

1

2

3

4

5

6

7

8

9

10

Value

$450,000.00

$450,000.00

$450,000.00

$450,000.00

$450,000.00

$450,000.00

$450,000.00

$450,000.00

$450,000.00

$450,000.00

$450,000.00

Monthly Rent

$2,288.00

$2,379.52

$2,474.70

$2,573.69

$2,676.64

$2,783.70

$2,895.05

$3,010.85

$3,131.29

$3,256.54

$3,386.80

Equity

50,000.00

53,930.19

58,150.38

62,682.08

67,548.41

72,774.22

78,386.23

84,413.13

90,885.78

97,837.36

105,303.52

Net Benefit

-31,500.00

-39,318.42

-47,361.14

-55,634.47

-64,145.15

-72,900.45

-81,908.24

-91,177.08

-100,716.30

-110,536.19

-120,648.06


As you can see in this case, you build up a fair amount of equity, but would have been better off renting and investing the difference. However, the odds are against this sort of market reaction.

At this update, my local market has seen all the crash we're going to unless the employment situation gets even worse. There is a premium for beaches, tourist attractions, and weather that's at least decent and usually wonderful all year long. People want to live here if they can, which means demand is high, supply is fixed, and if you won't pay it, someone else will. There is also upwards pressure on rents of single family housing, as landlords are looking at long term cash flow rather than flipping the property in a year, and the local market has mostly worked its way through excess inventory and there isn't as much "shadow inventory" here as some people seem to think (doesn't matter how much there is nationwide. The question is "How much is here?" There is no such thing as a national market for real estate, and anyone who thinks there is has just labeled themselves a bozo. Even a unified commuting area market is pretty much an occasionally useful fiction. Look at zip codes or even neighborhoods if you want an accurate picture of what is going on in an area - but that's too much detail for talking heads on national television programs)

Caveat Emptor

Original article here


My general rule of thumb is "Remodel for your own enjoyment. If you're lucky, you'll get some of your money back when you sell." The remodeling industry has made a very large amount of money seducing people into believing they will recoup their investment, or more than their investment. But as you can see here, it's a rare remodeling project that returns more than the cost. Therefore, don't remodel with the idea of making a profit, because you won't. Not a single one of those multipliers is greater than 1.

But there are times when remodeling to sell makes dollars and sense.

Mostly, it's when the existing stuff is so outdated that Ms. Newlywed takes one look and flees in terror from the Uranium Yellow or Art Deco Pink and Blue that's been out of favor since before her mother was born. Maybe it was fine thirty years ago when you bought it, and you've gotten used to it, but now it's fifty years old and you've just never motivated yourself to do anything about it. If the kitchen is straight out of 1955, and the bathrooms look like they were last decorated when Hawaiian kitsch was the hot new fad (If you're not aware, Eisenhower was President), it's probably a good idea to do something about that before you try to sell - "Try" being the important word. Because people looking for their dream home aren't interested, and these properties sit on the market. If they eventually sell, they will sell for way below everything else on the market, first because of the visible age, second because it sat on the market and you had to reduce the price further and further while paying carrying costs for months. These are the sorts of homes rehabbers and flippers look for, because they can make a profit on them. If you have the money, why wouldn't you want that profit for yourself?

For buyers, if you're willing to buy something that's solid but older, you can get one heck of a deal as well as being able to remodel at whatever pace you're comfortable with. Truthfully, most folks I talk to have at least some plans for as soon as they buy, anyway. If you're planning to install new kitchen cabinets and granite counters anyway, what does it matter if what's there is ancient, ugly, or poorly laid out?

The first level of remodeling is to clean, shine, and repair any surfaces that need it. This is a straightforward extension of the "carpet and paint" principle. New paint and carpet are cheap, and have a great return on investment. If the formica is burned or chipped, if the tile is broken, if it's dull and dingy, make it shine. It always amazes me that people with hardwood floors will leave them looking like they haven't been polished since they were laid down in 1932. Strip them, sand them, polish them - before you put the property on the market. It's a lot cheaper than replacing or laying new carpet. They will look beautiful. They will make people want your house. Not everyone, of course, but how many buyers do you need? If you've got something lots of people see as desirable, flaunt it by making it beautiful. Hardwood floors are high on that list.

Sometimes, there just isn't any choice but to take it to the next level. Stoves built in to the countertop and cooking ovens in the cabinets are so 1958. If there aren't any good matches for marred, gouged, or broken surfaces, you probably want to re-do the whole surface. Keep in mind that labor costs are pretty much a constant, and the largest expense of most jobs. You want to spend $4500 resurfacing the bathroom in plastic and linoleum, or $5000 resurfacing it in Travertine and nice tile? Add a moderately upscale toilet for a couple hundred bucks, and you've got a bathroom that looks like it comes out of Sunset magazine rather than an episode of the Flintstones. Somebody who flees in terror from the latter is likely to be attracted to the former. Even if they don't flee in terror from the Flintstones bathroom, most folks are going to be much more attracted to the Sunset magazine bathroom.

Keep in mind, also, that the new stuff you put in has to go with whatever you're keeping. If you've got a Mediterranean paint scheme, Art Deco counters are not going to work for most prospective buyers, and they're the ones you're trying to please at this point. Just sayin'. The more vanilla you keep it, the fewer prospective buyers you will alienate.

Don't go overboard. It can be a real temptation to spend $25,000 or more on new kitchen appliances, but you're not going to get your money back. Keep in mind that most appliances are personal property, so (in the absence of the contract specifying otherwise) you can take them with you when you go. However, in cases like that it's more common than not that those appliances remaining will be written into any purchase offer, and if you agree to leave them, you have to. If you don't want to leave them, then perhaps the purchase offer gets withdrawn to no beneficial effect, but perhaps they'll stay interested at a slightly lower price. If two-thirds of the gourmet kitchen that attracted a buyer is going away when you move out, it's not likely to do you much good in selling your property. I always ask my buyers why they're willing to pay more for the kitchen when most of it is going away. There are idiots who insist they don't want a buyer's agent, but betting on that is a bet you don't need to make - and almost always lose.

Poor lighting can kill a sale without the buyers ever realizing why. It's dark, it's cavelike, it feels old - they don't want it. Just leaving the drapes open when the property is being shown makes a huge difference. Replacing the lighting - particularly if you use CFL so you don't have to necessarily have to rewire for a bigger load - can be very cost effective.

If you're going to remodel anyway, clean up your lines of sight and floor plan if you can. The longer the uninterrupted lines of sight, the bigger the property "feels". The less complex the floor plan, the more open and larger it will feel. If you have to go through three switchbacks to get through the kitchen, that's a bad thing. Separate but connected "areas" are better than room dividers which are in turn better than walls, at least in the public areas of your property. If you're remodeling anyway, fix it.

One of the overlooked and relatively cheap remodels is the closet. Basic closets from fifty years ago are tiny by modern standards. People today have more stuff, and they want places to put it. People who get very interested in modern new kitchens and beautiful new bathrooms can just as easily get turned off by small closets. If they see a standard post-war closet arrangement (a three foot space between walls of two bedrooms, with half going to one bedroom and half to the other), they'll quite likely think that isn't enough closet space. "Next property! These closets are too small." Put a modern closet design in, with shoe holders drawers and cabinets and half size hanging spaces that efficiently use the space, and for most people, that's a horse of a different color. Closets are a bigger concern with more people than most folks give credence to, and they're way cheaper than most other remodels.

In many cases, remodeling may not get your money back, but it may be the difference between selling quickly and not selling for months, if at all. It's very hard to track this sort of information, and harder still to assign a dollar value to it. Keep in mind that a $200,000 mortgage at 6% costs $1000 per month, and property taxes and homeowner's insurance add to that. Not to mention that the longer it's on the market, the more you have to mark the property down in order to sell. At these prices, four months make a difference of about $6000 in carrying costs alone, never mind what you have to mark the property down to interest people in it with over a hundred days on the market!

Remodeling isn't the license to print money it's been portrayed as - except for the remodeling industry. Small budgets are more likely to recover large fractions of what you spend than larger ones. Unless the property is significantly behind the times, remodel for your own enjoyment, because you won't get as much back as you spend.

Caveat Emptor

Original article here

Copyright 2005-2021 Dan Melson All Rights Reserved

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