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

That was a question I saw.

The answer is YES there are problems!

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

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

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

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

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

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

Caveat Emptor

Original here


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here

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

Price the property correctly in the first place.

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

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

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

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

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

Actually, it's much worse than that.

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Original article here


Hi--I just found your site today. The best I've ever seen/read, etc. Thank You!! I do have a question I didn't see addressed regarding our current situation/dilemma:

Our present home, which we've lived in for 8 years, is worth around $180,000 (yes, it's a small town...), and we owe $105,000. My husband has been working for about 5 years now, & has a pretty good salary (around $100K) but we have a LOT of debt --mainly a result of having had 2 babies while in school. We have about $40 K in credit card debt, a $775/mo. student loan payment, & a $500/mo car loan which will be paid off in 18 months.

We've been planning on moving across town for a few years (MUCH better schools there), but had been holding out as long as we could with the idea that the longer we waited, the better house we'd be able to afford. And besides, the kids are still young, & their elementary school isn't intolerable, etc.

The problem is that the school situation DID become intolerable about 3 weeks ago, at which time I began to homeschool them, which is also intolerable! So we need to get this moving across town show on the road!

My question is this: I know we need to at least take out a home equity loan so that we can pay off the credit cards. Some of the rates are outrageous, and I'm sick of fighting with them. That would put our equity at $35,000. But since we want to move ASAP now, I assume we could just use the sale proceeds of the house to pay off the cards, & use the remainder as a down payment. Or, am I wrong? Our current debt to income ratio is so poor--will the lenders even consider our current plan to pay off that debt using sale proceeds, or will we have to refinance now & wait a period of time before pursuing a new house to show them that we're not just going to rack the debt up again? Oh, but we haven't incurred any new debt or put any new charges on the credit cards in about 3 years--does that make any difference?

Also, the houses in the neighborhoods we are looking at are around $300,000. I'd sure appreciate your advice on this. We really want to move immediately, but not if waiting until later, like this summer, would be be better...

Your situation is a classic example of the urge to hurry a situation, and how to come out better if you don't.

You don't mention how the market is in your area, or what your credit score is like, and yes, it does take a while for bills to show as paid off. It can take over sixty days. I see some options for you, all of which have drawbacks. This is a complex situation, and I don't have nearly all of the information it takes to recommend a particular solution.

You can refinance, sell, or do nothing with your current residence, and you'll want to rent it out if you don't sell. You can rent or buy a new property, although you do want to buy before long. There's some issues that need to be dealt with, and they take a little time to deal with them properly. You can rush the situation, but doing so will cost you some big bucks.

You don't mention what rents are in your current area. By the time you pay for the refinance, my guess is your balance would be $150,000, maybe a bit higher. I'm as certain as I can be without full workup information that you're in a sub-prime situation, which means you can choose a very high rate or a prepayment penalty that'll run you about another $5000 if you sell while it's in force. The high rate is the better choice, because it's only for a few months, but it also has implications for your debt to income ratio. The reason I ask about rents is that I'm wondering if they'll cover your mortgage on the place. The rate you'll get might be higher or lower, but let's assume seven percent. That's principal and interest of about $1000 per month, plus taxes and insurance. Now your husband makes plenty to afford some negative cash flow on the property if you folks have to and the rest of your debts are gone, but not a huge amount of it. You'll only get credit for seventy-five percent of the rent, as opposed to all of the expenses, but better to have it rented for a little bit of a theoretical loss than not to have it rented.

Whether you refinance or sell, it's going to take a grand total of about four months to get your bills showing as paid - about two months to get the refinance done, and two more months for your current finance companies to get off the dime and report the accounts as paid. It might be longer if you sell, depending upon how long it takes to get a good offer made and the sale consummated, then add two months. On the other hand, if your property is in good shape, vacant properties in good condition show very well. Understand that nothing happens immediately in real estate, and new regulations supposedly aimed at protecting consumers (while in reality protecting big banks from competition) have added at least a month to the time it takes to get a loan done.

With your new property, your debt to income ratio is going to sink your loan if your current bills aren't paid off. Unfortunately, A paper has an issue with paying off bills after your initial credit is run. If it's a credit card or other revolving debt, guidelines have issues with paying them off in order to qualify. If you pay off a credit card, the wisdom goes, you could turn it right around and charge it up again. Even if you pay it off and close it, the reality is that you could get another. So they qualify you based upon your current situation. Even paying off installment debt to qualify is at the discretion of the underwriter, and I have seen them turn it down. So you want to have the debt paid off, and showing as paid off, before you make the offer for a new place. That can take up to two months after they actually are paid off.

So you're going to want to wait at least two months after you pay the debt off before you make your offer on the house you want to purchase. This means either staying where you are for now, which I can see is unacceptable, or interim renting something in the area you want to live, which is likely to be better, and you might get a line on an extra-good deal if you are living in the area. Yes, you want to buy, but you don't have to do it all in one step.

So I'd most likely go rent a place - which gets you into the new school district now - while I tried to sell or refinance the current place. If you're not living there, be advised that a refinance is a cash out investment property loan, which carries higher rates and more difficulty. I'd probably try to sell instead, but that does place you at the mercy of the market, and not only do I not know your market, but (when this was originally written) we're still in the worst time of year for sellers. Which means settling for a lower price than you might otherwise get, but you will be rid of the debt without the headaches of being a landlord at a stressful time in your life. You can learn that situation later.

Now, if you sell, you get a down payment for the new place. If you refinance, you probably don't. Your credit score may dictate the sale option; I don't know. It should improve after everything is paid, but I can't guarantee that, and I definitely can't say by how much with the information I have. Better to plan on the status quo than to bet on it improving.

Now, a couple of months after the debts are paid, you'll be a a position to make an offer on a home you want to raise your family in. When I originally wrote this, If you had a semi-decent credit score (620 or above), 100 percent financing was no big deal deal, provided you stuck with a property and a loan you can document the ability to afford. If you've got serious credit issues, you're going to need a down payment. For the school year, you may want to delay until late spring or summer to give the kids some stability for the rest of the year. Worst time to buy, but you're looking at moving again in February if you get on the stick right now.

It's a real pain to move a household once, and here I am telling you to plan on moving twice. Let's look at what happens if you risk the solution that cuts the Gordian Knot.

Your husband is an attorney. I don't know what attorneys make around your area, but around here they can make several times $100,000. So somebody advises you to do stated income, state that you make several times what you do, and just make a bid right now on the home you want to raise your family in, while putting your current home up for sale. And if your credit score is decent, I could get such a loan done pretty easy at the time I originally wrote this. At this update. stated income has gone the way of the dodo and the only 100% financing generally available is the VA loan. However, let's consider what happens next in the original context.

Now you not only have your current debt load, but you also have the payments for a brand new $300,000 loan on a $300,000 house. In California, with good credit, that would have been 6.125% when this was originally written on the first, maybe a little under 10 percent on the second (Now it would be a little lower, but since second mortgages aren't going 100% loan to value, you'd have to have a down payment and accept PMI). $1460 on the first, $530 on the second, plus property taxes (California would be about $315 per month) and insurance of about $100, more or less. Total obligations added: about $2400 per month, on top of what you're paying now.

You don't say, but if you weren't struggling at least a little bit, you would have paid those debts off by now. So you are fairly close to the edge. My best guess as to your reserves: Non-existent. Now you have to come up with another $2400 per month. Where can it come from? Borrowing is the only thing that comes to mind. Charge up the credit cards, personal loans, payments start getting behind, your credit score drops - and it won't come back quickly if you start making those payments on time. Especially if mortgage payments on either place end up being late. Meanwhile everything is compounding, eating up your equity, even if the house sells fairly quickly. As I've said, we're still in the worst time of year for sellers. Its entirely possible you won't sell until Spring, no matter how good a job your listing agent does. In short, things get desperate quick. Not only is your cash flow unsustainable, you get motivated to sell for a lot loss money than you might have otherwise. With everything compounding, it's very possible that you end up selling to a shark for less than you need to get out from under your debts. This perpetuates the situation you're trying to get away from, and makes it worse because your credit is likely to take major hits.

So tempting as it is to take the situation at one go, you eliminate a lot of risk and stress by taking it in stages, and you render yourself a lot less of a target for the sharks of the real estate world. Yes, it adds something to your cash flow to go rent for a while, but not nearly so much as if you just bought straight away, and you give yourself a line of retreat if you have to take it.

There are a lot of things that could change this. As I've said, there's a lot of stuff I'd need to know before making a final recommendation for a client, but I've sketched out the biggest stuff that needs to be considered.

Caveat Emptor

Original here

I've seen many new home developments with vaulted ceilings, mini-vineyards, huge houses on little tiny lots...Why can't some developer built some homes for us regular people? A normal sized home with plenty of closet space and a decent (not designer) kitchen that is set more than 3 feet from the neighbors house. I realize that they need to make money, but more people could afford homes in this state if the builders weren't catering to people who already own 2 and 3 houses.

The developer has a certain amount of LAND for a development. That's all they have, and they are not getting any more. For this, they paid a set amount of money. Furthermore, once they have it, it's likely to be years going through the permit process before the can even build. That money they invested in the project, both upfront and as the project goes along? If they wanted to invest it in say the stock market, it'd be earning income - for years - before the first spade of earth gets dug. If it's three years from purchase to completion, that's a 33.1 percent necessary return just to break even from the opportunity cost (at ten percent per year - very doable). If it's five years, as is more likely, they need 61 percent. If it's seven, 94.9 percent. To this, add property taxes as they go, the costs of environmental studies and obtaining the permits and paying for inspections and certifying everything. If there's a loan going on, they have the cost of interest going on as well. Now there are ameliorating factors as well, but given the sheer amount of work that has to be done before they nail the first two boards together, a rational person could maybe be forgiven for thinking that society wants housing to be prohibitively expensive, because that's what the evidence says.

Furthermore, it's silly, but people buy a property based upon the structure and the amenities. Well, it's not silly to make that one of the factors, but people go overboard. They will buy a 5 bedroom 2800 square foot house on a 3000 square foot lot before they'll buy a 3 bedroom 1800 square foot house on a 20,000 square foot lot. The same structure is really worth a lot more when it's on a bigger lot, and even a lesser structure may really be worth more if it's on a bigger lot, as is likely to be the case here, but for most folks, we're talking emotional appeal, not rational thought process. In other words, like many people looking for a mate, they see the gorgeous sculpted toned and tanned member of the opposite sex, and ignore the abusive personality behind the beautiful exterior. I'm not certain I've ever met someone who wanted to live in such a development, but they sure sell like hotcakes! Add travertine floors and granite countertops and the fact that it's new to the 2800 square footer, and you've got people willing to pay $800k for the first property as opposed to maybe $550k for the second. In their mind, the first property might be a "flipper's investment" while the second is "the keeper" that they are going to make improvements on for the rest of their lives, but economically, we vote with our dollars and it's looking like a landslide for the status quo. If you opened your wallet for the house where you don't have any land, guess what? You're voting for developers to keep building them. You know something else? That brand new cheek-by-jowl development isn't going to be new forever. Considering market returns, that older $550,000 3 bedroom on half an acre is a better investment, even if it needs updating. Curb appeal and house bling and "ooh, it's new!" are the best ways I know of to sucker buyers into paying too much money.

The developer knows this at least as well as your average real estate agent. The developer has all of this researched down the the last centimeter of the lot lines. They are not in business to build wonderful homes that people are going to be happy in forever; they are in business to make money, and the blinged-out houses on the smallest possible lots bring in the most money for that developer. The fact that you're the very first person to live in the house is a further attraction to the kind of person who buys new cars, which is to say, most of the population, and it's worth serious money to that developer's bottom line, although it will cost you money in the long term.

Nor is the developer alone in this endeavor. They wouldn't make the most money from homes like that if people didn't pay the most money for homes like that. You want the real culprits in this scenario, look around you in any large crowd. It's all to easy to blame the developer, but the desires of the average home buyer and the regulatory environment both played huge factors in getting the state of new housing to where it is now.

There are ways to potentially fix the problem. They start at real consumer education, easing environmental restrictions and the permit process, particularly for high density housing, which may not be desirable, but when your front yard is the size of a postage stamp and most people wouldn't use it anyway, doesn't it make more sense to put all the community lawns together in one park that someone can actually get some use out of? Say, a place for kids and dogs to play? People say they hate condos, but condos, townhomes and row homes are all that's available to the average buyer if the price of land and developing it stays where it is. Environmental regulation and slow growth policies are fundamentally at odds with affordable housing in high demand areas. I'm not saying throw them out entirely in the name of putting up cardboard shacks, but I am saying that we can certainly choose a point friendlier to low cost housing than we have chosen. I can only conclude that society must value the environmental status quo more than it values lowering the cost of housing, in which case the status quo is the correct choice.

None of this has any measurable political support. Everybody is for lowering the cost of housing, at least for the poor, but put it on the ballot against loosening environmental protections and it loses. There are a certain number of additional reasons why this happens, of course. Multimillionaire developers are not politically popular, but Least Tern environment is. Rarely do people stop to consider that by constricting the supply of housing, you unavoidably increase the price. Nor can you do anything by governmental fiat to fix the problem that doesn't price even more people out of the market. Demand is a given - it not directly controllable. There are 330 million plus Americans and they all want housing they can afford. Even kicking out the estimated 13 million or more who are in the country illegally wouldn't do a whole lot to really solve this problem. The only way to treat the issue is by increasing the supply, which does seem to include being nicer to those multimillionaire developers, but in this case the issue is more affordable housing for everyone, and being nicer to the developers means that you get more housing units, which drops the price of housing from whatever it would have been without being nice to the developers. Because any time someone else enters the United States, whether legally, illegally, or simply by being born, you create a housing need. Every time there is a new American without another place for that American to live, we create somebody without a home. We price somebody out of the market. We now have an American who cannot afford to buy a home.

Now how to handle this issue until such time, as any, as society changes its mind and decides to make housing more affordable? Your best bet is to find a good buyer's agent to defeat the problem on a retail level, that is, for yourself, because wholesale solutions are not likely until people get rational about solving society's problems. You can't make people build the kind of housing you say you want. But you can make informed choices between what's out there now, and a good buyer's agent will look as far out as you tell them to.

Caveat Emptor

Original here

One of the most common things I'm seeing as I roam about the East County looking for bargains: Agents not doing their jobs.

Even when there were 40-plus sellers per buyer, single family detached homes that are priced appropriately were selling, and for appropriate prices. Condominiums weren't moving unless they were brand new with lots of glitter, but appropriately priced detached homes were selling. I can find all of the evidence of this you would care to see, because I've already seen it. Willing buyers and willing sellers. It's just that what an appropriate price is has shifted.

Let's change mental gears here for a moment. Here's the real differences between sellers markets and buyers market: Competition. Specifically, which side of the sale has to compete the hardest. In seller's markets, which is the mindset most sellers and most listing agents are still in, buyers are competing to buy the properties that are for sale. Because of this it is the buyers who have to compete to look attractive - highest offer, quickest offer, fewest contingencies. They have to offer more money or a bigger deposit or something else that the seller wants and nobody else wants to do. With the buyers market, it's the sellers who have to compete, and most of them were not doing it very well.

I want to make very clear that sellers are always competing against other sellers, even in the strongest seller's market possible. It's not enough to have your property "out there." In a strong enough seller's market, the prices might catch up to unrealistic asking prices, given time. In a buyer's market, prices are not increasing, and in a strong buyer's market, they are going down. In other words, the longer it takes, the worse your property looks. You have to have some stand out aspect to your property. It can be physical attractiveness, or it can be low price. Price will get buyers in the door, but it takes a strong agent to sell a fixer to the average buyer, no matter how attractively priced. For several years, the scumbag down the street would show the buyers something more attractive they couldn't really afford, relying upon with a negative amortization loan, done stated income to make it look like they could afford the payments. Buyers who haven't had this explained to them ahead of time will think they've just gotten the Taj Mahal for the price of a dirt floor shack, except of course, they haven't (Fortunately, this particular tactic has gone the way of the dodo because those loans are no longer available, but there are other ways to be able to quote low payments that aren't in the client's best interest).

The other way to stand out is to be priced the same, but have a more attractive property. Don't tell buyers you'll give them a carpet allowance, replace the carpet. Don't tell buyers that all they have to do is spend two months and $20,000 fixing it and they'll have a property worth $20,000 more. That won't wash in a buyer's market, if it ever does. The person who does the work, even of engaging a contractor, gets the payoff. Why should your buyers take the risk and do all that work and spend $20,000 cash that most buyers don't have (and cannot be part of the purchase money loan) when they can go down the street and find all of that work already done for maybe $10,000 more - or even the same price? Some other seller just out-competed you for that buyer's business. The only good news for sellers is that most of your competition isn't trying very hard, so small bits of competition can look very attractive.

Even lenders are still in denial for their lender-owned properties, and they are the ones with the hardest issues of all. They must get rid of the property. They don't have any choice. Even if it was in the same shape as surrounding properties - which it rarely is - they have a deadline to get rid of that property, and everyone knows it. Furthermore, the property is tying up many times its value in working capital because of regulations. They also have other constraints that other sellers do not. These make the property worth less, as they rule out certain buyers and make others less willing. In a buyer's market, every buyer counts. I had two clients putting in offers on different lender owned fixers in the last two weeks. One might comp out at the asking price of $450,000 if it wasn't lender owned - which automatically makes it worth about ten percent less than the comps. Add the fact that it's an ugly fixer that would be worth maybe $400,000 at most if it wasn't lender owned, and they will be extremely lucky to see $360,000 out of it. Not supposition, not guesswork, fact. The fact is that there's a beautiful owner occupied comparable on the same block asking $459,000. It's even a bit larger. There is no doubt in my mind whatsoever that the beautiful comparable would take $450,000. Actually, when I checked again the beautiful comparable was in escrow. One owner that competed well, one that is not competing well. I told the agent for the lender's fixer this, and she said, "I've been in this business forty years and I know what I can get for that property!" I offered to bet her $10 she couldn't close escrow on it within ninety days for over $390,000 net - essentially a zero risk bet from my point of view. From hers also, if she thought the property was really worth more. She wouldn't take me up on it - declining to risk even $10 of her own money upon getting a price within 15% of what she told her client whom she has a fiduciary duty to was an appropriate asking price. Furthermore, she's violating her fiduciary duty by not explaining this to her client. Doesn't matter how long she's been in the business. What matters is whether she reacts well to this market.

About five miles away, another lender owned fixer asking $480,000 because that's what the lender is on the hook for. And you know, it is a better neighborhood. Unfortunately for them, just because you were silly enough to lend them that much when the market was peaking doesn't mean someone else will pay you that much for it when the market is in the tank. What matters is the comparable properties, and there's one just around the corner that anyone would rather have listing for $470,000. Above par house for a below par price. Hasn't gone into escrow yet, but it will go fairly soon, unless someone else lists a better property cheaper. Even in the buyer's environment we had, they got a little bit of a bidding feud on it. Fast forward a couple of years and the market has turned. Properties priced correctly are seeing bidding wars, while properties priced incorrectly are still sitting without offers. This lender owned fixer is in rotten shape and has several issues that turn the average buyer off. I initially thought my client's offer was lower than it should have been, but the more I thought about, the more I think my client came closer to the mark than I did initially. Horrible floor plan, necessitating major work to make it attractive. Yard not suitable for children, despite the fact that there's a school on the same block that the agent is using as a "come-on". These people will be lucky to get anything over $350,000 for it, but the agent sent me a blanket, "Anything less than $400,000 will be rejected without counter," despite the fact that I explained how much work it will be to bring it up to the neighborhood standard. I left her some messages, and she didn't respond. The implication to me was clear: She is in denial, and doesn't want to hear plain facts explained. She's got dozens of REO listings. Maybe she schmoozes well, but she's not dealing well with the market. I don't know if she doesn't know market conditions or just acts like she doesn't. If nobody is willing to pay enough to get past the blanket rejection, it doesn't make much difference, does it?

Buyer's markets are the times when good listing agents really earn their money, as the gentleman listing the $470,000 comparable did. It may not be the great publicity of getting the highest price ever in the neighborhood, but getting it sold quickly and for something like asking price in a buyer's market is a real achievement. Especially with as many distress situations as are out there - people that have to sell, for one reason or another. (I did very well for my buyer clients, but it's depth-charging fish in a barrel. You really find out how good someone is when the market favors the other side of the transaction.) You find out how good someone is as a lister when there are dozens of FSBO and discounter listed properties in the neighborhood, sitting on the market for months. The last six months of Canceled, Withdrawn, and especially the Expired sections of MLS have all that and more, but that one property sold quickly, and sold for a good price. That agent earned every penny he got paid before the property was in escrow or even had offers.

The person who "buys" listings, telling the people that they can get them more money than anyone else, more money than the market will support, had a nice long run. When prices are moving up strongly and there aren't many houses to be had and everyone wants one, well a monkey could sell that house at that price given enough time, because given a few months the market will catch up to all but the most egregious of overpricing.

That is not the way things are in a buyer's market. Buyers have all the power, and they know it, because buyer's agents like me have told them if nothing else. When I originally wrote this, inventory was over nine months worth of sales, more properties were coming on the market and it was the worst time of year for sales. Given these facts, What do you think is going to happen? Where do you think the market is headed, at least in the short term?

(and incidentally, what kind of bargains do you think those few buyers willing to get off the sidelines can drive?)

The longer listing agents wait to talk some sense into their sellers, the worse it's going to be. The more days on market, the further the market falls, the more the sellers will have to move to meet it - and the more unhappy they will be with their listing agents. Actually this always applies, but it applies much more strongly when the buyers are in control. The agents I respect will refuse a listing rather than ask for a price they aren't going to get except by freak coincidence. They get the same no transaction either way, but if they refuse the listing, they haven't created unreasonable expectations, they haven't failed to live up to those expectations, and neither party has wasted months finding out what that agent should have known in the first place.

I saw agents telling people that because interest rates have stabilized or even moved down, that will revive the market. This is complete and utter nonsense in buyer's markets. I initially wrote something stronger, but my internal censor really wants to keep this family friendly. Yes, payments drive the market - when it's a seller's market. Buyer's markets are driven by the bottom line, because there are lots of sellers and only a few buyers and if this seller won't cut them a deal, the one down the block who is a little more motivated will. When every listing gets three offers within a week and buyers are getting desperate, they'll bite off on another $1000, $5000, or $10000 because "It's only $10 (or $50 or $100) more on the payment. They shouldn't, but they will. When buyers have the power and they know it, they'll tell the sellers to pay that $10 per month, because they're not paying the extra in the first place. It is the sign of someone who does not understand supply and demand to think otherwise, and I certainly wouldn't want that sort of numbwit as my agent. Your agent is your expert. If they are not an expert, why are you hiring them?

When I originally wrote this, I told people that the only way to change market momentum was to clear some inventory. Inventory can clear in one of three ways: the owner finds an acceptable alternative (such as loan modification), the owner decides to get serious about competing for a buyer's business, or the lender takes it over and eventually cuts the price enough to sell it. I've mentioned that the lenders are evidently still in denial, but they have legal requirements to dispose of those properties within a certain amount of time. The closer they get to that time expiring, the more desperate they'll get. Once the regulators climb onto that lender's back, they don't climb off cheaply, nor easily. But my real point is this: Sellers can compete on the individual level any time they want to, and the sooner they want to, the better off that individual is likely to be. Eventually, the seller's aggregate is going to have to compete much harder for the business of the buyers that are out there, and for the buyers they want to lure off the sidelines. It took a long time to sink in, but the fact did sink in to prospective buyers that the market got overextended. If you're selling, you can ameliorate your expectations and come out as well as possible, you can hope for the bigger fool of a bygone day, or you can take it off the market.

Caveat Emptor

Original here


At any given time, I will usually have at least one set of clients who really need to consider a condo or townhome who nonetheless have their hearts set on a single family residence. I agree to include single family residences in their search knowing full well I am going to get phone calls like this:

"Dan, a property just popped up on our search! It's right where we want to live and it's within our budget and we like the neighborhood and we want to buy it!"

And then I'm going to look at MLS and 999 times out of 1000 there is going to be a note in there that tells me there is no way lenders will touch the property (in 99 out of 100 such properties that don't have it, it should have been there). Net result: the vast majority of all buyers can't touch it, and I have to tell Ms. Client exactly what's going on:

"I'm sorry, Ms. Client, but that property has a broken foundation which no traditional lender will loan money on. So if you can come up with about half the purchase price in cash, we have a possibility, but otherwise that property might as well be the most expensive property in the city, because while you could afford it if you could get a traditional loan, the reason it has such a low price on it is that you can't."

Put yourself in the seller's shoes: They want to get as much as possible for the property. There just aren't a whole lot of people who go looking for ways to give money away that they could have gotten. Even if they are a philanthropist, they give the money to charities, not to anonymous buyers they don't know. Therefore, there is a reason for a low asking price relative to everything comparable around them, and the reason for a major price differential is almost always some defect that prevents a normal residential real estate loan from being obtained.

Agents don't put this information in the public area of MLS or any other advertisements they do for one reason and one reason only: doing so would restrict their ability to attract buyer clients who don't understand either this or the fact that calling the listing agent is about the stupidest thing a buyer can do. I don't recall ever having a listing in this category, but I would make it absolutely the first thing I mentioned. There is no point getting my sellers worked up with showings to buyers who cannot buy the property, and my responsibility is to my clients, not to luring prospective buyers in my own front door. That is a major priority of mine, but helping me find clients is not why people sign my listing agreements.

Here is what is going on. The sellers have a property with a defect that makes most lenders unwilling or unable to risk money on a loan against the property. A slab crack is the classic example, but there are many others. Unpermitted additions are another potential deal killer. Properties that don't have a working bathroom or kitchen. Properties without hot and cold running water, or without heat. I can go on and on, but these are the ones agents see time and time again.

Because traditional real estate loans with traditional real estate lenders are out of the question, the only lenders who can touch the property are the so-called "hard money" or "private money" lenders. Traditional lenders are publicly held companies loaning Other People's Money and they have to conform to what the SEC and Federal Reserve tell them to do. Hard Money loans are individuals and groups that have gotten together specifically for the purpose of loaning money to this market. They can do pretty much what they want, but the lowest rate on a "hard money" loan that I can remember seeing is about 12%, and right now hard money lenders want to see a 35 to 50% down payment minimum.

I keep saying this but it cannot be repeated too often: The Mortgage Loan Market Controls the Real Estate Market. The vast majority of everyone needs a loan in order to buy, and if they can't get a loan on a given property, it might as well be a storage area for what comes out of a sewage filtration plant. Such a property is worth much less than surrounding properties of otherwise equivalent features simply because of this defect. In fact, most such properties are still priced too high - the asking price reduction should be larger than it is - which is yet another piece of evidence on violations of fiduciary duty most agents will commit in order to get a listing agreement.

In point of fact, probably the majority of these properties go to "all cash" buyers who fix the disqualifying problem as well as making it pretty for Mr. and Ms. Upper Middle Class at a substantial markup from what they bought, making enough money to pay their expenses plus a substantial profit as well. That is the target market the agent has to hit. The fact that a given property cannot currently qualify for a traditional loan, but can be repaired so that it does is a business opportunity. Nobody risks pumping that kind of cash into a property without the lure of a potential profit that makes it all worthwhile, and there is nobody else involved in such transactions who is not made better off by the existence of this class of short term investor.

I shouldn't have to say that if you own such a property, fixing the problem yourself if you can will usually more than pay for itself. But there are many reasons people can't do this, most common of which is "we don't have the cash and can't get it", and without the people in the previous paragraph, what we all get is an abandoned condemned property of no use to anyone. The people who owned it get nothing. The people who would have eventually bought it (and been ecstatically happy to do so) would not even have considered it. The people who fix these properties are not only making money, they are performing a public service. I get angry when people think that the money these property fixers make is somehow morally wrong. It not only is morally right, it is economically beneficial to the community as a whole and everyone else involved in that transaction.

Nonetheless, if you are a buyer without the requisite cash, the purchase is not going to happen for you. The property might as well cost ten quadrillion dollars, because it is every bit as much out of your reach as a property costing that much. People who don't understand this are taking lenders and loans for granted, and as anyone who's been involved in the real estate market will tell you, you should never do that. Yes, they make good money also. But they also take substantial risks, as any real estate market lender of the last few years can attest.

Without lenders, we'd be stuck in the era before loans. Without the standardized lenders and programs and methods of freeing up money for the real estate loan market that we have built up over the past seventy-odd years, real estate prices would be a lot lower and we'd still be stuck with mostly cash sales with the practical result that the vast majority of real estate value would go "poof" just like a cartoon illusion. It's real wealth, but it rests upon a foundation of our current system of loans being available.

When such a loan is not available for a given property however, that property goes outside the system that we have built up to make home ownership available. Until somebody fixes the property to bring it back inside that system, it really is only worth only a fraction of the value of surrounding, otherwise equivalent properties. And if you as a buyer are relying upon that system of loans to enable yourself to to become a homeowner, such a property is as unavailable to you as if it were somewhere in the Andromeda Galaxy. On the other hand, if you are someone with the cash to buy and fix the property in order to bring it within the system there is serious money to be made - but people who fit in that category already know that.

The usual comment I get from buyers when I explain the above is "Oh, that's a shame," or words to that effect. It isn't a shame and it isn't an unrelated factor - it's the entire reason for the low asking price. If the property didn't have that defect, it would never have come up in your search because the asking price would have been priced completely out of your reach.

Caveat Emptor

Original article here

Expertise and attitude, not control of an informational chokepoint, is the way that things are going.

Let's analyze this from both sides of the problem. The current owner looking to sell really needs a marketer. For better or worse, most of their choices have been made; their main dilemma reducing to how to get rid of the result of those choices in the most effective manner. If I were Ambrose Bierce, I'd say their problem was how to convert their mistakes into cash, because they have that property, and they want is the person willing to pay largest amount of cash possible as quickly as possible. It's worth what it's worth; mistakes and omissions can cost them a huge percentage of what the property might have sold for but it's unlikely that even the best marketing program is going to sell the property for more than it's worth.

It's the buyer that has more need of an all-around expert on housing. They have cash or the ability to get it via a loan, and the want the property that best meets their needs for the lowest possible price. Note that nobody has an unlimited budget; despite all the attempts to pretend otherwise in the era of Make Believe Loans. Even if you're wealthier than Midas (Which many of the wealthy are, if you really think about it. Gold just sits there - it doesn't produce more wealth), you have to accept some constraints upon the property you decide to purchase, and knowledge of how those constraints compare to each other and how they work out down the road can keep you from being in the situation I joked about above, of needing to convert your mistakes to cash, later on.

But the current business models are all built around listing agency. Especially, the large nationwide chains and huge brokerages. Ridiculous as it may seem upon sober reflection, people do approach listing agents about buying property, especially the ones they have listed. I've written more than one article covering how Dual Agency is an invitation for disaster, especially for buyers, as have others, but still it happens. It's not like it's risk free for sellers, either. Some agents do get listings primarily for "buyer bait" and lose their best bait when the listing actually sells, and that's fairly benign compared to some other things that really do happen and aren't as uncommon as most people think. The entire current model of agency is built around listing, with only minor exceptions around the edges, and it's mostly oriented on the big name national chains with ongoing advertising campaigns. Those chains control pretty much everybody from the NAR on down, and through the NAR's lobbying arm mold the environment to their advantage. Due to the way the business is structured, It's very hard to succeed in real estate without listings, and it's much harder for independents to get listings than it is for the major chains. This is going to change no matter how many "campaign contributions" NAR makes, at least to a degree and possibly completely.

This whole set-up is a holdover from days when agents and brokerages could control access to market information. I shouldn't need to say this era is over, and the agent (or brokerage) that pretends they are entitled to three (or six) percent commission for access to the market is doomed, but the NAR seems to be leading the charge off the cliff, most recently with the move towards requiring agents to have hardware "dongles" in addition to a user ID and password to access the various local MLS services. They justify it as security, but what they're really trying to do is "protect agents from themselves" by making it difficult to share their MLS access with outsiders - attempting to control information. Where 99% of the information needs no access to MLS in order to obtain, this is ridiculous. Note to NAR: Most real estate information is public record, and can be obtained these days by visiting the appropriate county website. A lot of it can be retrieved automatically, via what we called "batch file" a few decades ago. There are dozens if not hundreds of places to obtain information on properties for sale, and a goodly percentage of them do not have their sources in MLS. Therefore, trying to justify what you make by creating an artificial information chokepoint is not going to succeed - all you're going to do is succeed in encouraging alternate pathways to the information.

There is no reason why any given local MLS can't have competition. The NAR doesn't own the concept - only the name. There's no reason why some smart techies can't set up their own service in competition, national or local, supported by whatever mechanism they can get to pay their bills. Furthermore, agents (Realtor or not) will line up to submit their properties to any competing service - it's fiduciary duty, after all. It's only the non-existent policing efforts of most such sites that have prevented them from taking more market share from official MLS affiliates. When this changes, so that a member of the general public can read a listing advertisement on an MLS competitor and have some confidence that it represents a real listing, these competitors will lose most of their handicap. If I had a dollar for every time a client called me asking why I hadn't shown them this wonderful bargain they found on a non-policed site, I could pay my office rent for a couple of months at least out of it (Buyer's agent recording 2201: "Because it's not a real listing - it's someone chumming for leads, and to avoid wasting your time with salespeople advertising things they haven't got is a small part of why you hired me"). It is only this lack of policing that is holding the competition back now. But sooner or later, those that are trying to be destination sites will figure it out. When they do, you can kiss MLS' dominance goodbye, and with it any illusions as to holding an information chokepoint.

Eventually, people will be able to put their properties on the market by going to a website and entering the information, or calling a toll free number if they're luddites. They'll need to show they are authorized to do so, but that will be the essential nature of the process. Buyers will be able to access the information for some very nominal price, like putting up with advertising or paying some nominal fee. That's where we're heading; the only items in doubt are how long to get there and what the exact pathway will be. Agents are in no way mandatory to this process of putting a property for sale on the internet or finding out which properties are for sale on the internet. The only way to survive and prosper as a profession will be to provide expertise that the average person has little to no opportunity to acquire. In other words, really learn things such that buyers and sellers of real estate can make a profit (or avoid a loss) by paying you, and make a living selling that expertise, not access to the system. Question 1: In the general economy, are there fewer expert consultants today than thirty years ago, or more? Question 2: Do the good ones among them command lower fees (even adjusting for inflation) or higher?

The issue lies in convincing people your advice really is that good. Holding an information choke-point won't do it, and the choke-point is going away within the next few years. But knowing what to make of that information is an expertise for which well-informed clients will pay and pay well, knowing that the system will be passing along those costs (along with a hefty markup) to those too stupid to pay. In other words, we've got to demonstrate and emphasize the fact that our compensation is an investment that returns more than it costs.

I'm not going to be saying listing is easy - it isn't. I learn more about the listing game, and how much more there is to learn, with every one I list, and not infrequently, I learn something important about listing from working the buyer's side (and vice versa, as well). As I have said in the past, I figure I'll have it completely down sometime in the next century or so. That said, the future of the listing game is easy enough to predict: How to make this property stand out amongst all the others, and how to attract the attention of the buyer who is suited to the property. Every property is unique; but for the vast majority of all buyers, there is a substantial list of properties that will serve their needs about as well. If you're any kind of a decent listing agent, you're going to be able to answer the questions of why this property is worth more to that buyer than the alternatives that are cheaper, and why the alternatives that are more expensive aren't worth the extra, secure in the knowledge that if they don't agree, they aren't the right buyers for this property and another set will be along shortly who are. If you're a top-of-the-line listing agent, you can do this without ever meeting prospective buyers. The seller's problem reduces to how to attract those suitable buyers, and the value of the listing agent to sellers lies in getting them a better offer sooner (Hint for those consumers reading this: It's not agreeing to list the property for a higher price! That's actually counter-productive on both counts).

That said, everything the listing agent needs to know pales beside what a good buyer's agent needs to take into account. I doubt I or anyone else will ever have the buyer's game completely down. It isn't that I know everything or will ever be some sort of shining exemplar of buyer's agents; I'm simply one of the best that happens to be available. I look at between 20 and 30 properties most weeks, every week of the year - 1000 to 1500 properties per year - and I learn new things pretty much every time I go looking. I learn things about the clients needs and desires by listening, and keep on listening. The future of the buyer's agent side is making sense of the information overload, debunking bogus information which lazy sellers and listing agents insist upon proliferating, and sorting better alternatives from those not so good, including knowing how to spot a Vampire Property. This starts at learning what a given buyer's priorities and needs are, and figuring out what areas they may be happy in and can best afford, and going from there to making comparisons between available alternatives.

In neither of these alternatives is simply having your real estate license and NAR membership certificate up on the wall going to help you extract an agent commission, particularly a larger one as opposed to a smaller. That license may get you in the door at the dance, but it's not going to fill your dance card. For that, you've got to bring something real to the situation, and the one thing clients are after, and always are going to be after, is expertise. Access, they're going to be able to get anywhere, but someone who really understands what's going on in this hugely complex transaction involving debt that most people are going to be paying for the rest of their life, and distills the specifics into something these clients can understand. Furthermore, agents relying upon chain affiliations to bring walk-ins to their door? The days of that happening are numbered, and the number is no more than the number of days until someone puts their ducks in the row to really compete with the MLS.

You're also going to need the right attitude. People are getting better and better at identifying shills. Even if you've got an exclusive contract, which are going to become more scarce, even those aren't forever and the chances of an agent being able to enforce it in spite of whether they helped an actual transaction or not are shrinking faster than Lily Tomlin ever did. Whether agents like it or not, it's becoming easier all the time for consumers to walk out on contracts with losers who conned them into exclusive contracts. If you want people to keep working with you, you need to demonstrate that this client's good is the most important thing in your world, and that's not something anybody can fake for very long. If they understand this and the expertise you're bringing to the table, they'll stick with you by choice unless they're con artists or agents themselves. I had one client not too long ago who admitted they'd been planning to ditch me for a part-time relative and decided not to because I was providing things they knew the relative wouldn't and couldn't. The non-exclusive contract which is all I ask for is plenty to discourage that, while leaving them feeling free to ditch me if I don't get the job done - so I'm motivated to get the job done, and they can know they're getting my best efforts risk free for them, not to mention that it would be entirely pointless for me to try and hold them to an exclusive contract they wanted out of. It's both pointless legally and bad business - so why ask for an exclusive in the first place?

However, the real estate profession has made a horrible botch out of stressing expertise and education thus far, which is one reason why discounters have thrived by offering nothing for less. The reason for this is that it would interfere with the profits of those national chains that control NAR. They can't hire newly licensed agents that used to work fast food fresh out of the local shake and half-bake real estate school, dress them up in a suit, and expect them to bring commissions into the brokerages if it's easy for consumers to sort out who has real expertise and who doesn't. The licensing exams themselves are pathetic, and intentionally so, in order for the brokerages to have a steady supply of inexperienced shake and half-bake licensees. No math more complex than a four function calculator, and you can use a four function calculator on the test in California (which is supposedly one of the harder exams). How can it be acceptable for someone who hasn't even been tested on the ability to set up a mortgage calculation on a calculator or spreadsheet to have a real estate license? It'd be bad enough if that license didn't include the ability to originate loans, but it does. There are a couple of questions on "what is this type of structure called?" but none on usages, advantages, disadvantages or weaknesses! I understand there's only so much that can be covered in 150 questions, but the NASD has 250 questions on their series 7 exam covering a far more limited expanse of material. There is no good reason why the real estate exam should not be a minimum of three full days, and requiring all previously licensed agents to take the new exam as well. No reason except that would constrict the supply of naive freshly licensed shake and bake licensees (For that matter, the most important knowledge for agents can't be tested, because it's both local and changes too quickly with time. It makes no sense to ask me about the neighborhoods and market in at the other end of the state - I not only don't know, I can't take the time to learn without forfeiting the time to create and maintain the requisite market knowledge for the area I do work). Alternatively, the state can do away with licensing altogether in favor of simple registration, and let the market develop informational resources as to the competence of a given agent. Consumers would demand it, and they'd be willing to pay for it whether directly or indirectly. Finally, don't get me started about all the "designations" NAR has cooked up that amount to a way to impress the ignorant and gullible ("Sell the agents the right to put some meaningless initials after their name to impress the marks!")

Above all, however, the future of real estate agency is going to be about accountability. If the industry won't develop real and reasonable performance metrics for individual agents, somebody else will. That's living in the age of transparency for you. Furthermore, you can't stand up and say you're the expert in their corner unless you're willing to defend your performance later in a court of law. Brokerages have a proliferation of forms that add nothing to the process except to make it more difficult for them to be successfully sued and distract clients from what is really important. But you can't tell the client you're an expert worthy of hiring, that's going to get paid however many thousands of dollars from their point of view, if you're going to ask them to sign fifty forms that say you're not responsible for the results of your work. Well, I guess some slick salespeople could and do, but it's hardly the sort of thing to inspire confidence in any rational client. We're neither inspectors nor appraisers, and especially not lawyers, but that doesn't absolve us of trying to solve those issues before members of those professions get involved, and do our best to help the clients understand and interpret when and if those professions do get involved. In my experience, ninety percent of inspector and appraisal issues should be solved by the agent before there's an offer, and about the same percentage of legal problems can be prevented by agent diligence beforehand. Especially the major ones. But if you make clients sign forms that say you're not responsible for this, what are they really getting in the way of an expert they can hold accountable? And if you can't be held accountable, what are you really selling besides your winning personality? They can get a better stand up set for forty bucks down at the local comedy outlet. Why should agents make a hundred times that if they can't be held accountable for performance later? The short answer is that we've got to make this confusing process that kills a dozen mature redwoods for pulp understandable and transparent, we've got to perform by making certain our clients can show a profit on the money spent hiring us (at least in the aggregate), and if we're not to be held accountable, what real assurance does the client have that what we have represented is true? Everything we add to the process that doesn't further one of these client goals is either obstructionism or distraction from what's really important, and a counter-balancing reason not to do business with us.

Caveat Emptor

Original article here

I have said repeatedly that buyer's markets are not the time to be selling a property if you have any choice.

There is one exception: People looking to turn around and buy a more expensive property.

If you're looking to move down market, do it when things are hot. But moving up works best when the market is cold. This is because the price of the more expensive property is what influences these moves the most.

It's still better if their budget will stretch to hanging onto the current property while buying the new one, because when the market turns they'll still be able to sell the first property for more than they can now. Nonetheless, it's still a good idea to move up in a buyer's market - even if you need to sell your current property - provided you can afford to do so.

Let's do some math! I'm going to use a real example. Let's say you bought a condominium ten years ago for $150,000. At peak of the seller's market, it was probably worth about $330,000 or more. Now it might be worth $260,000. Even if you bought with 100% financing, as long as you haven't taken cash out, you only owe roughly $130,000. Less 8% cost of selling, you're netting about $110,000 from the sale. Less roughly $10,000 for closing costs, and you're looking at having a 20% down payment for a $500,000 property, and you're still a conforming loan. In my favorite zip code at this update, that buts a really nice 4 bedroom 2000 square foot detached home with a panoramic view of the city and no Homeowner's Association! Not to mention the commute is pretty darned friendly for most folks and the public schools are top notch. Total monthly outlay, for loan, taxes, and insurance: just over $2500 per month ($2507. at more typical loan rates we're likely to see soon, more like $3000). Income to qualify: Just under $5600 per month, and that's with a thirty year fixed rate loan that I could lock right now without any points to the borrower, so the closing costs for the loan and property would be well under $10,000. About half that, in point of fact.

Now, let's say you wait for the market to recover. Let's say everything is a straight linear computation, even though it won't be - I'll bet you money that the more expensive home goes up further, faster, not to mention relative bargaining positions of a condominium owner versus a detached property owner. Let's say the loan rates stay exactly the same as today, which they won't, because in a period of high demand and increasing prices, there's more competition for money and therefore, higher rates. If you waited for that condo to be worth $330,000 again, that property you can get for $500,000 today becomes a $635,000 property. Straight line proportionality. You net roughly $173,000, again less $10,000 for closing costs on the new property. Now you do have slightly better than 20% down payment, to be sure, but you've still got to borrow $471,000. You can either do so with a Jumbo loan, or via a conforming first with a Home Equity Loan on top of that. Even using the full $10,000 for closing costs, your rate ends up higher. Equivalent cost per month that way: $3760. Income to qualify: a little over $8350. For making the exact same exchange, under conditions that I'll bet money are going to be less favorable than this. At this update, the market for desirable single family residences has definitely come back strongly; the market for condos is still languishing.

If you decide to go the route of the conforming first with an equity loan on top, it's a little more favorable: Assuming a 720 credit score, you can have a rate of 8.25% on a fixed rate 30 due in 15, giving you a total of just over $3650, saving you about $100 per month and cutting your income to qualify to about $8120, as opposed to the $6650 you'll need to document to make this exact exchange right now. Some people can work a little harder or longer hours, charge more for their services, etcetera, but most people make what they make. The one is less than a standard deviation over area median income; the other is almost two and a half. That's an awfully large number of people priced out. Assuming a normal distribution of incomes and given San Diego's median and standard deviations, (via Hyperstat) we're talking about the difference between 20.46 percent of the population and 1.30 percent of the population, a factor or 15 decrease. The difference between more than one family in five and less than one in 75 being able to afford said property, holding assumptions constant.

It is to be admitted that market constraints in the latter case might keep the prices down somewhat, but that's only as a counter-weight to all of the other forces, and it is quite easy for a mathematician or economist to prove that the actual equilibrium point will still be significantly less affordable than the current state of affairs. Don't worry, I'm not going to drag you through that. Nor are we talking properties that the average family can afford with this particular example, but the principle applies to every affordability range, from a bottom of the market condo to the top of the line. Nor does it take any great mathematical skill to tell you that the affordability of a good that everybody is trying to buy right now is less than that of the same good when large numbers of people are trying to sell and very few people want to buy. Think any number of hot tech gadgets or "must have" Christmas toys. Real estate isn't that much different, economically, but people can have perfectly great financial futures without the latest tech gadget. It's unlikely they will have an equally bright future without owning at least the property they live in. In a buyer's market, property is affordable because lots of people want to sell and very few want to buy, leading to a huge disparity between the number of people who could afford a given property if they wanted, and the number of people actually willing to buy, and thence to greater affordability. When a larger number of people are ready and willing to buy, the affordability will decrease. It's all a matter of simple supply and demand.


Caveat Emptor

Original article here

(This was originally written February 16, 2006, but it's relevant still)

One of the occasional questions I get from people has to do with why the housing bubble got so big (or if you're one of those still in denial about it, how prices jumped so far so fast).

This has to do with several factors. Legislation made real estate investments more attractive. Interest rates got low, and nontraditional loans proliferated. People took their money out of the stock market because of the tech bubble popping, and wanted to invest it somewhere. The feeling that the housing market could never go anywhere but up. And I will address all of these issues in the coming paragraphs, but the largest factor is and was psychological. People were simultaneously scared that if they didn't buy now, they would be locked out of the American dream, and avaricious in anticipation of buying and flipping properties for multiple tens of thousands of dollars profit.

The first enabling factor happened in 1996. President Clinton sponsored legislation giving huge tax exemptions to gains from the sale of personal residences. There were and are good arguments for doing so, nonetheless it had the effect of making real estate a more attractive investment. When a married couple can make up to $500,000 tax free over their basis every two years, that's a major incentive to start moving into a new house every two years in order to fix it up, or at least hope for a gain in fast growing areas. By itself, this was a minor factor initially, but by making real estate such an attractive investment (literally the best there is, considered in a vacuum), it started the bubble off. Since it hasn't been repealed yet and may never be, the value increase from this aren't really a bubble component, but the value increase for what was a one time systemic shift whetted appetites, even while the dot com bubble (itself a fear and greed phenomenon) was going on.

The second enabling factor was that interest rates got low. This meant prices had the leeway to rise, as most people buy homes (and other property) based mostly upon the payment. When 30 year fixed rate loans go to 5 percent, the same payments buys a lot more house than it does at 7.5 percent. If you could have afforded a loan for $100,000 at 7.5 percent, you can afford a $130,000 loan at 5 percent. Instead of a $300,000 loan, you can afford $390,000 for the same payment. $500,000 becomes $650,000. Even though rates went up after early 2004, this helped start the phenomenon.

The third enabling factor was that people had gotten burned in the stock market as the dot com boom deflated, and the real estate market was doing well. With both sides of "fear and greed" working the equation, this amounted to quite a bit of incentive to chase returns in the real estate market. "I just took a bath in tech stocks, but look at how the real estate market is going!" This is known as chasing last year's returns, but large numbers of people do it. Consequently, quite a bit of personal wealth was dumped into the real estate market. This had negative consequences on the stock market, exacerbating that decline, and for the real estate market, dumping a couple trillion dollars into the demand side of the equation didn't exactly hurt real estate prices. Supply and demand are always working. The important trick is to separate fear and greed, which are real but have mostly short term effects, from real long term changes to the market.

The thing that really drove the whole thing from behind the scenes was that the federal government "encouraged" lenders to expand their creditworthiness criteria. Thirty agencies of the federal government got together and used the Community Reinvestment Act (as renewed in 1995) as a bludgeon to force lenders to lend to minorities at the same rates (and rates of approval) as non-minorities. Since certain minority groups are statistically less scrupulous about doing things that maintain creditworthiness and financial stability (just as other minority groups are statistically more scrupulous), that meant relaxing standards. The loan market controls the real estate market. When practically anyone could get a no income documentation loan they couldn't afford for 100% of value, macroeconomic constraints upon price vanished.

Members of my professions, meanwhile, did absolutely nothing to slow the madness. Indeed, they added as much fuel to the fire as they could. As I have said elsewhere, buying a home really is a fantastic investment, all things being equal. It literally clobbers renting and investing over the long term, with those last four words being the critical part. There are limits, and many agents and loan officers went over them and three states beyond. Anybody who takes any real estate agent's unsupported word for investments and sustainability probably needs a guardian. Reality check: Here's a person who makes thousands of dollars if they tell you you can do something, and nothing if they tell you you can't, and has very little responsibility in the law for telling you lies. They're not financial advisers, after all. What do you think the average person will tell you in this position? (And before anybody sends me email or comments about the "superior ethics of Realtors®" they were just as bad statistically and worse morally, because they were holding themselves out as ethically superior, thus using the propaganda to allay legitimate concerns. I'll believe Realtors® offer some ethical advantage when I start seeing the Boards of Realtors® imposing some real disciplinary measures upon significant numbers of scumbags that the state regulators don't. Aside from advertising to build brand awareness, I haven't seen anything that the Boards of Realtors® contribute to real estate practice, and they actively work against consumer interests in significant ways.)

So there we are, with these factors doing everything they can to drive values up. This goes on for a little while, and now psychology starts becoming a real factor. "They're not making any more land!" making a scarcity argument. "Real Estate always goes up over the long term!", making a safety argument, and ignoring any number of past bubbles and downturns. Heck, I remember four previous ones in southern California! "You can always sell for a profit!", ignoring transaction costs, which are significant, and flat out misrepresenting liquidity. Real Estate can beat anything else, investment-wise, but it is certainly the least liquid class of investment that comes to my mind, as well as being sensitive to many factors beyond your control.

Couple this with a couple of years worth of twenty percent returns, and the feeding frenzy really kicks in. There starts being a real fear factor - people get afraid that if they do not buy now, they are never going to be able to afford a home. When prices rise by 50 percent in two years and wages rise by six, who can really blame them? Most people do not have the economic background to sit back and consider who buys houses, and what controls housing prices. So the mentality of "buy now or rent forever!" took hold, further exacerbating the rise. People were willing to do literally anything they could to qualify for a home, lest they be unable to qualify forever. And with the thinking detailed in previous paragraphs, they were told that "Even if you have to sell in a year, you'll still come away with a huge profit!" Yes, that's greed again, rearing its ugly head.

Up until this point, things were within reason. But into this situation stepped the lending community, particularly the sub-prime lending community, driven by the federal government breathing down their necks. More and more lenders started being willing to loan 100 percent of the value of the home. "Hey, why risk your own money when the bank will lend theirs?" This drove market leverage to never before seen heights. Furthermore, in an effort to sustain volume, lenders started a trend of competing ever harder for the most marginal case. Stated Income, Interest Only, and short term hybrid ARMs proliferated (The most common sub-prime loan is only fixed for two years). Finally, lenders started pushing the Negative Amortization loans, for those borrowers who couldn't really make even the payments required on the short term interest only alternatives.

Lest anyone think otherwise, the community of real estate agents was fully on board with this. Always higher, and fast increasing, prices meant they made more money in commissions from selling the same number of homes, and the apparent virtues of real estate as an investment of the moment kept seducing those who did not know any better. Those few voices of sanity were drowned out, and many left the business. There just aren't that many people who really qualify to buy homes at the peak prices we had based upon the traditional metrics, even relaxed as they have become, and if you won't put them into something they can't afford, somebody else will. Furthermore, during this period, more and more real estate agents were starting to do their own loans, further isolating any voices of sanity in the loan community. Speak the truth that a client probably cannot afford a loan once, and the real estate agent will never bring you another client again, and will try everything they can to pry any clients that they can away from you. After all, you 'cost' them a commission once. Interest only, and negative amortization loans further proliferate, as agents try to persuade prospective clients that they "really can afford those payments." Forty year loans start making a comeback, where they were all but extinct, and fifty year loans are introduced. Sub-prime underwriting standards are loosened until they ignore what happens when these hybrids adjust (or Option ARMs recast) and concern themselves only with the minimum starting payment. A larger and larger portion of purchasers is forced into the sub-prime market if they want to qualify. And still property values rose.

Or, more correctly, prices rose. The actual property value certainly wasn't growing that fast, only the common perception of value, aka price. People were getting away with these terrible loans, complete with prepayment penalties, because even though they weren't able to make their payments in many cases, prices were still increasing fast enough such that even if they sold relatively cheap, in order to unload the property in a hurry, and paid a prepayment penalty, they were still coming away with money, further aiding the illusion that there was no way not to make money. When workers are making more money buying a house and holding it for two years then selling than they are at their jobs, that's an incentive to keep doing it. That's an incentive for more and more people to get in on the act. And the feeding frenzy builds. Fear and Greed. When someone holds a house for two years and sells for a huge profit despite the fact that they did nothing to enhance the home's value, that has the appearance of easy money. When people start buying with the intention of short term flipping without doing any work (We call this "Hoping for a bigger fool"), and when they'd call to see if I knew of any such properties and hang up when I'd start telling them about properties that really were good investments but needed work, I knew the end was coming very soon.

The first group to holler "enough!" was not the lower income folks who were getting priced out of stuff even at the lowest end of the market. It might be what you'd expect, but it wasn't the case. My theory is that those people simply don't know any better, and didn't think they could afford to wait. It was the better paid, more economically savvy buyer at the higher end who first called "Bull****!" At least here locally, higher end McMansions and such were the first to start sitting on the market. These prospective buyers made plenty of money, and knew they weren't on the verge of being priced out completely. If they were right, they'd buy a better property when things fell apart. If they were wrong, such is life, and they could still afford something. Meantime, they were going to rent.

Lessons here: Always separate psychological factors from real market shifts. The general rule is that once they find an investment that appears to be working right now, the crowd always overreacts. Many times you will make more money in the long term by bucking the obvious trend, particularly if that trend is Fear and Greed driven.

When I first wrote this piece in early 2006, the advice I gave was these two paragraphs:

"If you are in an untenable position with your loan right now, whether because it's negative Amortization or interest only or just about to start adjusting: Either sell now for what you can get, refinance into something fixed for at least five years right now, or be resign yourself to disaster. With the yield curve inverted right now, there is practically no spread between the five year ARM and the thirty year fixed rate loan. Even someone who is as huge a fan of the 5/1 ARM as I am has to admit that, at the moment, the thirty year fixed rate loan is looking very attractive by comparison. When you get a much better guarantee of the rate not changing, for the same price, and the the loans are otherwise identical, what's not to like? As I've said before, you can survive and prosper when you're upside down on your home, as long as you have the right loan for it.

If you can make the real payments on such a loan, I would do it now while appraisers still have the ability to appraise your property for near peak values. If you lose the ability to appraise for near peak values, then you may well be a member of that rather large group in many parts of the country where the market will no longer bear a price greater than the loans on your property. When you owe more on the property than the market appraisal, then for all practical purposes you are stuck in your current loan. If it adjusts, amortizes, or recasts, you're suddenly going to be making much larger payments. If you qualified under one of the less sustainable programs I noted earlier, when this happens you are going to be in a world of hurt, and probably unable to refinance. Most common result: Losing the home, credit ruined for years, and a 1099 from the lender that says "we lost money on you!", for which the IRS will demand taxes. If your loan is going to start asking for higher payments soon, and you can not refinance, or cannot afford to refinance, it's time to sell, right now."

Very few people took this advice then. Lots of people wish they had now. Now, my advice is significantly different,

Caveat Emptor (and Vendor)

Original here

There is no such thing as a free lunch, but lots of people will pretend there is.

It seems to me that many people consider compensation earned by real estate agents as paying some kind of toll. They think of it as admission to the world of MLS, to showings and writing offers. Kind of like a tollbooth on a road somewhere. If there's another place just down the road that offers the same access cheaper, it makes sense to pay your access fee there.

If you think of what an agent or loan officer makes as a toll, just a cost of getting into the arena, it makes sense to go cheap. If you realize it is a payment for knowledge, expertise, service, someone who not only helps you CYA and prevents major mistakes, but makes a positive difference to the result, a different dynamic emerges.

There are existing offices modeled after every level of service from basically nothing on up. It costs them nothing to say "Full service for a discount price," but that doesn't make it true. Like a certain ex-president who "did not have sex with that woman!" you have to consider what definition they're using in making that claim. If sitting in their office with MLS access and a fax machine is "full service" for them, by their lights they are providing "full service for a discount price." Amazing how slippery the concept of "full service" is, which is why you should ask for specifics on what services are and are not included.

Remember how in my loan article Questions You Should Ask Prospective Loan Providers, I listed a whole bunch of questions the intent of which was to nail down how much of the truth they were telling you, you want to ask prospective agents what services their fees cover. Among other things, this exposes the "full service for a discount price" claim to be yet another Great Lie on the level of "I gave at the office," "The check is in the mail," or "Yes, I'll respect you in the morning."

The bottom-most level is essentially a fax machine and MLS access. I've met some where the fax machine was purely a service that converted email to and from from fax. I've even met some where I suspect they didn't have MLS access and were working off one of the free public real estate sites. They never leave the office; all they are about is access. This level might be good for you if you know as much as a good agent, like say, you were a good agent but lost your renewal application in the mail. Otherwise, you're setting yourself up for an experience like my first purchase.

Above that is the level of service that actually help you with paperwork. They still never leave the office, but at least they've got access to WinForms and some kind of checklist for paperwork. They're still not helping you with your investigations or marketing, but at least you might get some kind of more or less complete list of the disclosures you're required to make as a seller, while as a buyer you're going to be quite firmly told to get an inspection. Not that they're going to be there for the inspection, or help you interpret it, or help you figure out if maybe you need something more. They may or may not be aware of a large percentage of traps for the unwary that lie in these documents and the inspection, but at least they help you with the most basic level of CYA.

Assistance in negotiation may or may not become an option at this level. Since the ones at this level never go out and look at property, they can't have any real clue as to its virtues and faults, especially as compared to whatever else has sold in the area in the last few months, but at least they have may have enough of a clue as to general market conditions to keep you from making or accepting the wrong kind of offer. This is the level of the CMA, or comparative market analysis, which takes somewhere between 5 and 20 minutes and about the intelligence of Mongo from Blazing Saddles. At least you shouldn't make an offer or accept an offer that is completely and totally off base for your type of property in your area. The higher up the ladder of service you go and the more involved with the specifics of your market and your property the agent is, the more valuable this service becomes. Top agents that know enough about the property and the "comparables" can potentially negotiate the other side ten to fifteen percent (or more, in a market that favors you) from the numbers that someone using a lesser agent might be stuck with. I know because I've seen it happen - I've made it happen or not happen, and in one case, seen the next buyer pay more than fifty thousand dollars more than the contracted price I negotiated for one buyer who suffered an attack of insanity at closing.

At the next level above paperwork, you've got the agent who may go out and visit the property. For a listing, they're going to measure your property, take some notes for the listing, and maybe give some advice as to how to stage it or put you in touch with a stager who pays them a referral fee. For a buyer, they're more or less willing to open the front door on properties you've told them you want to view. Both sorts will make the effort to sell the property, the listing party more than the door opener. The listing agent's client is only happy when the property sells while most buyers bristle at more than a certain level of sales talk. In both cases, however, they're trying to get that buyer to sign up with them, preferably (from their point of view) with an Exclusive Buyer's Agency Agreement, so the pressure won't be real high in either case. This is also the level at which open houses become something that agents really want to do, in order to snare buyers' business. It is to be noted that there are a lot of agents who think they really are providing as much service as any other agent with this level of service. They aren't. They're still clueless or nearly clueless as to how it compares with everything else on the market in the area, or that was on the market, because they haven't gone and visited any on their own.

Somewhere along about this level of service and above, the agents may actually be willing to get out of the office to meet the inspectors and appraiser. After all, they've now got a negotiated agreement and it's in their interest to further the transaction so that they can get paid. They may also help you interpret what all of these reports say. Not necessarily; but at least it starts being a possibility, rather than pushing all of this off onto the clients or the other agent. This is where a lot of lawsuits start, so many brokerages actually prohibit their agents from being present at inspections - at most they can open the door and leave. I'm not a lawyer, but if I'm presenting myself as being an expert at real estate, not being present for the inspection seems to be evidence of gross negligence, just on the face of it. On the other hand, if the clients are representing themselves as being competent in this area in order to receive discounted service, that's fine with me. I actually make more per hour of my time with less legal liability.

Above this level of service, the services provided by good listing agents and good buyer's agents diverge dramatically. So much so that they cannot even be meaningfully discussed at the same time. Since a listing agent is essentially a marketer while a buyer's agent is charged with analysis and comparison among alternatives, this shouldn't surprise anyone. They are different functions at the heart, and many agents who are very good at one are considerably less proficient at the other. Fact. I can point to great listing agents who are putrid on the buyer's side, and vice versa. Often, it's as simple as attitude. Some listing agents can't stop thinking like listing agents, while some buyer's agents can't stop thinking like buyer's agents, and they are completely different thought processes. It took me a while to learn this, and I can point to a lot of agents whom the evidence indicates have not yet done so.

For the listing agent, the question largely resolves to pricing, plus what degree of staging and precisely how much marketing they are going to do. Note that even the most exhaustive marketing campaign is not likely to get more than the property is worth, but it can mean you get top dollar instead of significantly less, particularly if you price it correctly and have the property ready for the market when it hits the market. Pricing too high to begin with "to see if you can get it," is the mark of an inferior agent "buying" the listing, as you won't be likely to get the higher price and it will almost certainly reduce the final sales price by more than any lucky windfall might be. Particularly in the buyer's market most of the country has right now. These are all obvious things of value - when that agent spends time and money marketing your property, they're spending their own resources, not yours. How to word an advertisement, when to run it, where to run it - all of these are expertise. Go check out how much marketers with far lower sales who don't use their own resources and who draw a salary get paid make in the corporate world before you make a snap judgment as to whether it is or is not worth the money. Here's one example, and keep in mind that this is only a part of what a good listing agent does.

On the buyer's agent side, the question is more singular: How much property scouting are they going to do? Are they going to wait until the client asks to check out a property or are they going to go check out every possibility in the market? Are they going to go out on their own to eliminate definite turkeys before telling you about the cream? Still more important is are they going to tell you about good and bad, reasons why it's good and why it may be deficient, on every property, but that's something you can only observe in action. This is the paramount and unanswerable reason why you shouldn't sign any exclusive buyer's representation agreements unless you are so certain of this agent that your spouse can tear your arm off and beat you to death with it if you're wrong. They need to cover what the property has and what it doesn't, and what it's going to take to bring it up to an acceptable level where it is deficient. Structural flaws, basic amenities, floor plan, lot layout, etcetera, not to mention location location location. Not just now, but for any future sale that you might later decide to make. This whole thing is so time intensive it can't profitably be done on any basis other than the complete combo package of buyer's agent services, and it requires a level of expertise and market knowledge that cannot be acquired on the fly, and aren't cost effective to learn for one transaction. You'd make maybe thirty cents per hour. I might believe fifty or even seventy-five cents per hour in a high cost area like mine. However, if you have an agent with this knowledge and the right attitude, there's nothing else that will make nearly so much difference, both in terms of price and in terms of final satisfaction with your purchase.

If you don't want "the full package", that's fine with me and every other agent I know of who's capable of the full package. As I said, we make more per hour with the lesser packages even if we get paid less. But we can also work with a lot more buyers wanting less intensive service, or a lot more sellers, and make more money overall. Furthermore, it's a lot easier for someone who makes a regular habit of doing "the full package" to perform lesser services than it is for someone who doesn't to perform greater. That market knowledge we get from the other clients we have? It doesn't magically disappear because this client isn't paying me to run around scouting properties. Usually I'm working with multiple clients in my area and while one wants the whole nine yards, another doesn't. Just because I'm not scouting for you doesn't mean I'm forgetting about all the stuff I scouted for someone else. But someone who doesn't make a habit of it is working from the same zero base I'd be working from outside San Diego County.

Somebody once asked me about Hourly pay instead of commission for agents. Just as you'd expect, agents can charge less if the client is going to pay an hourly rate for their time regardless of whether there is a transaction. That's called transaction risk, and is a real risk of this business - the chance that, if you're paid on commission, you can spend dozens to hundreds of hours with someone, as well as lots of money, and not make a thing. If the client chooses to bear the transaction risk, that's fine with me, and they'll at least have the opportunity to pay me less for a successful transaction - although they'll still pay the cash if there's not. As I just wrote, that's the risk they are choosing or not choosing to take. The cash alternative is potentially a lot less expensive, but I haven't met a whole lot of people who like the idea of writing me a check for actual dollars they earned and saved without any certainty of a happy outcome for them. When you get right down to it, most clients do not want to assume transaction risk. But neither agents nor clients can have it both ways.

Some agents have huge lists of what they do, specifying point by point all the services they provide, splitting the services up into the largest number describable to make it seem like more. Others lump them together by more general categories, and may do anything that belongs within the due diligence and responsibilities they agreed to, where the "splitter" figures since it wasn't covered, they aren't doing it. Nonetheless, either way is basically valid. A written representation that they perform specifically named services obligates them to do so, but there is rarely a significant difference between someone who does that and someone who lumps them into more generic categories. I suppose it's all a matter of whether you want someone with a detailed checklist and someone who goes around looking for something they might have missed even though it may not to be on a checklist - but it applies to your transaction.

There are also agents who want a full package price for discount service. Mostly they are working under a well-known chain nameplate and have an extensive advertising campaign telling the suckers how great they are. This procedure, especially when compared with what other agents are offering, will also help you find out about the money you'd waste with them before you sign their agreement.

You may have noticed that I haven't attached any specific numbers to any of this. That's because it's both variable by market and negotiable within a market. The more services you want, the more money the agent will want to make. Ditto with resources, both time and money, you ask them to invest. If you're determined to get the best bargain you can, you need to shop agents and compare their competence and their attitude as well as their price. If you want to negotiate pay with a professional negotiator, well I've got admiration for your chutzpah. Plus I have to admit that it's a fair test of those abilities. Even if those negotiations turn out bad for you, imagine where OJ Simpson would be today if he had a cheap lawyer. Or Bill Gates, the massiveness of whose fortune lies in one legal victory over IBM, as well as his lawyers outlasting the government anti-trust lawyers at a later date.

My service bundle is 100% negotiable, and not being a slave to NAR or the brokerage oligarchy that controls it, I'll fight any effort to change this. My understanding is that any such attempt to force us to conform is doomed under California law (at least), but I am not a lawyer and I'll defer to other expertise there if it wants to chime in.

But I do think it reasonable that agents and brokerages be forced to specify what services they do and do not offer, and what they are and are not responsible for in a given transaction, at least by category. Good full service agents do this now. The next dedicated discounter I see who does this will be the first. The very services which are most time consuming and lead to the largest liability are the very ones that dedicated discounters will not fulfill and will do their darnedest to pretend don't exist. But they're also the ones that make the most difference for most clients, and would rank as most important for those clients if they were asked to rank them.

Caveat Emptor

Original article here


We live in (A California city). In a 2 bedroom 1 bath home on approximately a 20,000 Sq. ft. lot. It is easily worth 500K to 600K with a current mortgage of $116,000. The mortgage/Title is in the name of my father and his wife 90% and myself and my wife with a 10% interest.

My father who is 75 and retired wants to take out about $80,000 cash which would create a new loan of approximately $200,000. He currently has a very small income from investments and lives in a paid off home in (out of state).

He would like to gift this (California) home to us and we would like that also.

Based on your expertise what is the best way to transfer the property to my wife and I and at the same time obtain a cash out stated income loan. How will a lender expect this to be handled? Do we all qualify together and the lender then allows my father to transfer/gift title at the close of escrow?

I realize that whatever lender wants to make the loan they will want to have my wife and I qualified to be on title. Since we have a 10% interest I would assume that we could all be asked to show assets and income. This might be complicated. I am a realtor but I haven't made much money in the last two years because I've worked on a business startup currently breaking even with no income.

My wife has a terrific long term (16 yr) job with a law firm. Gross income $85,000. All of our expenses are very low and the last time I looked our credit was a 785 FICO score. When I do the front end ratio 28 with only my wife's income it appears to be no problem at all. When I do the backend it's a little more snug but definitely doable. I've racked up some credit card debt funding the startup business. I can pay it off but I would like to retain working capital handy for my business.

I believe a stated income loan would be the best way to go.

Here are the assets and documentation I would be willing to show, and the lenders exposure to the property.

1. We would have approx. a 36% LTV at the end of the transaction. 300k+ equity
2. Assets in a 401K of $200,000 +
3. Approx. $30,000 in savings accounts
4. Approx. $40,000 in negotiable stocks
5. I will of course provide credit reports.
6. Employment documentation for my wife only.

I believe my father and his wife have approximately $200,000 in mutual funds plus social security and she has a part time job doing a water district's billing.

This one is fairly complex on the surface. Issues that I see right off:

-family transfer
-documenting current interest
-structure of transaction
-Will your father be selling you some of his interest as part of this transaction?
-likely the cash out quitclaim issue
-Who is going to be primarily or completely responsible for new loan
-verification of rent/mortgage

You say that you are already on title of record, and that the desired end state is to have you and your wife owning the property outright.

The best way to structure this is probably as an actual sale transaction. Your father selling you and your wife a larger interest. Because this is a family transfer, you still would likely qualify to continue having it taxed based upon original acquisition price, but that needs to be checked, either through the county or your title insurance company for the transaction. You also need to scrutinize the current owner's policy of title insurance to see if it will continue coverage. There have been changes in the industry since the property was bought. If it doesn't, you're going to want to buy a new policy.

There is a standard policy with every lender I've ever done business with. If someone is brought onto title via quitclaim, you can't get cash out for six months after that date. This prevents several sorts of fraud. I am going to presume that you've been on title longer than six months.

There are three ways that suggest themselves to structure this transaction. Each have their potential advantages and disadvantages. First though, we need to take a look at another issue.

In all real estate transactions, and for all loans, the method of evaluating the property is the so-called LCM, or "Lesser of Cost or Market," method. Market is what similar properties around yours have sold for within the past twelve months, and that is what it is, and is computed by the appraiser.

Cost is the purchase price. In refinances, there is usually no purchase to consider, because the value has changed since purchase. In purchases, there usually is.

Whichever of these two numbers is less determines the value of the property, as far as the lender is concerned. It doesn't matter if similar properties are selling for four million dollars - if you buy yours for one hundred thousand dollars, the lender will loan as if the value was $100,000. It can't be any higher than that, because the seller willingly sold to you for that amount. If the property was worth more, they would have required you to pay more.

For family transfers (and indeed, any related party) this presumption goes out the window. Parents do all kinds of stuff for their kids that they wouldn't do for anyone else, and vice versa. Lenders still won't loan money based upon a number above nominal purchase cost, however.

Furthermore, there have been a sufficient number of scams over the years that they will take additional measures to protect themselves. The presumption of willing buyer and willing seller is violated on both ends of these transactions, and many times it has been A selling the property to B for an overinflated price for the purpose of getting a loan and departing at midnight, leaving the lender holding the bag. Remember, I told you in my very first article here, is that because the dollar values are so large on real estate transactions, every single one is heavily scrutinized for fraud. There's a reason for that. These additional measures differ from lender to lender, and some lenders will not undertake related party transactions at all. When I'm getting loan quotes from lenders, if it's a related party transaction, then words to that effect are the first words out of my mouth. It saves a lot of time and effort.

Now, I mentioned there being three ways I can see that make sense to approach the transaction?

The first is a full price sale with upfront gift of equity. You buy the property for $600,000. They sell it to you for $600,000, but give you $340,000 in equity in addition to the $60,000 you already own. You get a loan for $200,000 (actually a bit more to pay for costs), the old loan gets paid off, your father gets his $80,000. This has the advantage of being a true picture of what's going on. The problems are that to the lender, this screams fraud. They're not likely to be too worried that its for below market value, but $340,000 is a lot of money. They are going to want to see evidence that there's not some loan going on under the table between you and your father, because that would affect whether or not you qualified for their loan. Furthermore, estate tax is back to where it started over a decade ago due to the law sunsetting, and this would have significant estate tax implications.

The second is full sale price with subsequent gifts of equity. Sell it for full price, from you and your wife as ten percent and your father and his wife as ninety, to you and your wife as twenty-five percent and your father and his wife as seventy-five. They can then give you a gift in accordance with IRS annual gifting rules (at this update, $17k per year from each donor to each recipient, so potentially $60k per year). You can even combine this with the initial sale, making your interest thirty percent, which might make the loan easier. In this case, you are all four probably going to be on the new loan to get the best rates, as $200,000 is about thirty-three percent of $600,000 - a larger amount than the equity you and your wife currently have under this scenario. There is a further major difficulty with this lies in the possibility that the complete equity may not be gifted in your father's lifetime.

The third way is to sell the full property at a reduced sale price. Approximately $300,000 would probably be sufficient. Everything here is like the full price sale, but they're only giving you about $40,000 in equity upfront - which is within the IRS single year limits (two donors, two recipients). The bank has less difficulty believing that (although they're still going to want a letter stating that it is a gift!). The downside is that it's still a family transfer, and the fact that if you wanted to refinance within a year there would be appreciation issues on whether or not the bank would believe you.

All three ways have their bumps and walls which you very well might run into. Each lender has their own anti-fraud measures, and sometimes, what might otherwise have been the best way to structure the transaction will fall afoul of them.

As to the loan itself, I have good news and bad news. I'm going to start with the bad. Verification of Rent/Mortgage is going to rear its ugly head no matter what you do. The bank is going to want to see some kind of evidence that you and your wife have been making rent or mortgage payments every month, and from all that I can see in the email, there's no evidence to support this. The only person who appears to be in a position to verify that is your dad - unless you've been writing the checks for the mortgage and can prove it. The lenders may or may not accept your father's word for it, and they are going to want evidence. If you're actually on the current mortgage, this would be extremely helpful.

The good news is that with an income of $85,000 per year which your wife alone makes and you should be able to document, you have a monthly income of about $7083. This means that the back end you'd qualify for on A paper, thirty year fixed rate basis, is about $3180 (about $2690 if we're talking about an A paper ARM). Picking a random A paper lender, I get about 6.25 percent rate thirty years fixed full documentation (rates are much lower at this update) , which translates to a monthly principal and interest payment of a little less than $1232. With the yield curve right now, the five year ARM isn't much lower, meaning there's probably insufficient reason to do that instead.

Take $1232. Add $600 per month, which is about the worst case scenario for property taxes that I see (as I said earlier, you can probably preserve the current tax basis). Add another $150 per month for homeowner's insurance, which is a high estimate for most urban locales. This is still less than $2000 per month, leaving you almost $1200 of other allowable payments before you would not qualify full documentation. When this was first written, they could have done stated income if they'd wanted, but that'd have been giving the bank money they didn't need to.

Because of the multiple concerns, of which the most important are family transfer and verification of mortgage/rent, there are many reasons why the best way to approach this might change, but when you separate it all out, it certainly looks doable.

Caveat Emptor (and Vendor)

Original here

At a very young age, my parents bought me a book of Aesop's Tales. Aesop has gone out of style, probably because these are stories with a moral lesson, and it seems the modern society is actively averse to moral lessons. But one of the ones that has stuck with me was the tale of the dog with a bone and the reflection in the water.

It happened that a Dog had got a piece of meat and was carrying it home in his mouth to eat it in peace. Now on his way home he had to cross a plank lying across a running brook. As he crossed, he looked down and saw his own shadow reflected in the water beneath. Thinking it was another dog with another piece of meat, he made up his mind to have that also. So he made a snap at the shadow in the water, but as he opened his mouth the piece of meat fell out, dropped into the water and was never seen more.

It is precisely this mistake that I'm writing about, and it applies to all real estate transactions. The dog's mistake wasn't that he wanted more. That's normal and natural, and I've certainly never done business with anyone who didn't. The dog's mistake was wanting the other benefit as well as his own, and not realizing he placed the benefit he thought he already had on the line in order to obtain it. But, as he discovered, the goodie that the dog in the water had was only a reflection of his own goodie. In order for the dog to have his own goodie, the dog in the water had to receive his. The same applies to the benefits the seller and buyer believe themselves to be getting. They are mirror images of the same thing, and one cannot exist without the other.

A lot of what gets written alleging to be good financial advice violates this very simple lesson.

Some things are a cost of doing business. If I don't pay for all the things that enable me to serve my clients, I'm out of the real estate business. Yes, they cost money, but if I didn't spend that money, my income would be zero. For consumers, this includes things like property taxes and HOA dues and Mello-Roos. If you want that property, they are inseparably attached. It is correct to include them in calculations as to whether a property is worth acquiring or worth keeping; it is not only pointless but counterproductive to try and get out of paying them.

This applies to the costs of acquisition and selling, as well. Be certain you understand the real costs involved. They may be large, or seem large, but doing without any of the professional services that have evolved is likely to end up being a lot more expensive in the end. If one is cheaper than another, there is a reason. Find out why; and while it may be that someone is just comfortable making less money, other explanations are such as they do not provide important services that really do make a difference are more likely to be closer to the truth. Don't expect them to tell you this, though, especially since most people will just believe fairy tales like "full service - discount price", and won't investigate why prices or loan quotes are lower. It shouldn't surprise any adult that sometimes it's worth paying extra. If this were not true, none of us would have our own cars, let alone seven seat luxury model vehicles. Cars are about the most expensive mode of transportation there is, but the vast majority of all adults in this country own and drive at least one. Including me. The reason is because the abilities they convey are more valuable than the costs they entail. if you don't pay the cost, you don't get the benefit, and yet many people will fool themselves into trying.

Most importantly, though, the lesson applies to negotiations for the sale of real estate. There's nothing wrong with making the best deal you can, but once you have the contract, honor your end of the bargain. Negotiate issues revealed later reasonably, and in good faith, based upon their own merits. It sometimes happens you find out the other side is getting something fantastic out of the deal. That's not a problem. It's a benefit. Insurance they're going to carry through with their end of the deal, which is a good thing because you wouldn't have signed off on it unless you thought you were getting about the best deal possible, right?. Real estate transactions are based upon making both sides happy with their side of the deal. You can't force someone to sell a property to you or buy it from you. Even attempting that is a felony. There can be circumstances that make it more likely someone will accept a proposal that they might not in other circumstances they would not, and very few people have unlimited time, money, or energy for a transaction to happen. But whatever the other person - other people - in the transaction are getting out of it, those benefits belong to them, and if it appears as if those benefits are in jeopardy, the other side can usually get out of a purchase contract. It may cost them something in some instances, such as the deposit, but successful suits for specific performance are rare, and more so where there's a competent agent involved on that side. Not to mention all those court costs.

The practical upshot of all this is that if you fail to act in good faith, that good deal that you thought you were getting is completely gone, and there's a significant chance you'll end up spending thousands of dollars on legal action as well. All voluntary transactions flow from perceived mutual benefit. The other side has to believe they are getting a benefit in order to want to consummate the sale. Figure that if the other side wants out, they can get out. In fact, many over-aggressive later negotiations give the other side grounds to exit the contract without penalty. Nobody's going to buy a property where they can't run the water or flush the toilets, but once the sellers agree to fix that problem in an acceptable manner, don't try to get anything extra out of them. If the septic system is bad, they can either install a new one, (maybe) fix the existing one, or hook the property up to the sewer. Asking them to re-plumb the entire house is not (usually) reasonable, and asking them to re-wire the entire house on top of that is, in the immortal words of Monty Python (Book of Armanents, chapter two, verses nine through twenty one), right out - and going that far has the same effects as holding onto the Holy Hand Grenade too long. If you find out you're not getting such a great deal, then you're likely to be the one looking to exit the contract, and if they fail to give you satisfaction with a newly discovered issue, maybe you should want to. There's nothing wrong with exercising the inspection and appraisal contingencies, assuming you have them in the contract, or forcing the buyer to consummate the transaction or get out of the way of someone who will, or getting the lender to deliver the loan they said they would.

Greed envy is one of the banes of a successful transaction, and if you don't have a successful transaction, you don't have anything positive, and you quite likely have significant extra expenses. To go back to the dog and the bone, a failed real estate transaction is worse, because not only have you lost your bone, you've lost everything you spent in obtaining it, and you still don't have what you wanted, whether it is your new property or cash for your property or new financing. If you make your initial choices based upon the benefits to you, the fact that someone else is getting a benefit as well is not something to cause you heartburn and make you want to take it away from them. That way lies disaster. Instead, think of it as insurance that you're going to be getting that benefit that you wanted enough to sign the contract or loan application in the first place. And if you're not going to be getting the benefit you thought you were, maybe you're the one who's going to want out.

Caveat Emptor

Original article here

I sold my house in (state) in august 2001 I hired a title attorney whose (local company X) acted as a agent for (national company Y). The facts are that there were errors and omissions which led to negligence in the performance at the closing of the property. The property taxes for the year 2000 were not paid. The title company did not do their duty and gave clear title to the buyer. Now, more than 5 years later Company Y is claiming I owe them these back taxes plus accrued costs. I would kindly appreciate some feedback

Yes, you owe the money.

The title insurance policy you bought insures the person who bought the property. Property taxes are part and parcel of all land ownership. A reasonable person should have paid those taxes. But they didn't get paid.

This doesn't mean that someone didn't screw up. Every title search needs to include a search for unpaid liens that includes property taxes. That's just the facts of the matter.

However, this does not relieve you of your duty to pay those taxes in full and on time. If it was an obscure mechanics lien recorded against your property erroneously for work that was never done, you'd have a great case. If it was for stuff that you paid, and had reason to think you paid in full even though you were short, you might have a case. But not stuff that every reasonable property owner knows has to be paid, and didn't get paid at all.

Let us consider what would have happened if you still owned the property. The county would be sending a law enforcement official around with delinquency notices, which would include interest and penalties for late payment. If those weren't paid, they'd send law enforcement around another time with a tax foreclosure sale notice. You would have to pay those taxes.

It's no different because you sold. Because property taxes are a valid existing lien on the property, albeit one they missed during title search, they paid it to clear the buyer's title, as the policy requires them to do. On the other hand, when an insurance company pays a bill like this, and title insurance is insurance, they acquire the right to collect payment via subrogation. This fancy word just means they paid the damage on behalf of someone, and now they have the right to collect payment, just like auto insurers who pay for the damage to your vehicle and go sue the party at fault, for which that person's liability insurer usually pays. In this case, the person with the liability to pay that property tax bill is you. I'm not an attorney, so I don't know, but there might be a case you can build against the person who did the title search for the interest and penalties that have accrued since the search. Before that, the bill was all yours, and given that it was for 2000, should have been paid before August 2001. On the other hand, that title company might not have had a duty of care to you, despite the fact that you were the one who paid the bill, as the insured was your buyer, not you. Furthermore, the cost of paying the attorney can often go to several times the cost of paying the taxes and penalties. You'd need to talk to an attorney for more information. You might want to call company Y and ask if they'll settle for the bill as of the sale date, because they don't want to pay for an attorney any more than you do, and they did screw up, and if they hadn't, you would have paid the bill back then, right? Company Y can then recover the balance from their agent, company X.

Any lien that exists before the sale, discovered or not, is your responsibility. The only time that I think you are going to get off the hook is if you are dead and your estate probated and distributed before the lien is discovered. Basically, you've got to die to get away with it. Perhaps intervening bankruptcy might do it as well. I don't think so, but I'm not a lawyer. If you had died, the title company would still have paid, as the policy requires to protect the buyer, but would have had no choice but to eat whatever amount they paid, because there would be nobody alive who they would have a valid claim against.

Caveat Emptor

Original here

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