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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 very 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, away goes the purchase offer to no beneficial effect. 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 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 some 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


A while ago, I wrote Top Ten Reasons Your Home Isn't Selling. It was well received so I thought I'd take it from the buyer's perspective. Once again, I'll try to inject as much humor as I can. And in case a few people don't realize it, the real purpose of this article is to help you look ahead before you make these mistakes.

Number 10: The Commute: It never ceases to amaze me the number of people who will commit themselves to living in a neighborhood they've never lived in before without a real evaluation of how to get from there to everywhere else they need to be. Don't just drive from the house to work once when there's no traffic. Try to drive back and forth at the times you'll be driving it every day. Or if you're a public transportation person, figure out what that's going to be like before you're stuck doing it. Take into consideration that the commute is going to get less enjoyable as time goes on. Be certain in your own mind that you're going to be okay doing this as often and as long as you have to. If the commute is intolerable, then as certain as gravity you're not going to be living there or not going to be working there. For genius IQ points (or at least subgenius), try the paths you're going to have to take to your other common destinations. Grocery stores, the mall, your Tuesday night class in whatever, the kids' scout meetings. If you have to travel or work in different locations, do those trips also. An good agent should ask about all this, and be aware of the effects. An Evil Agent, will, of course, induce you to buy property where you'll have to sell it - generating more commissions.

Number 9 Beautiful Surfaces: They've just put Travertine and Italian Marble all through the room you want for the nursery! Too bad about that six inch wide crack in the foundation they covered up! Still, it's obviously the house you've got to have! At least until the first time your toddler breaks multiple bones falling on those tiles. Unfortunately, by then it's too late. And just wait until the old cast iron plumbing fully closes up or springs a leak, but at least it puts out the fire caused by plugging too much into eighty year old wiring! Yes, beautiful surfaces are nice - and one of the best ways to get novice buyers to pay too much.

Number 8 Insufficient shopping: You looked at one house and fell in love. Unfortunately, it was the crummiest most overpriced house in the neighborhood. Other people trying to get out before the new needle exchange program opens down the street are going to be praising you for paying so much that their house will appraise for whatever value they need it to! If you don't look at ten to fifteen properties, you're definitely short of market information, even with the best agent in the world. I have seen people shop more for $20 toaster ovens than half-million dollar real estate. Scary.

Number 7: Skimping on Services: Trying to do without title insurance or inspection is a recipe for disaster. I've said this before, but title issues really do happen, and it's not always with the person who may appear to be the current owner. Ditto the inspection. I don't think I've ever had a property where the inspection didn't reveal anything I didn't know about the property. I've had the stuff the inspector found be trivial many times, but never non-existent. Here's one thing that seems to be a rule: if you're getting a good bargain, there will be something you want an inspector's opinion on before the sale is final. People understand cash, and many don't understand the concept of insurable risk. By the time you join the ranks of those folks out half a million dollars worth of property and still on the hook for the loan, you may have a different opinion.

Number 6: Location: Backing out of your driveway onto the high-speed expressway, your spouse's vehicle is flattened by the bus returning this week's escapees to the maximum security prison a quarter mile down the road - past the explosives factory, the toxic waste dump, and the chemical plant. She's taken to the emergency room at the hospital for the violently insane across the street, and neither you nor your lawyer ever do come up with conclusive proof of what happened after that when the airliner landed short of the runway. Seriously, there are many things that can rule out a location, from the above through several milder forms of ambient environmental issues, down to misplaced improvements. You might be able to move a building. Nobody has ever figured out how to move the land it came on.

Number 5 The Loan: The only way to qualify for the dollar amount you need is to take an unsustainable loan or a loan that is guaranteed to self-destruct. I'd like to be humorous here, but this is somewhat less funny than the most politically incorrect joke I've ever heard, let alone what I'm willing to print here. Betting on rising values and falling rates to enable you to refinance more favorably is literally putting your home and your future on a craps table. This leads into-

Number 4 Didn't Adhere To Budget, and not having a known budget in the first place is the ultimate case of this. I've written at least one two three articles directly upon the point of figuring how much you can afford. Figure out your budgetary limit first, and shop by purchase price, not payment. This isn't to say you have to spend the maximum, but the worst ways people shoot themselves in the head (not the foot) is by falling in love with the property that's too expensive for what they can really afford. In How to Effectively Shop for a Buyer's Agent, I tell you to immediately fire any agent who wants you to look at a property that cannot be obtained within the budget you tell them about. The asking price can be a little higher than your limit, with the understanding that if you can't get the price down that far via negotiation, you're not interested.

Number 3 Assuming Something That Isn't True: Josh Billings was correct. It's not what you don't know that gets you - it's what you know that ain't so. I've been the unwitting victim to this, and I've seen enough other transactions to have come to the conclusion that people who deal in real estate without an expert fall into two categories: Those who know they got taken, and those who don't realize it yet. There are so many tricks and traps that get played upon the unwary that there is literally no way to write about all of them because new ones are invented continuously. You have to be someone who deals with these issues every day to have a prayer of realizing the pitfalls of some of them. Consider that if some trick motivates a buyer to pay 10% extra for a $500,000 property, that's $50,000 extra in the seller's pocket and out of yours. I've learned to question everything, and to ask, "What are the possible explanations for this?" Unless you're an agent yourself, you probably wouldn't believe the grief this saves my clients.

Number 2 Failure to Plan: A good agent has contingency planning in effect for everything, and those plans don't include permanent vacations in countries without extradition. If you're seeing all this stuff for the first time, how likely is that to happen? Even the second or the third? The reason I do so well for my clients is that I've got a solid plan from the time they contact me for the first time, and I have plans to deal with everything I don't control. This includes everything from if they get their hearts set on exactly the wrong property to negotiations before and after the contract to what happens if the inspection reveals something major, and how to lay the groundwork in case stubborn negotiating partners don't see it may way, or the universe decides to jump in with an unpleasant surprise . If you don't have this sort of plan, may I suggest you hire someone who does. Because failure to have a plan in place will cost you large amounts of money.

Number 1 Not Having a Strong Buyer's Agent. This is the first thing you need to shop for, before you so much as look at online listings. Have at least one in place before you look at any property, even new development. You want one who's going to go digging for both good and bad. There is no such thing as a perfect property, because if everything else is perfect, the price certainly won't be, and if you're only willing to settle for the perfect deal, you're either wasting your time or asking someone to take advantage of your ignorance. If you use the seller's agent, they have a fiduciary duty to present that property in the most favorable light. Given the choice between an agent pretending problems don't exist until the small print disclosures and an agent who fails to do their legal and contractual duty, which would you choose? If you don't like this choice, then you want to apply the information in How to Effectively Shop for a Buyer's Agent. Having a good buyer's agent will make more difference than anything else in your real estate experience.

Caveat Emptor

Original article here

Real Estate "Pig In a Poke"

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Over five hundred years ago in Europe, there was a con game that was more practiced than any other con game in the history of the world. It was simply the thing to try on the new rube in town. Someone would claim to be selling a suckling pig in a sack ("poche", from which we get "pocket" as the diminutive, as well as "pouch"). You have to understand the situation back then to appreciate what was going on. Suckling pig was tender, delicious meat, the sort that the average person of the time might only eat a few times in their life. Perhaps never, if they were poorer than average. It was highly sought after, and commanded quite a price, in terms of the average person's wages.

In reality, what was in the pouch wasn't a pig at all, but rather a cat. Most modern Americans don't realize this, but "roof rabbit" was eaten back then, because the alternative was often starvation. Before potatoes were brought back from the New World, Europe did not find it easy to feed its population. Nonetheless, I'm given to understand cat meat is nasty disgusting stuff, a food of last resort, because cats are almost 100% carnivores. However, the victim of this scam didn't usually get to eat the cat, either, because they were expecting a pig, which was not nearly so nimble. As a result of this, when they opened the sack, the cat would escape. This con gave us three phrases that are very popular today: "Let the cat out of the bag," and "left holding the sack," as well as "Buy a pig in a poke."

So what if prospective buyers have a hard time viewing a property?

This isn't 500 years ago. People that have the financial resources to buy real estate in the United States today aren't likely to be that trusting. If they were, some alleged Nigerian millionaire would have relieved them of those resources. In fact, in advice given since at least 1530, people have been advised ""When ye proffer the pigge open the poke."

Why? Because if you don't, people are going to presume it's a cat (at best), and they're only going to offer what cat meat would be worth to them, which may not be anything. But if you show them that there really is a delicious suckling pig in the sack, they may be willing to pay the premium prices that suckling pig - or a beautiful turnkey property - commands.

I don't know how many times I've gone over this with clients. People aren't looking for reasons to buy your property, they're looking for reasons not to buy your property, and, "They don't want to let me look at it," is more than sufficient reason to lose interest.

Does that have anything in common with the educated pig buyer? You bet it does. They wanted to see the pig, otherwise it was only worth the cat price (i.e. nothing unless they were starving, and then not much).

The entire process of real estate has evolved with inspections, appraisals, etcetera is precisely because the information possessed by the parties at the time of the contract is asymmetrical. That's fancy talk for the seller knows more than the buyer. The entire viewing and inspection idea has evolved from this basic fact, and the need to remedy most of the imbalance of information.

But if prospective buyers have a hard time being allowed to see the property, they are not going to make good offers. The idea is that there's probably a reason that seller won't let them look at the property, and they're most often right in that presumption.

Every time I start looking through MLS for property that might suit my buyer clients, I run across several of the stupidest ideas in real estate. I can handle one and usually two hour notices, but when someone asks for four, they're not likely to get it. I've got someone who wants to go look at property now, or wants me to go look at property now and get back to them on it, and I'm usually trying to shoehorn a few extras in while I'm in the neighborhood. If I can see your property, I might think it's worth my clients attention. If I can't, I definitely won't.

But four hour notices aren't anywhere near the worst: 24 hour notices are at least as common. In a way, I understand. Tenants can legally require 24 hour notice, but it's to my listing clients advantage to come up with some reason to cut that as far as possible. What are the tenants paying, $2000 per month or so? Offer to rent a storage locker for them and rebate some rent money, and your average tenant is going to agree so fast your head will spin. This kills the "I'm worried about them stealing my stuff!" angle as well. Always be ready and willing to show, and since every day the property doesn't sell not only adds carrying costs but means a (statistically) lower sales price, the money you spend generating cooperative tenants is a fantastic short term investment, better than anything short of a jackpot lottery win, and a lot more dependable.

That's not the worst, though. That dishonor goes to "property shown with accepted offer." Here we go with the cat thing again. The question that goes through my mind when one of my buyers asks about one of those is, "How bad could it be?" Why that question? Because the worst case scenario is precisely what the property is worth until the seller opens the "poke" and shows us the "pigge" instead of the cat or worse. Contingencies aren't going to cut it. Contingencies are for when you know a little bit and want to know more. In this instance, the buyer doesn't know anything, because they haven't seen it. The fact is that in the absence of any observational evidence, I figure there's a reason why the seller doesn't want us to know, and negotiate accordingly. Mind you, if you're willing to take a blind risk this can generate a fantastic bargain at the right time, with a seller who's ready to listen to reason about the effects of this upon value. But most aren't.

I can't blame the seller who doesn't understand this. The fact that they're clueless on this point is evidence of agent failure. This is one more way that agents "buy" listings and hurt their clients. Failing to make the client understand that showing restrictions lower perceptions of value as well as sales price is a major agent failure. Because the agent does not make certain the client understands the way that buyers approach properties, that agent is failing in their fiduciary duty, and their client will end up paying more money in carrying costs as well as getting a lower sales price because of it.

A while ago, I wrote an article on Top Ten Reasons Your Home Isn't Selling. It's no coincidence that talking about real estate in this context explicitly hits the three biggest reasons why real estate doesn't sell. Not only is it a direct instance of problem number three ("Showing Restrictions"), but by restricting showings the property becomes less valuable ("Price") and highlights a major shortcoming of the listing agent. And since these folks have won gold, silver and bronze medals in the "shooting yourself in the foot" event, may I suggest that after some appropriate time has passed, such a property from such a seller may become a very lucrative desperation mine?

Caveat Emptor

Original article here


Quite a lot of the time when I view a property, I get requests for feedback.

Usually it's an automated email. Other times, it's some office assistant who wants to fax me a form which will "only take a few minutes of your time".

The point of these, and the various other methods that get used, is to shift the burden of the work they should be doing from the listing agent, which is where it needs to be, to other people. Basically, my competition is asking me to do their job for them. The only time I will respond to requests for feedback is if the agent involved will spend at least as much of their own personal time as it takes for me to provide the feedback. In other words, the agent - not their flunky - has got to listen to me talk, and then write it down themselves. If they start arguing with me, it's no longer a request for feedback, it's a sales call. But in any other circumstances, they're telling me this feedback is not important enough to justify their time, so why should it justify mine? I don't have any responsibility to their client; they do.

The point of both of these, and three or four other methods that get used, is to pressure their listing clients to drop the price. Many offices have multiple employees gathering this information, the idea of which is to get the client to lower the price because the agent didn't do it in the first place. They get the listing by promising a price they know they can't get, and then use the feedback information to hammer the client into reducing the price. This is actually two cardinal sins in one action, and I'll be damned if I'm going to help these slimeballs not only hose their clients, but also take listings away from good agents doing their fiduciary duty by failing to do that duty. This should also tell you how good an agent who uses their great feedback system as a major selling point is likely to be. Agents who know the market don't need a feedback system.

This whole rigamarole is easily avoidable by the agent doing the job they agreed to by accepting the listing.

Here's the way it should work: Agent knows the market. Agent persuades listing client to put an appropriate asking price on the property before it hits the market. Listing gathers plenty of traffic, who like what they see. Appropriate offers come in, negotiations ensue, a contract is agreed upon, escrow is opened, and the transaction is consummated. Everybody emerges happy. Time elapsed: under thirty days from listing to contract, and 45-60 more to completion (less if there's no loan). The only hard part is the pricing and staging discussions with the client, at least a week before it hits MLS. By accepting the conflict then and doing their job in the first place, the agent avoids a lot of problems that will happen later if they do not. Furthermore, the client emerges from the successful transaction not only happier, but objectively better off in that they get more money as well as a quicker transaction.

Here's the way these problems start: Instead of the above situation, an agent doesn't know the market the property sits in. Maybe they work across town in a different suburb. People decide to list with an agent whose office is near their office for convenience. Unfortunately, that's twenty or thirty miles away from the neighborhood they live in, and the agent might be vaguely aware that the area the property is in actually exists. They have no clue what the market in that neighborhood is like. An agent from twenty miles away is one of the best predictors I know of a mis-priced property (at least in urban areas like mine. The situation changes in rural areas). They have no idea of the market in the immediate area. I was just in a very nice property today priced $110,000 more than a very comparable property two blocks away. It's got an extra 3/4 bath, the comparable has a nice California room. The comparable has been on the market for months, and it's only $30,000 overpriced. This should give you an idea how badly overpriced the newer listing is. The listing office is way up in Carlsbad. Big Mistake on the part of the homeowner, and it's going to cost them.

More importantly than market knowledge, the agent didn't do the most important part of their job.

Here's what happens: Homeowners are usually quite proud of their property, and they understandably want the highest possible price for it. They see high asking prices, and they think they should be able to get them. Few members of the general public understand the relationship between the market, asking price, and sales price, not to mention how long it takes to sell. So when they interview agents, they're looking for the agent that will promise the highest sales price.

Here's the issue behind that: How does the client know if the price an agent says they can get is real and deliverable? The answer is that they don't. Ladies and gentlemen, I get paid on commission. I'd like to be able to get $2 million for a tiny condo in The 'Hood. The fact is that buyers choose to make offers upon the property that appears to be the best bargain for their needs and desires. The entire idea of listing and marketing the property is to attract the attention of the buyer whose needs and desires that property meets better than any of the available competing properties. Yeah, there's an element of seducing the buyer into liking the property more so they will pay a higher price. But like a lover, an agent can never seduce two people at once, so if they're seducing the seller they're not seducing the buyer. Not successfully, anyway.

So what a bad agent does is promise whatever sales price they think will get the owner to sign that listing contract. As soon as they've got the contract, they start planning ways to get the owner to decrease the asking price.

What's the harm in that, you ask? Those buyers they are trying to appeal to look at the property online. They see that too high price, and decide they're not interested. The buyers who do come by see that they can get something better for the same price so they make offers on the other property. Thirty days out, pretty much everyone on the market has decided they're not interested, and new buyers coming onto the market see that it's been on the market for over a month and their first question is, "What's wrong with it?" They don't want to go look at it. A good buyer's agent like me might be able to talk them into seeing it if the agent sees a bargain, but they don't see a bargain because it's overpriced. In order to lure the buyers back, you've got to cut the asking price to below what you could have gotten if you had priced it correctly in the first place. Otherwise, you're waiting for months until people like me think you might be willing to negotiate to something advantageous for my clients, and that's going to end up even worse for you. Meanwhile, whatever reason you wanted to sell the property is on hold. Being hammered by your agent to lower the price, you get so desperate that you'll take offers you should have trashed when the property first hit the market.

Here's the cute part, if you're one of these agents: Because these properties eventually do sell, and lots of people fall for this trick, that sleazeball looks like a "top producer." They've always got a large number of listings in the pipeline, Waiting for Godot. When one of them finally has the price dropped far enough, it sells. Since in the production metric used by the real estate industry, they are getting their 3% of lots of different properties, they're doing great for themselves and it appears that they're successful - precisely the sort of agent many people look for. In reality, their clients end up hurting. A freshly minted licensee who approaches the listing correctly will reliably achieve results superior to this.

Unless you're basically an agent yourself, the pricing discussion should be difficult. There is a fundamental tension between the desire to get the highest possible price for a property and the need to price it competitively with other properties. If a prospective listing agent does not understand this, ditch them. If this tension is resolved easily, there are two possibilities. Far more common of the two is that the agent isn't doing their job. They could be ignorant of the market, or they could be seducing you into a listing contract by talking a Bigger Better Deal that they cannot deliver upon. There really isn't much difference. The other possibility is very rare around here, although it was more common when prices were going up like crazy: The homeowner doesn't try to overprice the property.

How can a homeowner deal with this issue? The only foolproof way is to really understand your competition - the other comparable properties for sale in your area. You also need to know about the properties that have actually sold, because it's not uncommon that some idea of inflated value creeps into a neighborhood, and all of the properties sit on the market unsold until they figure it out, while the next tract over is selling a little bit better. Since it's unlikely that the new owners are going to allow you to view their recent purchase, you're pretty certain to be at an information disadvantage.

Keep in mind, however, that the pricing discussion should be difficult. If it's not, there's probably something wrong. Furthermore, unless you're Martha Stewart, the "what to do so it shows well" discussion is likely going to be uncomfortable as well. Remember that it's for your advantage. I'm trying to make you more money, faster, by making your property more appealing to buyers. If the agent doesn't tell you how to clean it up and get rid of the clutter and make certain it stays presentable, that tells you that everything is either already perfect (unlikely) or that they're shying away from telling uncomfortable truths you need to hear. This is never a good sign in an agent.

Avoid listing agents who don't work your area consistently. In a city, if their office is more than ten miles away from your property, they're not likely to be a good agent for you. I am willing to list properties outside my area, but I am very upfront that it's going to take me a few days to size up the competition and the recent sales before I'm ready for the pricing discussion. An agent from further away who doesn't make a point of telling you this is dangerous to your pocketbook. My website tells people where I make a habit of working, and by extension, where I do not. Theirs should do the same thing. My website also talks about bargain properties I find in La Mesa and the nearby communities where I work. This is further evidence that I really do work that market.

The pricing discussion is important, and getting it right in the first place will reliably put more money in your pocket sooner than overpricing it. The agents who won't face the uncomfortable task of persuading you to price the property properly in the first place are not agents you will be happy with later. Keep searching until you find an agent who will work your best interests, even if it risks irritating you.

Caveat Emptor

Original article here

What is Real Estate Worth?

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One of the most common questions in real estate is "What is this property really worth?"

The easy answer is the same as the deepest, most profound one I can come up with, "Whatever you can get someone to pay for it." It's the answers in between that you've got to watch out for. The appraised value is simply a guesstimate based upon the sales of similar properties. But there is no such thing as an identical property. A Price Opinion is just a guesstimate based upon what an expert thinks might be an appropriate asking price. Even an accepted offer means nothing if the people making it back out, change their mind, or can't qualify.

Now it's no secret that some people can get folks to pay more for real estate than others, and others can bargain the price down better. But the bottom line is that if it's not worth what you paid, why did you buy it? If it's worth more than you sold it for, why did you sell it? There isn't a good answer to either one of these questions. It's worth what it sold for. Period. The only possible exceptions are when there's a distress sale, and even then, the bottom line answer reads, "Under the circumstances, that's what the property was worth," which is identical to what that answer is in all other situations.

This goes for the other side of the coin, failed transactions, as well. Why didn't you sell to a good offer? Why didn't you offer more? Because it wasn't a good offer, or because it wasn't worth more, to that person.

If you walked up to the average person on the street and offered to sell them a parcel of land on which there's a home, anywhere in the US, for $5 or $10 or $100 or even $1000, most people would take you up on it sight unseen so long as you could deliver clear title. I can safely say that the average residential property in this country is worth at least $1000 to every legal adult in the country. Why then all of these elaborate rituals of listing contracts and MLS and inspections and offers and escrow and title insurance for the transfer of property?

The answer lies in the fact that sellers want to get the highest price possible. Ideally, they want to find the one buyer who will bid more than anyone else on that particular property, because the property is worth more to them than anyone else.

To find that one perfect buyer is actually fairly rare, in my experience. But you can certainly find buyers willing to pay more than $1000, in most cases. How much more? Well, that depends upon the property and the buyer, how widely and effectively your marketing net is cast, how effectively you negotiate, and other, lesser factors. As with all investments, it's a trade off and sometimes the money you'll get from a better buyer isn't worth the money you spend finding them. Knowing stuff like that is part of what I get paid for.

It does you no good to accept the offer of someone who can't qualify for the loan they need in order to purchase the property. It does no good to make such an offer. How do you tell, as a seller? Make it a part of your counteroffer that the deposit revert to you the day after contingencies expire. That's not friendly, and it may lose you some potential buyers, particularly in a buyer's market, but it's the only way to be sure. Prequalification and pre-approval letters are basically used paper, for all they really mean.

There is nothing wrong with saying, "My property is worth $X" as long as you understand that it's shorthand for "Similar properties in my area are selling for about $X". Because your property is never worth $X. Nor are any of mine, Donald Trump's, or anyone else's. It's not worth that unless you sold it for that, and if you sold it, it's not yours anymore, is it?

People get caught up in the damnedest ego blocks on comparatively few dollars. You put the property up for sale because you wanted something other than that property, right? You're out there offering money for the property because you think you can make more money with the property than with the money, right? Or that you'll be happier living there than any other property you can buy for a similar number of dollars? Trying to squeeze too many dollars out of the other side of the transaction can and often does leave you with no transaction, and no benefit at all. There is a thin line between hard bargaining that gets you a good bargain, and overplaying your hand that gets you left out in the cold.

Don't get left out in the cold.

Caveat Emptor

Original here

This question:


What real estate office can I trust to help buy below market house in (location) California?

brought someone to the site and I have not previously written a real answer to the question.


The short answer is "nobody."

This doesn't have to do with trust. It has to do with the facts of life and bad assumptions.

What is the definition of market price? It is the price at which a willing buyer and a willing seller exchange a property. In other words, what you buy it for is by definition the market price.

Everybody wants to buy real estate for less than it's really worth, just like everyone wants to sell it for more than it's really worth. Mathematically speaking, at least fifty percent of each have to fail, and the fact that you're even asking the question indicates that you have made incorrect assumptions.

Real Estate is not like stocks or bonds. No matter how big or how small your transaction, it's always a "one of a kind" transaction. Every property situation is unique. If you are selling, you need to find one buyer willing and able to buy that property for a price you are willing to sell. If you are buying, you need to find one property attractive to you where the owner is willing to sell at a price you are willing and able to buy it at.

This is not to say that the general market is irrelevant. If someone is pricing a more desirable home lower than you, you've overpriced your property. If the identical condo next door to the one you bought sold for ten percent less, you probably overpaid. But it's not for nothing that the mantra about the three most important things in real estate being "location, location, and location." No two properties are ever identical. Think condos, even. Which would you rather have: The one right next to the parking lot, the mailboxes, and the swimming pool, or the one way in the back where you have to walk a quarter mile from your car, and further from everything else but have no disturbances? I assure you that a goodly portion of the population would choose the one you think of as less attractive. It's the choice of the individual buyer, and a real estate agent has to learn how to get the attention of the person who's most likely to be interested in that property.

I keep telling people that getting a good price at sale time is nice for both the buyer and the seller, but the really important thing for the quality of investment is your amount of time in the investment. Let's go back a few years. Homes in my neighborhood were worth maybe $180,000 at the time, and condos were worth maybe $65,000. Had people going around making low ball offers on everything. Offered maybe $55,000 for the condos, $150,000 for the homes. Nobody who wasn't desperate wanted to sell, of course, and that's just what they were checking for - desperation. Had they offered something vaguely reasonable, say $60,000 for the condos or $170,000 for the detached homes, they likely would have gotten a property. At least one group of these people ended up not buying anything. Fast forward five years. Those same condos were worth $275,000, and those same homes were selling for $500,000. If the thought of missing out on $210,000 profit for the condos because you couldn't make $217,000 bothers you, then you seem pretty rational to me. If, on the other hand, the thought of missing out on an extra $20,000 you're not going to get for the single family residence makes you want to just throw $330,000 base profit (tripling your money!) out the window, please go waste someone else's time.

This update allows me to make yet another point: those same properties are now selling for $150,000 for the condos and $380,000 for the detached homes. What's the difference? There are two actually. One is inventory. More people want to sell now, fewer people are willing and able to buy. The second is the loan environment controls the real estate market. When anyone with a pulse can get 100% financing, prices rise quickly because it's not real money to those buyers. When it's difficult to qualify for a loan, as it is right now, that holds the prices down. As a reaction to loan investor losses (aka closing barn door and adding five more after horse has already escaped), it's more difficult to qualify for a loan right now than any time since I have been an adult - thirty plus years. What happens to market prices when loan restrictions start easing back to some happier medium, as they will?

There is nothing wrong with desperation sales and offers that are desperation checks, so long as you are willing and able to then proceed to something more reasonable, or just as happy to move on. Nobody wants to sell to somebody looking to flip a property, but they do want to sell for a reasonable price. That's why the property is on the market. Somebody offers me (or my client) fifteen percent less than comparable market sales, I usually counsel my client to write something like "offer rejected. Why would I (my client) want to give you fifteen percent of my investment's value?" and append a list of comparable properties. Counter-offering just wastes time when the offer isn't even in the right ballpark. The ones who can come back with a reasonable offer want the property, or they wouldn't have made the offer. The ones just looking for the desperation sale aren't going to bother.

Now some potential buyers are only interested in desperation scenarios. I've got a couple clients like that. That's fine, but you're going to work awfully hard and put in a lot of offers before you get one, and the ones with the most potential for quick profit are going to be the ones where there is a lot of work to be done. Additionally, right now the market just won't support CondoFlippers Inc.

Yes, I believe in hard bargaining. Judging from evidence I see around me, I'm one of a small percentage who does. But I'm willing to come from a reasonable starting position. As I've said before, bargaining room is nothing. Bargaining strength is everything. I do love it, though, when my clients decide they want to put an offer in on a discount agent's listing, because the client I'm acting as buyer's agent for is going to think I walk on water when the transaction is over, while the sellers are going to find out first hand the truth of the adage "You get what you pay for".

Lest you think that your negotiation discount equals your profit, it isn't. It's a small part of your profit. Let's say you get the property for $250,000 or you won't buy it at all, even though comparables are selling for $275,000. Let's say you intend to flip for $290,000, not that that's going to happen in this market, but let's say you succeed anyway. Your net is something like $268,000, after spending $253,000 or so to buy, and you spent about $5000 making the payments on the mortgage even if it did sell right away (more likely, given the current realities, that you spend the entire "profit" on the mortgage payment!)

Now let's say, instead, that the market collapses twenty percent the day after you buy, down to $220,000. If you have a sustainable mortgage and bring in a tenant, your cash flow should be even or positive. Hold on to the darned thing for five years, and at historical seven percent average per year, the property is worth $308,000. Hold it ten years and it's worth $432,000 under the same assumptions. The first number gives you as much profit as the flipper even has a theoretical chance for, while the latter blows the flipper out of the water. Even after a price collapse, and because you've been in a sustainable situation this whole time, it really isn't critical how long the prices take to come back, because you're not under the gun of a deadline. So long as you have a sustainable cash flow, the risk is essentially nonexistent. It's when you have an unsustainable cash flow that you've got to worry. Say like, an empty unit where you've got to make the mortgage payment without rent because you're trying to flip it.

In fact, given a sustainable cash flow, unless property values collapse and stay down forever, the question is closer to when you're going to cash out and how much, rather than if. Southern California Real Estate has always moved in cycles. What's down today is up forty percent five years from now. The trick is being able to bridge the gap between now and then. Having the fortitude to buy when nobody else wants to, and sell when things are ripe for a fall, will make you more money than anything else.

If some of the above seems like I'm attacking the "bigger fool" theory of real estate, consider this: Somebody's always the last, biggest, fool in line, and until you find a buyer and consummate the sale, that person is you*. It should be an agent's responsibility to see to it that their clients aren't the only ones without a chair when the music stops. For all too many agents and loan officers, their thinking stops at the receipt of the commission check. I may not sell a house every day of the year, but my clients don't get foreclosed on. That isn't an accident.

Caveat Emptor

*- if you are buying a place to live, the bigger fool theory is limited in its application. You've got to have a place to live. If you never sell, it's not nearly as important what the property is worth. The only times the value of the property is important is when you sell or when you refinance.

Original here


There have always been real estate transactions that fall apart. The reasons why they fall apart are as varied as the people who enter into the transaction in the first place. Let's get back to the very basics for a moment. An offer to purchase is a representation that a given prospective buyer would be at least willing to purchase the property on the terms you are offering. Accepting that offer to purchase means that the seller is at least willing to sell it on the same terms that the buyer is offering to buy upon. If one or the other of these parties is not willing to consummate the deal on those terms, why was there both offer and acceptance? There was offer and acceptance, or there isn't anything more than negotiations to fall apart. People fail to reach agreement all the time. That's not what this article is about. It's about what happens to prevent the transaction from being completed after you have a valid contract.

The last credible figure I heard was that 50 percent of all escrows in San Diego County are falling apart. This means that one out of every two contracts don't happen. A few years ago, the proportion was a small fraction of that - I can't find it online, but I seem to remember 11%. This increase is both outrageous and preventable.

The first reason transactions fail is new information. It isn't cost effective or a good negotiations tool for a buyer to spend money on inspection and appraisal before there is an acceptable contract. When this information comes in, you can expect there to be a reassessment of the transaction, because you can expect there to be something about the property that does not conform to reasonable expectations. I certainly can't remember any transactions I've had where the inspections didn't reveal anything new. Most of the ones where I was buyer's agent, what was revealed was trivial enough to ignore, but never a one where there was nothing. Transfer disclosures from the current owner to the prospective buyer are another of the possibilities for new information to crop up.

All of this new information can indicate a need to subsequent negotiations when it comes to light. If the buyer thinks it's small enough that they are willing to accept the transaction "as is", they can choose to let the transaction continue on the track it's on. If it's big enough that they're unwilling to deal with the situation, they can also choose to walk away. The vast majority of the time, the sanest response is some new negotiations based upon the new information. This isn't normally about things like overall sales price, it's about getting the property into the condition and functionality that the buyer thought they were getting in the first place. Either party can be obstreperous and unreasonable at this point, effectively killing the transaction.

There's also the issue of cold feet, and the related issue of "grass is greener" syndrome. Either one can apply to either party in the transaction. In the first, the buyer decides they don't want to buy or the seller doesn't want to sell after all. In either case, they weren't really "sold" on the benefits of the transaction to them. "Grass is greener" is where they still want a deal, just not this deal. Those happen when markets are asymmetric in power. A few years ago, it was sellers who wanted to bail out of contracts they had duly negotiated because someone offered them a higher price. More recently, it's been buyers trying to pull out because they think they've found a better deal somewhere else. Both are vile. It's not a sin to want the best possible deal, but once you enter into a legal contract you should be prepared to honor your representation that you want that deal. Both of these phenomena are the fault of poor agents, and both are a good way to waste a lot of money in legal expenses when their clients are sued for specific performance. I don't want any part of agents that don't take appropriate steps to prevent either one of these in their clients, and I take note when I hear about them. It's also a reason not to take an attitude of "no quarter!" in negotiations. My client signed that offer or contract because those terms will make them happy. If the other side decides they need to bail out because the terms are odious, my client isn't happy.

Closer to the point is ability to perform. This can be a seller who can't or won't or doesn't meet their obligations in a timely fashion. Delivering good title to the buyer is kind of important to the transaction, and it does occasionally happen that the seller can't do this. Or they don't have the money to make needed repairs, or just won't get off their backside to actually do it.

But far more commonly, it's the ability of the buyer to perform their obligations under the contract that kills the transaction. I have heard about occasional buyers who couldn't or wouldn't or didn't perform on other scores, but the most central of these in the current market, and the reason for at least 90% of the rise in failed transactions, is that the buyer cannot qualify for the necessary loan.

The Era of Make-Believe Loans is over, but judging by the evidence, there's an awful lot of people who haven't figured this out yet. That's the first thing I want to find out when I get a new buyer into my office: What's the evidence of their ability to qualify for the necessary loan? How much do they make, what are their other payments, what is their credit score, how much do they have for a down payment, and is there anything about their situation which might be a cause for concern during the loan process? I don't want to give them the third degree, but I want to be confident I'm not wasting their time or mine, and that I'm not setting them up for a failed transaction. Failed transactions don't make clients happy, they waste the client's money, and they aren't any good for my business, either.

A few years ago, if somebody came into my office with a 580 to 600 credit score and two years in the same line of work, chances were excellent that a loan could be done - even 100% financing. That is not the case currently, and the time to plan the loan is before the clients fall in love with the property they can't afford.

Lest I be unclear: except for VA loans,100% financing is completely gone (at least for right now). The same thing applies to Stated Income loans. Purchase contracts not written in concordance with current loan underwriting standards are going to fail and that is as predictable as gravity. Write the purchase contract wrong, and you have killed the deal before it begins because there's something there that's not going to be acceptable to the lender, and sometimes it can prevent other folks from signing off on the deal as well. Furthermore, if the required steps in the contract are going to cause the seller to balk, you're better off finding out before you've got a contract.

The loan environment, especially for loans above 80% loan to value ratio, has changed drastically in the last few years, and all of the changes thus far have been in the nature of making qualification more difficult.

Even the government programs like VA and FHA with their low down payment requirements have their stumbling blocks. Not only do they require a buyer to qualify via full documentation of income (as do ALL government-based loan programs), but there are subsidiary requirements as well. Some properties are not eligible, period. Some people (and some companies) can't be involved, period. Investment property and second homes are iffy to doubtful with the VA and practically non-existent for FHA. It's a real good idea to know if you're going to hit one of these roadblocks before you are sixty days into a transaction that's not going to happen, and now we're all going to pay lawyers to fight over the deposit.

When I list a property, I want real information that tells me a loan is doable for this borrower before I advise my client to accept a given offer. Pre-qualification is a joke and even pre-approvals aren't anything to put stock in. The only examples of either that I trust are ones that I wrote, because I know what went into them. However, Steering is illegal. I can't require the buyer to get their loan through me or even to talk to me (or anyone else of my choosing). What I can do is require their loan officer fill out my form and provide documentation that enables me to determine whether a loan is doable or not. If I can't find a lender that can fund that loan, we've got a problem. When I'm the listing agent, it's kind of important to know this before we counter.

Unfortunately, we've had ten years where loan money was easy to get, no matter how ridiculous the transaction, and it's left a very strong imprint on many agents. Many have literally known no other environment, and they're finding it hard to make the necessary mental changes. I haven't been in the business ten years, either, but I do understand how the loan environment has tightened up and its effects upon my clients. Even the agents who have been in the business much longer may have no real grasp of the loan environment and often they're just checking off the box that says, "pre-qualification" on the checklist because that shows they did their due diligence. That isn't going to fly anymore. It may or may not help them when they're defending against a lawsuit, but it certainly isn't going to make their future ex-client happy about the thousands of dollars they lost, either because they couldn't qualify or because their prospective buyer couldn't.

Caveat Emptor

Original article here


For at least the last thirty years, I've been hearing "affordable housing" advocates yammer about the high cost of housing, and how working families can no longer afford "decent" housing, which they apparently consider to be the three or four bedroom, two bathroom detached home. They go on and on about what is necessary to create more of this type of housing and our "moral obligation" to create more of it. In light of the current situation, I'm going to make a conscious effort to continue my occasional series on factors that influence the overall market for housing. I'm going to examine the broad macroeconomics involved, the assumptions necessary, whether it is or is not long term sustainable, and the choices we face in sustaining or curtailing it.

Today's topic is how the housing market of today came about and what sustains it. A century ago, roughly eighty-five percent of the population did not live in major cities, but rather in small farming communities which more or less blanketed the nation. Suitable land for housing could be anywhere, and so it was much more readily available and much cheaper. When the criteria is "anywhere there's land I can farm," you can choose any arable parcel and build a house on it. Even if you don't live on a farm but in one of the small towns, when you can walk the length of the town in five or ten minutes, it's a lot easier to arrange housing for everyone. If one particular town becomes too crowded, the next one over became attractive. If you need a place for a few more people, one of the farmers whose land immediately surrounded the town could usually be persuaded to sell some land. The cities were dense affairs, much more like european cities than is the case today. Indeed, the few large cities we had built up before World War II still retain that urban core with dense multistory housing that is characteristic of the period. The typical pattern of the day was that young women, in particular, would continue to live with their parents until marriage. Young men of marriageable age would most often live in rooming-houses or boarding houses once they became gainfully employed. Apartment dwelling was only somewhat expected for young couples just getting started and urban dwellers who might have been together for many years, yet could not afford anything better in close proximity to their profession. Urban housing was tight-packed because the land was very expensive by standards of the time, and urban transportation was communal to a far greater extent than today. It is much more common today for even people in Manhattan to own and drive cars than it was before World War II. The use of steel as a building material was a big deal for those urban centers because it meant that it was possible for them to build further up. San Diego is very much a post war city, but even we still have areas that were built in those times - packed in tightly, cheek by jowl, extremely dense living. Once upon a time, before reliance upon military work and bad policy ruined it, San Diego was a major west coast port and the base for the largest fishing fleet in the world - two of my aunts married tuna fishermen. Even further out, in what were before WWII the "newly urban" areas of North Park and National City, the housing very much resembled classic "company town" housing - 600 and 800 square foot one and two bedroom cottages sitting on 3500 square foot lots. These were the era's predecessor to the exurban bedroom community of today, usually owned by members of the skilled trades or young professionals. The core suburbs today such as La Mesa were still economically speaking, farming communities. Even Mission Valley was mostly farms until the early sixties. During this time frame, only the comparatively wealthy lived in larger houses within city limits. If you go to Mission Hills above Old Town, or Grant or Banker's Hill (and here and there in other neighborhoods) you can still see a very few of the large houses for the well-to-do of that era.

Indeed, the three bedroom, two bath detached house in an urban setting for the working class is almost entirely a creation of the post World War II mood in this country. For several years, very little housing had been built, and now these men who had gone off to war and saved the world as seventeen and eighteen year olds who had traditionally remained with their parents or moved on to boarding houses until they got married were now returning as twenty-two and twenty-three year olds who were traditionally married and starting families by that point in their lives. The women to marry them wasn't a problem; the housing to put the new families in was. These folks had several years of savings (war bonds, the wartime sacrifices, etcetera), and the traditional apartments were considered a poor and at best temporary inconvenience until that new modern post-War marvel - tract housing - could be built in sufficient numbers. And if such housing was horribly inefficient in terms of land, utilities, and transportation, nonetheless we were the wealthiest nation in the history of the world, and accommodating their desires for such was the least the nation could do for our valiant warriors. Furthermore, with the aforementioned savings they had accumulated during the war, the young men and their new wives could afford to pay for this new housing. If you're wondering about "It's a Wonderful Life," keep in mind that most of that 1946 movie takes place well before the war, and even by the time of its release, the country hadn't yet shifted very far from the way things were done pre-War.

The land was available and largely vacant then, and certainly could not and can not be covered effieciently by public transportation, but the newly affluent families (through savings during the war and better jobs after) could afford far more automobiles as well. For the first time, women were staying in the work force in significant numbers until motherhood. There was plenty of land available. As a young child in the early sixties, I can still remember when there was space between all of the suburbs, even when we drove to Los Angeles to visit family members or Disneyland. I-5 was brand new thanks to President Eisenhower, and from the point we got out of the Pacific Beach, there weren't any towns visible from the road, just widely separated houses, until we passed Oceanside and Camp Pendleton, at which point there wasn't anything more until San Clemente and San Juan Capistrano, then another good long way past that before there was anything more again. It wasn't until just before Disneyland that we saw more city. The I-5/405 split in the middle of present day Irvine was out in the middle of nowhere back then. My parents almost bought a 320 acre farm just east of the Del Mar fairgrounds the year I was born. One of my best friend's parents had considered a farm in Mission Valley, despite the fact my friend's father was in the navy. If you clicked on the images, you know none of these are empty land any longer.

Why not? Suburban housing and to a lesser extent, support services have eaten it up. The only open area between the Mexican border and the Tejon Pass is the stuff that's been held aside for other reasons, such as Camp Pendleton, which the Marines badly need. Los Angeles with 3.8 million people has an area of almost 470 square miles, while by comparison cities of similar population elsewhere such as Ahmedabad in India, Alexandria in Egypt are a fraction the physical size. If we're going to keep doing the same thing, we're going to run out of places to put everybody. In fact, in Southern California we have essentially done so. New development is taking place in Hesperia and Victorville, or out past Banning, or out in Hemet or eastern Murrieta, all of which are an hour and a half minimum trip time from the center of the urban areas they service, even if you're driving it at an hour when there's no traffic. Nobody wants to drive an hour and a half each way to work - especially not in stop and go traffic when gas is this expensive.

This also creates a lot of logistical problems. Most inhabitants of the cities concerned would have no trouble naming the most salient problem, which is transportation. When you have that many people that spread out, and you need to move them all significant distances at pretty much the same time, it takes a massive amount of transportation infrastructure to do so. US 395, the predecessor to I-15, was one lane each direction from Escondido until just a few miles south of present day I-10. But it isn't just transportation. Utilities are a much larger headache to supply than sixty years ago as well, and the logistics of keeping that many people supplied with groceries and gas and everything else make the transportation and utilities problems seem easy.

Finally, there are legal and political barriers to continuing to build housing in this manner. Environmental concerns are the most obvious of these, but building codes, zoning, and other concerns form significant obstacles to its continuation, as does the consumption of land. Once upon a time Southern California was some of the most productive farm land there was. My wife's uncle was a well-off citrus grower until the developers bought his land for millions of dollars. I can remember (barely) large tracts of citrus in El Cajon and Lemon Grove and Escondido. The only reason the hillsides north of Escondido are still relatively uninhabited avocado farms is because they're steep enough to render development difficult. The same applies to all of the other agricultural land remaining.

All that aside, I would like for housing prices to be affordable, and for everyone who's going to grow up in this country for the next century to be able to afford the type of housing they want, where they want. Absent some major changes in public policy and employment practices, it's not going to happen. The land no longer exists, we can't afford ongoing losses in arable land (look up how few countries in the world are net exporters of food), the transportation networks are saturated, environmental regulations are restricting development as are legal hurdles such as necessary permits (which add roughly $20,000 per unit to the cost of new housing, but over $100,000 to the price due to constricted supply), and lets not forget legal challenges from NIMBYs, BANANAs and environmentalists who already have their 3 bedroom 2 bathroom suburban home, and whose property values just happen to increase in a manner directly dependent upon how far they can constrict the supply of new housing. In short, the current situation does not appear to be sustainable absent major societal changes.

Caveat Emptor

Original article here

Must you sell if you list at a specific price and the broker comes up with a qualified buyer?

in the US in general, no you do not have to sell, but you could still be liable to the broker for their commission. You might also need to justify why your decision was non-discriminatory (assuming that it wasn't), but if (for instance) your broker brings you someone you have had business dealings with in the past, and they have tried every maneuver possible to scam you after reaching agreement in those past dealings, you are (usually) quite justified in refusing to do business with them.

Talk to a lawyer, but generally speaking, if you do not have complete and perfect agreement between the parties on the contract, you do not have a valid purchase contract. If you didn't want to do business with (say) Bill Clinton or George W. Bush, such is your right as long as you refuse to do so on the basis of them being a particular individual, not based upon them being members of a class protected under anti-discrimination law.

In general, nobody can force you to sell unless you've agreed to a fully executed purchase contract. But I'm talking about legal force here, not economic. It can be expensive not to take a particular offer. I am not familiar with any cases where a real estate agent, listing or buyer's, was awarded a commission even though there was no transaction consummated, but that doesn't mean it couldn't happen. And lest the general tone of this article be mis-interpreted, refusing to sell on the basis of race, sex, religion, sexual orientation, lifestyle or any other legally protected reason is setting yourself up for a lawsuit.

List price is a representation that you would be willing to accept that price, but there are other proposed terms of the contract to consider. As I have said before, if you're still arguing about who replaces a given light bulb, you don't have a valid contract any more than you do if you're $100,000 apart on the price. I can't imagine stressing about a light bulb like that, but the point is just because someone offers you full list price does not mean you have to accept their offer. If the other terms proposed are onerous, if it comes attached with conditions you don't care to accept, or if it is merely from an individual who you have done business with in the past and are unwilling to be involved with again, you are usually within your rights to refuse the offer.

Or instead of an outright refusal, you can return a counter-offer back to them, which is usually the smarter thing to do.

Caveat Emptor

Original here

One of the concepts I keep seeing without a decent treatment is the concept of leveraging an investment. Real Estate has this like no other investment. You go talk to a bank about leveraging eighty to ninety or even one hundred percent of your investment in the stock market, or the same percentage of a speculative venture, and see what happens. Be prepared for laughter, and they're not laughing with you. But for real estate the lenders will do it. Why? Because it's land. It's not going anywhere, and they're not making any more.

The fact is that real estate has the potential for leverage like no other. This is due to the interplay of two factors. One is the fact that you can rent the property out to pay for the expenses of owning it, and even if you use it yourself, you're able to save the money you would be paying in rent. Everyone's got to live somewhere, and every business needs a place to put it. The other, more important factor is leverage, the fact that you're able to use the bank's money for such a large portion of your investment. The bank will loan you anywhere from fifty to one hundred per cent of the value of the property. Yes, you've got to pay interest on it, but you're paying that through the rent - either the rent you'd save or the rent you're getting - and there are tax deductions that make such costs less than they might appear.

Now here are some computations based upon the situation local to me. Suppose you have a choice as to whether to buy a three bedroom single family residence for $450,000 (to pick the figure for a starter home) or rent it for $1900 per month. Let's even allow for the fact that the home may be overpriced by $100,000. You have $22500 - a five percent down payment. More than most folks, and you would invest that and the difference in monthly housing cost, and earn ten percent tax deferred if you didn't buy the house. Let's crank the numbers and see what they say.






Year

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

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

$736,698.18

$788,267.06

$843,445.75

$902,486.95

$965,661.04

$1,033,257.31

$1,105,585.32

$1,182,976.30

$1,265,784.64

$1,354,389.56

$1,449,196.83

$1,550,640.61

$1,659,185.45

$1,775,328.43

$1,899,601.42

$2,032,573.52

$2,174,853.67

$2,327,093.43

$2,489,989.97

Monthly Rent

$1,900.00

$1,976.00

$2,055.04

$2,137.24

$2,222.73

$2,311.64

$2,404.11

$2,500.27

$2,600.28

$2,704.29

$2,812.46

$2,924.96

$3,041.96

$3,163.64

$3,290.19

$3,421.79

$3,558.66

$3,701.01

$3,849.05

$4,003.01

$4,163.13

$4,329.66

$4,502.85

$4,682.96

$4,870.28

$5,065.09

$5,267.69

$5,478.40

$5,697.54

$5,925.44

Equity

22,500.00

-48,406.32

-17,287.01

15,999.55

51,604.93

89,691.37

130,432.52

174,014.27

220,635.59

270,509.51

323,864.05

380,943.34

442,008.77

507,340.18

577,237.20

652,020.69

732,034.20

817,645.65

909,249.05

1,007,266.37

1,112,149.54

1,224,382.64

1,344,484.16

1,473,009.54

1,610,553.79

1,757,754.34

1,915,294.15

2,083,904.97

2,264,370.91

2,457,532.19

Net Benefit

-31,500.00

-110,236.00

-94,761.88

-77,990.23

-59,828.07

-40,176.54

-18,930.59

-4,021.36

28,797.71

55,524.07

84,333.56

115,367.22

148,774.35

184,712.85

223,349.64

264,861.00

309,432.96

357,261.61

408,553.54

463,526.08

522,407.72

585,438.30

652,869.38

724,964.38

802,381.90

885,736.68

975,442.55

1,071,939.93

1,175,697.38

1,287,213.19


The Net Benefit Column is net of taxes, net of the value of the investment account. The cost of selling the property is also built in. Now most people won't really do this, invest every penny they'd save. I have intentionally created a scenario that contrasts a real world real estate investment where you bought in at a temporary top, with a hopelessly idealized other investment.

There is a potential downside, and it could be big. This is a real risk, and anyone who tells you otherwise is not your friend. Look at the beginning of years numbered 2 through 5 in the equity column. You haven't gotten your initial investment back until sometime in the fourth year. Look at years 1 through 7 in the net benefits column. You're immediately down $31,500, due to me assuming it would cost you seven percent to turn around and sell the property. A year later, due to me assuming the bubble has popped, you're down by over one hundred ten thousand dollars, as opposed to where you'd be in you put it in the idealized ten percent per year investment. There is no such thing, but for the purposes of this essay I'm assuming there is. This is the illustration of why you need to look ahead when you're playing with real estate - a long way ahead. A loan payment that makes you feel comfortable for a couple of years isn't going to cut it. You need something viable for a longer term. If you'll look at projected equity at the beginning of years five and six, it goes between fifty odd thousand and eighty some thousand, assuming you've been making a principal and interest payment. You have plenty of equity to refinance there if you need to. If you need to do something in year three, however, you're hosed. If you've been negatively amortizing, you're hosed. You owe more than the property is worth. The payment adjusts, you can't afford it, you can't refinance, and you have to sell at a loss, as well as getting that 1099 love note from the lender that says "You Owe Taxes!"

But now look ten years out. At the beginning of year 11, you have $323,000 in equity, and if you sell at that point, you are $84,000 ahead of where you would have been if you invested that money in the idealized investment I've posited. That's four times your original investment, and I only assumed real estate went up seven percent per year, whereas the alternative investment went up by ten percent per year. How could that possibly be right?

The answer is leverage. That $450,000 was almost entirely the bank's money. The appreciation applied to this entire amount. But you only invested $22,500. The bank isn't on the hook for the value; their upside is only the repayment of the loan. If the property goes to a value of $481,500 and then $515,205 (normal seven percent appreciation in two years), then that extra money is yours. Think Daffy Duck shouting "Mine! Mine! All Mine!". Daffy's got to pay some money to get the property sold, as real estate is not liquid. Then the bank gets all of its money. The bank always gets all of its money first. After that, however, then the extra belongs only to the owner, not the lender.

The lender gets none of the appreciation. This is all fine and well with them, by the way. They've been well paid whether the property increased in value or not. This money from increased value is all yours. This applies even, as in our example, if the property lost value for a while. Yes, if you had had to sell in year two, you'd have been up the creek. But you didn't; you kept your head and waited until the property increased again. Given that you didn't, the only numbers that are important are the numbers when you bought it, and when you sold it. The rest of the time is completely irrelevant to the equation, a fact that is true for any investment, by the way. Doesn't matter if the value is ten times what it was when you bought on paper, it only matters that when you actually sold, it was for a loss. Doesn't matter if the value goes to zero the day after you buy, and stays there for thirty years. If in the thirty-first year it rebounds to fifty or a hundred times the original purchase price and that's when you sell, then you really were a genius. Get it? Got it? Good.

So when the property appreciated back to $688,000 and change at the beginning of year eleven, and you only owe $364,000 and change, that's $323,000 in equity. You're almost fifty percent owner. Even after you pay seven percent to sell the property, you come away with $275,000, as opposed to a little over $191,000 that you'd have in the idealized but unleveraged investment.

Keep in mind this whole scenario is a hypothetical. Every Real Estate transaction is different. Every property is different, every market is different, and the timing makes a critical difference. That's why you can't just call your broker to sell it and get a check within seven days, like you can with stocks and bonds. That's why a decent agent is worth every penny, and a good one is worth more than you will ever pay us. But properly executed, a leveraged investment pays off like nothing else can, and real estate is the easiest way to make a highly leveraged investment that is stable until such time as it is favorable to sell.

Caveat Emptor

Original here


The buyer's deposit is always at risk. This is just a fact of real estate transactions. I could pretend it's not so, but that wouldn't keep the deposit from being at risk - it would just make me a liar. Nonetheless, because it's cash that the buyer had to forego spending that money in order to painstakingly set it aside a few dollars at a time, they understand that the deposit is real money in no uncertain terms, where most don't have that same understanding about a loan that's probably fifty times bigger and just as real. It may be comparatively rare that the buyer's deposit is actually forfeit (As of yet, I haven't lost one), but by recognizing that it is at risk and planning for it, I can protect a client's deposit far more effectively than anyone who pretends otherwise.

The first rule is to be careful writing the offer. I want to make certain that all offers (and counteroffers) consist of something my client qualifies for and that I can make happen. This is one of the best reasons why real estate agents want to know enough that they could do loans, even if they don't. If I wasn't a loan officer, I'd consult a loan officer before writing an offer. Review client qualifications and necessary loan guidelines before the offer is written. If the issues of whether the client can qualify and what needs to happen so they do qualify have already been solved, you start the transaction with the largest part of the road to successful completion already paved.

Related to this is the issue of a client getting cold feet, which is one of the most common ways to lose a deposit. The best way to solve this is by showing them enough properties that they really understand the value offered by this one. Some agents believe in pressure sales and glossing over problems with the property. I believe in meeting these issues head on. One thing I tell every buyer client at our first meeting is that there is no such thing as a perfect property. They need to decide what they're willing to live with and what they aren't, and how much they're willing to pay for not doing so. It's my job to make certain they understand what the issues are with a given property, and that they'd be happy paying the necessary price to live there. All of an agent's nightmare scenarios start with talking someone into buying a property they don't like, so I'm not going there ever. This also solves the "cold feet" before we make an offer, where someone who doesn't understand these issues is going to be in danger of cold feet at every bump in the road.

The main issue with all of the buyer contingencies is time. You have a certain number of days to deal with those contingencies. When I get them done well before the time limit, the time limit isn't a problem.

For the loan contingency, I want an automated underwriting decision ASAP. Usually, there are reasons not to do this before we've got that fully executed purchase contract, but once we have that contract, there's no reason whatsoever not to do it that day.

I also want to order inspection and appraisal immediately, to meet those contingencies. I've got seventeen days for those. If I've got the appraiser and inspector out there the next day, I should have their report within two to three business days after that. Any subsequent negotiations needed due to those reports, I can start on right away. If the seller isn't going to be reasonable (or reasonable enough), we can find out about it right away and if the buyer decides to walk away based upon these reports or subsequent negotiations, we're in a much better position to argue that they should retain the deposit than if it were twenty-five days into the transaction and now the deposit is in jeopardy regardless of whether the contingencies have been released in writing or not. All parties agreed the contingencies ran for seventeen days in the purchase contract, and if that period is up, there's an argument to be made that the deposit is forfeit. I'm not a lawyer, so I don't know if it's a good, valid, legal argument, but if the whole issue is moot because we're done on day ten, the argument never gets started.

While this is all going on, I'm getting any final loan stuff together. This includes Preliminary Title Report and Escrow information. That complete loan package should be submitted before I go home on the day I get the appraisal. If it's not done by then, something major is wrong. I can submit loan packages with the appraisal "to follow", but it's better to submit them complete in the first place, even if it does mean I've got to pay for color copies. Every time an underwriter touches a file, they can add conditions. Those conditions can effectively make a loan impossible, and far more loans are approved with impossible conditions than flatly rejected. Also, submitting a loan with minimal information is itself one of the best ways to raise red flags in an underwriter's mind, or would be if raising red flags in the underwriter's mind was a good thing. It isn't. Once red flags get raised, expect them to throw as many roadblocks at you as they can. Better to submit a clean, complete loan package as soon as possible. Doing the extra work right off the bat really does save you a lot of future work.

This has become even more important of late. When I first wrote this, underwriting was a lot less paranoid than it is now. Even when refinances were running several weeks, purchases were usually no more than two days for underwriting. If you submitted a clean complete file, any prior to documents conditions you do get would be minimal and trivial, and the funding conditions were just the absolutely standard cookie cutter stuff. That has now changed. Fannie and Freddie and the Federal Government have now added all kinds of new twists to lending. I have lately started saying that we need to extend the default loan contingency period on purchases to 30 days on purchase contracts, because it has become difficult to get a real loan commitment in seventeen, and even forty five day escrows are becoming a thing of the past because the new requirements mean that loans take longer - adding three weeks or more to the process in some cases. I don't like getting anything other than the routine funding conditions that happen on every transaction, because it means I have to get those conditions and wait a couple of days for the underwriter to get back to the file. I originally wrote that this waste of time is my fault if it happens, but with the best will in the world, it will happen to you a pretty significant percentage of the time. In the past year that percentage has increased in the last year to nearly 100%, and there's nothing that can be done to change this because giving unnecessary information to an underwriter is the Number One way to get the loan essentially rejected.

I believe in giving the seller and their agent a reasonable amount of time to hang themselves, but once the loan is submitted, I'm going to be asking about their responsibilities if I haven't gotten evidence they're done yet. Allowing them to hang themselves doesn't mean letting them hang my client. I want to see that termite inspection in particular before the end of seventeen days. The standard contract has the buyer responsible for section 2 work. It's never happened to me, but it's very possible that there's enough section 2 work needed to call the transaction into question. After seventeen days, this becomes more difficult for the buyer.

As soon as possible, I order the closing documents and get them signed. Even if you're not ready and able to close the transaction as a whole, this is a good idea. Something that's already done correctly isn't going to be an issue if my client gets called away on business - particularly out of the country as does happen. Notary work becomes a real issue outside the United States - it must be done at a US Consulate or Embassy. There is no exception for "Buyer had to leave the country" (or even just "go out of town") written into the time frames and contingencies on that purchase contract. I suppose you could ask for one, but it will make most sellers more than a little nervous, for tolerably obvious reasons. Better to know and plan in advance, but life happens. Better not to be bit if it does.

If I can get all the ducks in a row before the contingency period expires, not only does this preserve my buyers rights and give us an advantage in subsequent negotiations, but preserves as much as possible of my client's options to exit the transaction while preserving their right to recover the deposit. If I can close the entire transaction before the end of the contingency period, that makes me very very happy, and not just because I get paid sooner. It means that the issue of my client losing the deposit for walking away never comes up..

By finishing everything before the end of the contingency period, I've also preserved as much as possible of the right of specific performance in case the seller gets cold feet. It happens. Not so much right now, but a few years ago in the crazy seller's market, it happened because sellers decided they could get a higher price. If my buyer client is happy with the state of the contract as it sits, their lawyer can quite likely argue specific performance of the contract, and maybe recover legal costs too. Not my place to say whether or not, as I'm not a lawyer. I only know that lawyers seem to be much happier with agents that keep this information in mind.

If I can't close it before the end of contingency period (and I recently had signed loan documents sitting at escrow for two weeks while we waiting for the sellers to finish termite work), I still want to get together with my clients before the contingency period expires, put the evidence in front of them, and have them make a choice to continue or abort the transaction. Just because the contingencies haven't been released in writing is no reason that a seller's lawyer can't argue that they were released anyway. Much better if the argument never comes up because it's a moot point.

There is nothing I can do that generates an ironclad, foolproof guarantee that my client won't lose their deposit. But doing things the right way, quickly, can certainly make it a lot less likely than pretending that tje deposit isn't at risk. Lawyers and judges are the only ones who can answer the question of whether it has been forfeited, but it the issue is resolved without them getting involved, everybody is going to be happier. Neither party should have signed the purchase offer if they didn't want the transaction to happen on those terms set forth in the contract. Therefore, making it happen quickly, reliably, cleanly, and before the deadlines have passed is the best way to prevent making anyone unhappy.

Caveat Emptor

Original article here

That's one of the questions I've been asked, and it deserves an answer. Know that there is some flexibility to the answer, as there are embedded trade offs. You don't need as much of an income, or as high of a credit score, if you have a larger down payment. A sufficiently high credit score can also mean that you can afford a more expensive property, as higher credit scores get better interest rates, and therefore, lower payments for the same property. On the flip side, if you have monthly bills that consume a large amount of your income, you cannot afford to pay as much for a property. When I originally wrote this, there was another tradeoff involved in whether you can prove sufficient income via the traditional means of w-2s or income tax forms, as the alternative loan forms do not give rates as good, and most have higher down payment requirements. However, stated income loans are gone, at least for now. Finally, most of this only applies if you want or need a loan. If you intend to pay 100% of the price with cash, you can buy anything legal that you desire with your cash, and the hurdles become much smaller. So admittedly this only applies to 99.9999% of first time home buyers.

The first thing any buyers need if they want a loan for the property is a source of income. If you want a loan, you've got to have money coming in from somewhere to make the payments. Preferably, it's a documentable, regular source of income, such as paychecks or income from a business on which you report taxable income. I suppose I should mention that tax cheats have difficulty getting good quality home loans, because I have dealt with a few people I suspect of that. Don't worry, I'm not an IRS employee and I won't turn you in. But all lenders must report loan transactions, and every real estate transaction is a matter of public record. If you make a major purchase or take out a major loan, the IRS can take an interest in you. Just saying.

You income, together with whatever amount you have for a down payment, gives you a budget for a property. The vast majority of the loan is driven off two ratios, debt to income and loan to value. These two ratios together will determine minimums for everything else about your loan. If your credit score was not horrible, a down payment was pretty much optional for several years during the Era of Make Believe Loans, although it has since become essentially mandatory as the VA loan is the only loan out there where most lenders are willing to fund loans without a down payment.

You will need at least a few thousand dollars for a good faith deposit, and probably another thousand at least for appraisal, inspections, and miscellaneous stuff. The once-upon-a-time rule of thumb about a 2% earnest money deposit has long gone by the wayside, but a good deposit is often evidence that you are serious about your ability to consummate the deal, and might get you a lower price in negotiations. I will argue against my listing clients accepting any offer, no matter how good, without a deposit, and most sane real estate agents agree with me.

The larger the down payment, the lower you can expect the needed income to be, and the better the interest rate you are likely to get at any given time. In order to make a difference on the terms of your loan, the required down payment generally goes in increments of 5%. 3.5% for an FHA loan is the absolute minimum for most people currently, but you will get a better deal from conventional loans that require a minimum of 5% down (But as few lenders as will do that, they can charge higher rates than others). 10% will get you better terms than you would get for 5% down, 15% will get you better terms than ten, and the really major differences happen if you can put 20% down. More still will get you better terms yet, but 20% is the big dividing line.

If you want to take advantage of a governmental first time buyer assistance program, either the Mortgage Credit Certificate or a locally based buyer assistance program, you need to be very careful about staying within what you can prove you can afford via tax forms. Stated Income, or documenting your income via bank statements, is not an option on any of those programs and never has been. Using creative financing options, such as negative amortization loans, with such programs is similarly forbidden. First time assistance programs are not designed to encourage irresponsibly buying a more expensive property than you can afford; they are designed to help you stretch what you can afford just a little further. Know what you can afford in terms of sales price, because agents and loan officers can too easily manipulate payment quotations. Rules of thumb based upon income (2.5 times income, four times income, whatever) are garbage, and the entire concept is a good way to get into trouble. This article will help you compute what you can afford, once you know the approximate rates for current thirty year fixed rate loans.

You will need to be able to document a two year history of housing payments. Since you have never bought before, this means rent. No fun to have had to enrich someone else for a couple of years, but there are valid reasons why lenders require a history of regular housing payments on time. If you can document that you've been paying regular rent to your parents, grandparents, or what have you, that can count, although lenders will usually demand copies of the canceled checks rather than accepting their word for it.

You will also need a history of credit payments. Mortgage lenders want to see evidence that you have the habit of paying your debts on time regularly. The usual criteria is three total lines of credit, one open for at least 24 months, the other two for at least six months. These can be revolving lines of credit such as credit cards, or installment debt such as car payments or student loans. Note that they do not necessarily have to still be open, but whatever balances and monthly payments you still have will be counted against your debt to income ratio.

Also, you generally need at least two open lines of credit in order to have credit scores reported by the major credit bureaus. Ideal is two long term credit cards with very small balances. The way I handle this is to charge one thing per month for about $20 or so that I would normally pay cash for, and pay the bill in full when it arrives. You will need an appropriate credit score for what you are trying to do. What score is sufficient will depend upon the exact characteristics of your transaction. Better scores will lower your rate, and therefore your payments, but the best thing that can be said about a 580 credit score (which some lenders will accept for FHA loans) is that it isn't putrid. Unfortunately for those who want to buy now without any cash, the lenders have now figured out that them being on the hook for 100% of the value of the property is a good way to lose money. I do anticipate 100% financing returning eventually, but "eventually" could be years, and even A paper has introduced differentials to the tradeoff between rate and cost based upon credit score, where until recently, as long as you staggered over the line into qualification, you'd get the same rates and costs as King Midas.

The last things I will mention that will stand you in good stead are also optional: An educated layperson's knowledge of the process (I would like to think being a regular reader here will help with that), a investigative attitude, and the willingness to shop effectively for services, both loan and real estate. There seems to be popular resistance to this, but getting a good buyer's agent will not only save your backside, it'll make a real difference to the quality of the property you end up with as well as to how much you pay.

Caveat Emptor

Original here


Many agents seem to answer this question differently depending upon whether their client is the prospective buyer or seller, according to what they think will make the client most comfortable. When their client is making an offer, "No, your deposit could never possibly be at risk," while when their client is evaluating an offer, "And besides, if they renege or can't bring it off, you get to keep the deposit." Both of these are false, misleading, and practicing law without a license.

The cold hard fact is that the deposit is always at risk, but there is absolutely no guarantee that a jilted seller will get it, either. The answer to "Is the deposit at risk?" from a real estate agent can never honestly be anything other than "Yes."

For buyers, the deposit is "at risk." Otherwise, what would be the point of having it? If it couldn't be lost, why would it need to go into escrow? Just to prove the buyer has a couple thousand dollars to their name? I can do that with a Verification of Deposit. The only reason to make a deposit on a purchase offer is that it is at risk, and no listing agent in their right mind is going to accept any purchase offer where there is no deposit - even if the buyer is doing a "one dollar down" VA loan. That seller is risking a minimum of a full month of all carrying costs (usually much more) upon your representation that you want the property, and they are entitled to keep your deposit if certain conditions are met. For sellers, no you don't automatically get the deposit if the buyer flakes out. There are burdens upon you and your agent, and contingencies, aka escape clauses for the buyer, built right into the purchase contract. You don't want to allow those clauses, that's your choice, but you'll severely restrict the number of people willing to make offers as well as the price you will actually get. Even if the seller negotiates the payment of the deposit to them as part of the contract, the buyers can still sue to get it back. This is the real world and an offer is being made with real money and real consequences to that money. If you're unable to come to terms with that fact, stay a renter, because that fact is not going to change. For agents, if the only way you can make a sale is to misrepresent the deposit, it doesn't take a great fortune teller to see a courtroom in your future.

For buyer clients, I can do a lot to keep a deposit from being forfeit - any agent and loan officer can. Get out in front of all the contingency issues and any other reason that my client might decide they don't want to purchase the property, and get them dealt with right away, during the contingency period. Loan, appraisal, inspection, I want them all done before their contingency expires, or at the absolute minimum, a loan commitment with contingencies I'm certain we can meet. As of this writing, I have not yet lost any buyer deposit money. Nonetheless, since no agent can honestly guarantee the deposit will not be lost, I cannot and will not pretend that I'm some kind of exception to the law. The only way I could make such a guarantee is by putting up my own money as a surety, and if my client lost a deposit for a reason that was in any way my fault, I hope I would reimburse them (Until it happens and I'm facing an actual choice, there's no way to be certain). But it's not my investment, and if the investment succeeds, I'm not going to share in the proceeds (I'm given to understand that's illegal, at least in California), and one of the essential, unchangeable facts about investment is that there is no such thing as a risk free investment. If you don't understand this, any money or assets you may have can be considered a temporary thing, and you have no business in a profession with responsibility for other people's money. Anyone willing to say that there is no risk is either a fool or a crook. Nor is it likely your agent or anyone will reimburse you, especially for situations beyond their control, or if you misrepresent your situation or miss deadlines.

For listing clients, the same thing applies: Get what I need to done right away, and keep after that buyer's agent to remove contingencies in a timely fashion. If they won't remove contingencies when they are supposed to be removed, it tells me all I need to know. It's my client's call, but I know what my recommendation is going to be. I want the transaction to work, but I also want my client to get that money if it doesn't. Incidentally, Deposit issues are one reason of many that nobody should ever be willing to accept dual agency.

The bottom line is like something out of quantum physics: Schrodinger's Cat. Ideally, you want the sale to go through and record and for everybody to be happy because it all turned out exactly as agreed. Unfortunately, that's not perfectly predictable or knowable in advance. If it was, no real estate transaction would ever blow up, and the deposit would not be an issue. There are laws and procedures, and things agreed to in the purchase contract, that you have to be a real estate lawyer to offer an informed opinion about, and the judge, arbitrator, or whatever making the decision to make a definitive ruling. Escrow has custody of the money, but they're not going to do anything without mutual agreement of the buyer and seller. Either side can potentially decide to be stubborn and force the matter to arbitration, court, or whatever is appropriate, and all the consequent expenses of the legal system (which additional money is also at risk as the usual agreement is that prevailing party is entitled to legal expenses). And the legal system runs in incomprehensible ways for unpredictable reasons - the one thing that seems to be a constant is that if the judge wants the ruling to go a certain way, they can probably find a precedent to justify it if they try.

The point is this: The deposit is at risk. It is not "safe", and it does not necessarily belong to the seller either. Since this is cash, people understand that it is real money, because they had to scrimp, save, and set every single dollar in it aside from other uses, so they get understandably nervous about it. It represents a great vacation, a down payment on a new car, or something else very desirable that they're giving up, and they're putting at risk of forfeiture. Against this, the seller wants it if the transaction fails. There are ways to protect it, and ways to endanger it, and you've got both agents working to their client's advantage. As with any other competitive or potentially competitive situation, that makes the result indefinite until the game is complete. It isn't common in my experience that the deposit is forfeit, but it does happen. And anybody who tells you otherwise is either lying or hopelessly incompetent. Nonetheless, real estate is such a powerful investment that you are well advised to come to terms with the risk, because it's a necessary risk in order to buy real estate.

Caveat Emptor

Original article here

Copyright 2005-2014 Dan Melson All Rights Reserved

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