Recently in Buying and Selling Category

This was a comment on Real Estate Sellers Giving A Buyer Cash Back. The interesting thing is proposing hourly pay instead of commission for agents.

That makes a lot of sense. Disclosing (net) cash back to the lender changes the purchase price, which also changes the buyer's basis in the property - sorting out the tax situation nicely as well. And when a buyer is bringing a down payment to the table, they should be able to vary it as necessary to keep the LTV where they want it.

Speaking of choosing buyer's agents, though, I wonder what your opinion is of paying one by the hour (instead of via commission)? In the future day when I might be in a position to buy, there's a local buyer agency (who actually maintains a reasonably informative blog about the local market) that has the option to work that way and I'd welcome a third-party perspective on the pros and cons.

My view of them is -

1. For buyers is willing to do their own research and self-direct their search, they can get the specific parts of the buyer's agent package they want a-la-carte, without having to buy the whole package.

2. Since the agent's compensation isn't driven by the price of the property selected (or the commission a seller is offering) there's significantly greater incentive alignment between a buyer and their agent.

1. If the buyer/agent relationship doesn't work out for whatever reason, a buyer still ends up spending cash for the hours used.

He's got some good points. Here are some more that I see:

First off, when do you fork over the money? Up front? Is the up-front money refundable? How easily? This could quite easily be a tool for locking up exclusive business. They do a rotten job, but you've already got $5000 on deposit with them, so you figure you might as well get what good you can out of what you've got spent. Commissions are contingent upon an actual finished transaction. In other words, I've got to get the job done in order to get paid a commission. I don't have to get it done to get paid an hourly rate.

Second, it occurs to me that this may be something aimed at getting more money: The hourly pay on top of the commission. It never ceases to amaze me the number of people who don't realize that buyer's agents get paid out of the listing agents commission. This is called a cooperating buyer's broker (CBB) fee, and it is paid to the broker, who then sends a part of it to the agent. What happens to the buyer's agent part of the commission? Is it used as an offset, is it refunded point-blank (running squarely into the issue of fraud if there's a loan), or what? The most reasonable way would be as an offset against outstanding hourly, and the remainder rebated for closing costs only. However, 2.5 to 3% of the purchase price can be an awful lot for a buyer to pay in closing costs, even with seeding an impound account in California. The buyer is likely to end up basically using the money to buy the rate down further than is really beneficial, simply because there's no other benefit they can legally get out of that money. So I tell you not to waste your money buying the rate down too far, then I give you the choice of that or forfeiting the rest of it to no good purpose. Does anyone else see the contradiction here?

Third, what is the basis for billable hours? Is it time actually spent with the client, or is it time spent working on the client's file? If the client isn't present, how does the client verify the figures?

The time I actually spend with clients is a fairly small proportion of all the work I spend on them. Maybe 20 percent, at the very most. Consider the parable of the iceberg: What you get is a lot more than what you see at first glance. Last week, I spent six hours looking for one set of clients, and another couple hours on-line winnowing before that. It took us less than two hours to view the properties I decided were worth showing them. Do I charge based upon my time spent, or based upon actual face time?

Now ask yourself, does the basis for billable hours constitute a hindrance to effective job performance? I have thought about it, and "face time" billing would cause most agents - and their supervising brokers - to be a lot less generous with their "file time". But "File time" is what makes a good agent. If I bill based upon "file time", I've got to be able to show what I did with that time, and I'm going to be running head on into clients who won't believe I spend the time I've spent, or at least say they don't, no matter how good the documentation. But does billing by "file time" give agents incentive to pad their time sheets? It seems likely to me that it would. Does billing by "face time" give agents an incentive to go as slowly as possible? Seems likely to me that it would, when the clients incentives are directly opposite. Not all agents would abuse either one of these, but enough would.

Here's another issue: Agents don't get all of what they "make". Brokerages have expenses, and they're entitled to make a profit on what they provide. Agents individually have expenses, some of which are fixed, and some of which are variable. If we work on an hourly basis, how much do we add for overhead? Are the clients going to be receptive to it? Even if I bill by "file time" there's a lot of stuff I couldn't bill for, but is nonetheless essential to the proficient practice of real estate. As any accountant or business school graduate will tell you, you have to recover the costs somehow in order to stay in business, and the way they generally do it is by building an overhead allowance into billing. I occasionally do consulting work at $150 per hour. Even with the more efficient, longer relationship of finding a client a property, I'd need to bill at least $70 per hour to end up with a middle class living at the end of the month. I strongly suspect most folks wouldn't be inclined to pay those kind of wages without evidence of value provided in advance. This would discourage clients from signing up with newer agents or brokerages who might very well do a better job than someone long established who has gotten lazy. Without a proven track record (as in "known to them"), how are you going to persuade the average schmoe who has only been told that, "Real Estate agents don't even need any college!" to fork over $70 per hour before they've seen the work? Commissioned salespersons have to get the job done before they get paid. Not so hourly workers. I realize business people do it all the time, as I've been on both ends of that, but most folks aren't business people, and even the ones who are tend to take a different approach to their personal affairs. Finally, can I really justify billing my consulting work $150/hour while only billing actual buyer clients at half that rate? I'm not going to reduce the consulting rate. If my time is worth $150 per hour (as my consulting clients have told me it is), it's worth $150 per hour. You willing to pay $150 per hour for my expertise, sight unseen? Other people have and will again, but that enlisted military man that walked into our office this afternoon might have some difficulty. I suspect most people would rather let me keep the buyer's agent commission. What if we're billing by "face time"? I'd have to charge a much higher number of dollars per hour to pay for my preparation time. Fact.

Let's ask if most people are likely to be adult enough to pay for something everyone else is offering "free", or at least where they don't have to write a check for money they have painstakingly saved? If the abomination that is Internet Explorer doesn't persuade you on that score, I've got my experience with Upfront Mortgage Brokers to fall back upon, and I can tell you that the answer is most emphatically no, at least in the aggregate. Every time I've had somebody ask about doing a loan on the UMB mandated basis of known fixed compensation, they've ended up canceling the loan. The UMB actually lets me offer cheaper loans than my normal "fixed loan type - known rate - guaranteed costs" because the client bears the risk of late loans, somehow mis-adding adjustments, etcetera. With UMB, I agree to get the loan done for a fixed amount of total compensation - but the clients know what that number is, and it isn't what most people think of as "cheap". With my normal guarantee, I assume the pricing risks, but I have to include the costs of those risks in my retail pricing. Upshot: The loans are slightly more expensive, but people like them much better. In fact, they can't sign up for them fast enough. The only possible reason I can find for this difference is that they don't have an explicit figure for how much I and my company are making (gross - the net is much lower).

Choosing or not choosing a loan based upon the fact that it seems the loan company is making a lot of money is a great way to shoot yourself in the wallet, but you'd probably be amazed at how many people do it. People tell themselves that the loan company is "making way too much money" off their loan and end up choosing the lender who offers something at a higher rate that costs thousands of dollars more - but doesn't have to disclose how much they make. I've not only seen it in action - it's been proven by government research. here is the research paper from the FTC. (Thanks to Russell Martin of

All of the preceding are not reasons to refuse to offer hourly compensation. They are simply reasons why I wouldn't expect a lot of it. The final consideration is this: Most agents are independent contractors, not hourly employees. Would hourly compensation create a situation where the Labor Board would rule that this hourly pay pushes agents over the line into an employer-employee relationship with their brokers? Given how most brokerages require their agents to do other things that are on the list of bullet points of statutory employees (regular required meetings, etcetera), it seems likely to me that it would be enough extra that FLRB might well rule that the agents involved are now statutory employees. This would change everything about the broker-agent relationship from its long-established norm (Brokerages would have to pay overtime, Social Security taxes, minimum wage. Holidays. Minimum time off. Etcetera. They might even have to deal with agent's unions). I don't say that agents couldn't work on an employee basis, but all of these added costs to the brokerage would certainly tend to make the wall of getting started higher for new agents, and harder to negotiate, thereby artificially restricting the number of agents. This would have the effect of limiting competition. I don't think that's a good idea for consumers, although the big chains would certainly love it, as it would make it harder for independents to compete.

If you think paying by the hour is a way to get superior real estate services cheaper, I have some land in Florida. Who's going to charge low hourly rates? Unprepared, less qualified agents. It might work out to be a little less, and people who have the intestinal fortitude to move quickly without being goosed on the biggest transaction of their lives might save a little bit in that the agent or brokerage's total compensation is a little less than it otherwise would have been, but where is the level of the value they provided in order to earn that money likely to be? I submit to you that I have reason to believe it would be considerably lower in the aggregate. More than enough lower to place their patrons in the unenviable position of buying the real estate equivalent of the Yugo.

In short, I see a whole lot of drawbacks, many of which are fairly well buried, while only a few advantages, which may be obvious but are outweighed for the vast majority of the population by the drawbacks. I might be willing to do it for the right client who asks, but I'm certainly not going to advertise it.

Caveat Emptor

Original article here

When we sold our home just over a year ago we were talked into selling for a bit more than the original offer so the person could get money back to do renovations... I objected based on percentages and stuff and my realtor and the other realtor agreed to commissions based only on the original agreed to asking price. Then I could not find any other reason to object, after all, if the loan officer was willing to loan that much money, what reason was it for me to say nay?

But now I hear it is illegal to do this? Yikes? Have you heard of this?

What should I do now?

The same thing anyone should do when they discover they may have inadvertently violated the law: Talk to a lawyer.

For all of this article, please keep in mind that I am not a lawyer. I don't even play one on TV. Not in California nor in any other state, and the laws and precedents can be different from place to place. So please double check everything with someone who is a lawyer, and if there is a conflict, follow their advice.

That said, my understanding is that it is not illegal per se for a seller to give a buyer cash back. If I hand you $500,000 cash - or something worth $500,000 to you - and you hand me back title to the property and $50,000 cash, or something worth $50,000 to me, there is absolutely nothing wrong with it. It's a free exchange, willingly agreed to by competent legal adults. No harm is done.

Where illegality does come into it is when there is another party to the transaction to whom it is not disclosed. In most real estate transactions, there is a lender involved. That lender is loaning what is usually a very large sum of money based upon the representations which were submitted to them. To intentionally and materially falsify those representations in order to persuade a lender to make a loan they would not otherwise make is a textbook case of FRAUD. Loan fraud is, literally, a federal offense. Go to jail for a while, and be a convicted felon for the rest of your life. Whether it's done by lying (stating something that isn't true) or by omission (failure to inform the lender of relevant facts) does not matter. Furthermore, due to the fact that fraud is a felony, there's a good likelihood of adding conspiracy in there - another federal felony offense.

The potential offense here is in failing to disclose the cash back to all parties in the transaction. If it is disclosed to the lender and issues the loan anyway, there is neither a criminal offense nor a civil tort, at least according to my best understanding.

The reason this fraud happens is because if the cash back is disclosed to the lender, then they will treat the purchase price as being the purchase price less the cash back amount. If the purchase contract says $400,000, but the seller is giving the buyer $20,000 back, it isn't really a $400,000 purchase price, is it? Net to the seller is only $380,000. Net cost to the buyer is only $380,000. That looks like a $380,000 piece of property to me, not a $400,000 one. The lender will take the same point of view, and base all of their calculations off of a $380,000 purchase price at most.

What that means is that if the buyers are not putting at least $20,000 down, they are over 100 percent of the value of the property. Which means the borrowers loan amount will be reduced accordingly. In fact, as I have said in Seller Paid Closing Costs (or, When Your Prospective Buyer Has No Money), it's better for both the buyer and the seller if they don't do this, because it is in both of their interests to use the lower purchase price that results from making the official price lower by the cash back amount.

In short, this whole charade is worse than self-defeating if it is disclosed to the lender, because if it is disclosed the lender will only lend based upon the net purchase price: "official" price less the cash back. If the cash back (or equivalent things such as paying buyer debts) are disclosed to the lender, I cannot think of a reason to do it, because whatever purpose you wanted to achieve with the cash back will be defeated. If the buyer wanted the cash to fix the property, they're either going to have to take it out of their down payment money or, dollar for dollar, out of the cash they got back, in order to have the same loan to value ratio that the loan was underwritten for. $400,000 official price minus $20,000 cash back is $380,000. So if the buyers put $20,000 down, the loan and the transaction would be doable only as 100% financing (not available as of this update except under a VA loan), and the net benefit the buyers got out of their down payment is zero. Alternatively, they can just take the $20,000 cash and apply it to the purchase price, over and above the $380,000 the lender will base their loan calculations on. Net benefit to doing all of this: Zero. Furthermore, there are drawbacks for both the seller and the buyer. It actually hurts them to do this if they disclose it to the lender.

What was the purpose of that $20,000 again? If it wasn't a down payment, the buyers will need to come up with $20,000 for a down payment from somewhere else. If it was a down payment, well, why not do the transaction "straight" in the first place? I assure you that a lender to whom this is disclosed will see it this way. Why not just reduce the official sales price by $20,000, pay less in commissions, lower fees, less capital gains, and have the buyer have a lower sales price, which translates into lower property taxes in a lot of places?

Which is precisely the reason this whole thing does not get disclosed to the lender. The buyers are trying to have their cake and eat it, too. They only want to pay $380,000 for the property, and have the lenders think that they paid $400,000, so they can borrow as if they paid $400,000. In other words, a material misrepresentation of the situation in order to induce the lender to make a loan they would not otherwise have made.

In short, FRAUD.

It is mostly the buyers, their agents, and loan officers who pull this kind of nonsense. Some of them are thoroughly blatant about soliciting this kind of crime. I don't know what they're thinking, but this is not harmless, this is not minor, and it has been explained to licensees. I can only presume a willful disregard of the rules. It can be difficult for sellers to even know who the buyer's lender is going to be, and it really isn't any of their business. Nonetheless, if the lender can show that sellers were a party to the deception (side agreements aside from the main contract are pretty much proof on the face of it), they can be dragged into the mess. Actually, sellers and their agents can be dragged in quite easily, side agreement or no, but side agreements are the equivalent of a smoking gun still in your hand while standing over a corpse. So if you're going to insist upon a side agreement, also insist that it be disclosed to the lender and proof that it was disclosed to the lender. Better still to make it all a part of the main contract. Optimum is not to give or ask for cash back in the first place. It sets you up for a criminal fraud investigation, and no matter how innocent you may be in fact, I have been told by someone who found out the hard way that they are no fun to endure. If you're a professional, it shows up in records as a complaint against your license, and I'm not even certain it comes off when you're found not culpable.

Caveat Emptor

Original article here

I keep running into people who paid money for a get rich quick seminar and are looking to buy property for zero down and immediately sell it for a $50,000 profit. Somebody With A Testimonial Told Them How It Could Be Done.

Sorry folks but the people with the real secrets to getting rich don't sell them for $199 at the Holiday Inn. They didn't do it during the stock market bubble, and they're not doing it now in real estate. As I told people back then regarding the stock market, don't confuse a rising frothy market with investment genius. And that rising frothy market has now changed. Deals like that do happen, but they're always less common than the People With Testimonials will admit, and they are snapped up quickly. Usually they never make it as far as the Multiple Listing Service. Before they're even entered into the database of available properties, they are sold, and they rarely fall out of escrow because the people who buy them know what they are doing.

Consider, for a moment, yourself on the opposite side of the transaction. You're not going to intentionally sell your valuable property for less than it is worth, are you? And if you're buying, you're certainly not going to pay more than market value, are you? Remember that Wile E. Coyote ended up at the bottom of the canyon under a rock for more reasons than that the Author was on The Other Side. "Super Genius!" Says so right there on the label. But betting large amounts of money on The Stupidity Of The Other Side is a mark's game.

About the only reliable source of "quick flips" for profit are distress sales. In no particular order, most of these are people in foreclosure, estate sales where neither the estate nor the heirs can keep the payments up long enough to sell normally, and where somebody's been transferred and has to sell now. The requirements are that they have large amounts of equity, not short sales or even lender-owned property, and the need for a quick sale.

These people get mobbed by prospective buyers, and by agents looking to represent them in the sale. Everybody wants something for nothing, and one of each group is going to get it. One agent is going to get a transaction where if it gets as far as the MLS, all he's got to do is type it in and bingo, the buyers will line up. One buyer is going to get to buy below market. Usually, they're the same person. The multimillionaire brokers all usually each have at least one going on.

The issue for these buyers in distress sales that is rarely addressed until it gets to actually making the deal is that they're going to need a certain amount of cash that they are prepared to lose. Putting myself in the position of the person who has to sell, I'm not going to give this person the sole shot at buying if I'm not pretty certain he can deliver. The only way to measure this is cash - how much they can put down on the property. How much of a deposit they can make that I can keep if they can't qualify. Remember that in this case the one thing a distress seller cannot afford is a buyer who can't consummate the deal quickly - unless the seller is going to get to keep something substantial for the experience. If you don't want to buy on those terms, than at that price someone else will. The multimillionaire real estate brokers, for instance. There are a lot of people who make a very good living at foreclosures because they go around from foreclosure to foreclosure offering cash for a below market price. Matter of fact, they pretty much saturate the foreclosure market. The chances of a seller in this position accepting an offer without a substantial cash forfeiture for nonperformance are basically identical to the chances of them having a listing agent that doesn't understand the situation. And quite often, that listing agent makes an offer themselves, in violation of all that is ethical.

Get religion about this point: There is ALWAYS a reason for a low asking price. Usually, a noticeably low asking price should be even lower than it is. Unless they're a philanthropist looking for some random person to donate money to, this seller wants to get as much for the property as they can. What they're hoping for is a buyer who doesn't know what a really bad situation they're getting into. "A cracked slab? How bad could it be?" is probably the classic example of this (The answer was about $300,000 in one case, but it could be as low as $20-25k). These sellers have been dealing with the situation. They've had a reason to become intimately familiar with the problems. They're hoping for an unsuspecting buyer whose agent wants an easy transaction and will not explain to them, or simply does not know, what those buyers are getting themselves into. I could certainly keep my mouth shut and do more transactions, easier, if I didn't take the time to tell my buyers everything I know about what they're getting into. I just had a buyer who loved the floor plan so much on a property with mold infestation right out in the open that he wanted to make an offer, even after I told him "Anywhere from ten to two hundred thousand to fix, maybe more, and probably at the upper end of that because you can see how it has spread". Luckily, his wife talked him out of it. The universe knows that most of these good deeds don't go unpunished. But that's what I'm theoretically getting paid for, and as often as I do my job and it causes them to get angry and I don't get paid, it's preferable to the eventual consequences of not doing the whole job and getting paid for it.

There's a newsletter I get from the State of California every three months. It's always got a long list of people who are losing their licenses. So if your agent tries to really explain something like this, listen to them. They're not trying to talk you out of the Deal Of The Century so that someone else can get it (the Deal of the Century in real estate comes around surprisingly often if you can afford it). They're trying to make certain you go in with your eyes open. It's likely to be a better agent than the guy who thinks "Okay, I've told you that the hill is known to be unstable, so I'm covered. It's not my fault that you didn't instantly understand all of the implications."

(On the Mold House: In the meantime, I called and left a message for the agent, and she returned my call and left a very accusatory, defensive message about "What is the documentation for your accusation of mold damage?" Opening my eyes, you silly ostrich - it's clearly visible - Eeewww! - right there, and there, and there, and there's moisture coming out at the bottom of the wall downstairs. My guess is that it's coming from the standpipe in the walls of the upstairs hall bath. I look forward to seeing her name on the List of Dishonor)

The typical property where there is real potential for quick profit is going to require work. Work as in physical labor that you're going to have to do, or pay someone else to do. Not to be sexist, but "The husband died (or became disabled) and the wife couldn't keep it up," is a cliché because it is so common. Sometimes the work is easy - carpet, new paint, clean up the yard and bingo! The property jumps in value! Sometimes the work is harder, and the profit is larger. And sometimes the buyer is basically going to have to tear the house down and start over. There is always a reason why the seller didn't do the work so they could make the profit themselves. Sometimes it's because they're lazy, sometimes it's because they can't. Sometimes it's because the work was risky, sometimes because it was expensive, and sometimes it's because the seller can get some poor fool to buy it who doesn't realize that they're going to have to make an investment that isn't worth the payoff.

Caveat Emptor

Original here

I have found your blog to be very informative. I was out riding my bike and rode past a house for sale. In a few minutes of Internet research I've found out a bit about it. The property is bank owned and it sounds like a property in need of repair. However the information I have found out doesn't add up.

From a real estate web site listing recent sales in the area, I found out that the property last sold for 5% less than the asking price. Apparently the sale happened in October.

The house is now listed in the local MLS service, and the text of the listing leads me to believe that the house was listed in December. It seems from what I have read on your site a foreclosure takes at least 3 months, and this house apparently was back in the hands of the bank and listed two months after it sold.

The house is priced well below the market and within my budget, but that the bank got it back that quickly raises a giant red flag for me. Also, given that the MLS listing says the sale is as-is and that there are no contingencies allowed raises another red flag.

How if they don't accept contingencies do you do a home owners inspection? Pay for one before making an offer, and risk you'll be throwing the money away if the seller doesn't take your offer? Or do a home inspection after they accept your offer, and forfeit your deposit if the inspection covers up a big problem.

Actually, foreclosures are perfectly fine for a first time buyer if you've got the wherewithal to work with them.

Lender owned, which means it didn't sell at auction, is an entirely different story than buying at the auction. You can make offers with contingencies for inspection, usually for seven or ten days, and providing it's an attractive offer otherwise, the lender may very well accept. You're always risking the inspection money on any property, because if it comes out that the house is messed up, you still have to pay the inspector. For lender owned (REO) properties, you don't need to forego an inspection contingency. Financing contingencies are also very doable - I've got one in escrow now with both, and I'm working on another. If it wasn't possible, they would reject the offer out of hand, and they haven't. Disallowing an inspection contingency makes the property worth a lot less, because a lot fewer people are willing or able to handle the risks involved. If your particular property is specifically disallowing inspection contingencies, it tells me they know about a problem, and it's almost certainly a big one. It can still be worked, but get yourself a really top-notch buyer's agent. It's worth paying them (or paying them extra) yourself if you need to, because you'll make more on this property, and they will earn it, because there's a lot more liability for them on this kind of property.

If you're looking at an REO, be aware before you even step onto the property that there are going to be maintenance issues. More often than not, there are even sabotage issues. Furthermore, because the lender doesn't live there and almost certainly knows less about the property than an inspection will reveal, they are exempt from transfer disclosures. They are not for Mr. and Ms. Upper Middle Class looking for the perfect house, they are not for Mr. and Ms. Just Barely Scraping Into The Property, and they are not for Mr. and Ms. Fumblefingers, Mr. and Ms. No Time, or even Mr. and Ms. Procrastinate. But if you've got the inclination and the skill or the cash to fix it, foreclosures can be quite lucrative. Foreclosures are always a risk - the more so because the current owner literally does not know and has no way of knowing what the condition of the property really is. That lender has never lived in it, so they cannot disclose things that most owners would know and be required to disclose. Furthermore, the lender usually requires some addenda of moderate obnoxiousness or worse, aimed at getting the deposit and limiting your opportunity to exit the contract - and making the property value even lower, as such addenda are a thing of negative value to most folks. But if you've got the resources to make that risk a manageable one, you can pick them up well below the price of properties with similar characteristics.

Lender sales are pretty much always "as is." However, I have successfully negotiated repairs and allowances for repairs upon multiple occasions. They are more limited in nature than most, due to the "as is" nature and most lender's unwillingness to put more money into the property, but it is very possible if you discover defects that make the property less than fully inhabitable within the definition of the law. Hot and cold running water, working electricity and heat (Not air conditioning, however), total enclosure of the dwelling area, and active fire hazards can all be negotiated even in "as is" properties. There really is no such thing as a pure "as is" sale.

You might also want to read my article, "Why There Is Money in Fixer Properties" if you haven't already.

Caveat Emptor

Original article here

As a seller, a purchase offer is not money in your pocket. As a matter of fact, accepting the wrong purchase offer can cost you tens of thousands of dollars if the buyers can't consummate.

I recently dealt with clients making an offer on a property where the comparable sales run in the $350,000 to $370,000 range. The ask is $380,000, which isn't outrageous in and of itself, but Seller Paid Closing Costs are so endemic that they are essentially priced into the market, at least up to a price of half a million dollars or so where first time buyers peter out. My clients initially offered a price a bit above the lower end of the comparables, and paying their own closing costs. The owners rejected that but my clients really liked the property, so we sweetened it to what was essentially a full price offer, without any appraisal contingency, and the mechanics of my clients' offer (larger than necessary down payment) were such that there wouldn't be any obstacle to getting the loan and closing the transaction unless the appraisal had come in under $330,000.

But when I called the agent on the phone to make certain they got it, she was quite snippy, implying that they have offers for tens of thousands more. Well, I don't know that she had the greatest negotiation technique in the world, because it completely turned me and my clients off of the property.

What I do know is that people offering way over asking price are not, in my experience, coming in with large down payments. In fact, when I have dealt with them, they were mostly first time buyers who were asking for seller paid closing costs, and even sometimes Down Payment Assistance back when it was still available. Basically, the deal is "We'll give you a really great price if you pay for all the ancillary costs we don't have the cash for." And these transactions result in everybody being happy and even noticeably higher commissions for the agents, as commission is paid on the full sales price.

So far, so good. But what if the appraisal is lower than the purchase price? The comparables in this instance are all between $350,000 and $370,000, as I said. Even moving up in the square footage department and adding another bedroom won't boost that much, as the property is already above average for the neighborhood - anything much more would make for a misplaced improvement.

The upshot of all of this is that the appraised value is not likely to be sufficiently high to support the loan value, unless the competing buyer has a much larger than required down payment, which they can then use the excess of to pay the amount that the sales price is over the appraisal on a dollar for dollar basis. As I've said, this isn't likely to be the case where someone is offering significantly above the asking price. People who have somehow acquired the money for more of a down payment understand that this is real money, far more than people with a minimal down payment planning on simply having higher payments.

So unless the appraiser commits fraud, the value is going to come in between $350,000 and $370,000. Let's be generous and say $370,000. Lender's evaluate value on an "LCM" or "lesser of cost or market" basis. Since the appraisal will be beneath the purchase price (if the agent's representation was truthful), the lender will treat the value as being the appraised value, which we have posited to be $370,000. Let's say the purchase price is $400,000. For a 100% Loan to Value Ratio loan, which are not available right now, the lender will only lend $370,000. For a VA loan, which will go to 103% for veterans of the armed services, the limit would be $381,100, including loan costs, and everything else including the VA funding fee - the real limit is $375,550 for the buyer's purposes. For FHA loans, the maximum loan limit would be $363,525, and that includes the 1.75 points the FHA charges - the real limit is $357,050. For conventional conforming, the effective loan limit is either 90% ($333,000) or maybe 95% ($351,500).

So, assuming a $400,000 purchase price, to make a VA loan fly, the purchaser has to have a down payment of at least $24,500, and that's assuming they're not paying any loan charges, at least not themselves. For the FHA, they would need $43,000. For conventional, maybe they could get by with $49,000, but it's more likely they would need $67,000. All of these figures are exclusive of any transaction costs the buyer is paying, of course.

If that buyer doesn't have that cash, that transaction is not going to happen. You might as well reject it to begin with, because if you accept it, all that is going to happen is that you're going to waste six weeks or more Waiting for Godot. It is my usual experience that buyers with down payments of the size indicated understand that dollars are dollars, no matter what form they are in, and are unlikely to offer prices much over asking. There are exceptions, but not many. The reason people end up paying more than asking price is because they need something special from the seller, and therefore the seller who is willing and able to give it to them can extort a higher price for that property in return, and the most common reason why buyers need these sort of concessions is because they haven't got the cash necessary for the down payment plus closing costs. Therefore, in order to induce the seller to give them the extra they need in some wise, they offer a higher official purchase price that nets the seller what they want after the givebacks. Unfortunately, if that higher purchase price is not supported by the appraisal, the buyer then has to come up with more cash - and we just posited that they don't have it. Prognosis for the transaction: not good. So perhaps it might be a good idea to require a buyer to come up with some evidence that they do in fact have the necessary cash to make the transaction happen. When I write a buyer qualification letter, that is one of the essential parts it must contain: Evidence of cash to close. When I have a listing, that's one of the things I want to see before I advise accepting an offer: Evidence of cash to close.

I should also mention that all things being equal, it is not in the seller's interests to pay buyer costs, even if they get a dollar for dollar higher price. Why? Agent commissions, title insurance, and several other costs are dependent upon the official sales price. You net more money from a $370,000 sale with no givebacks than you do from a $380,000 sale with $10,000 in givebacks. Furthermore, for the buyer, property taxes are based upon that official sales price. Making the official sales price $10,000 higher means the buyer pays more in property taxes. There is nothing wrong with the practice of givebacks, so long as it is properly disclosed to the lender and approved by them, but it can cost both the buyer and the seller significant amounts of money.

Too many agents became used to the Era of Make Believe Loans, and don't understand yet the implications of it being over. Whether you're a buyer or a seller, you want to consult a loan officer on whether or not the loan for a given purchase offer is likely to be able to be done. Of course, if your agent is a good loan officer, you're already ahead of this game.

Caveat Emptor

Original article here

I've found several of your mortgage articles very helpful, and wondered if you could help me find a way to solve the dilemma I've been presented with by a loan officer at my bank. My husband is Active Duty DELETED, and is getting out in August of this year. We've found a house we want to buy in the state we'll be moving to, but when I went to the bank I was told no lender would touch him with less than a year in the service and no promise in writing of a job in DELETED. He doesn't have any credit history, but mine is fair (I haven't seen my FICO score recently but I do believe it to be over or around 620). I can provide w2s, income tax records, rental history (never a late payment), etc, but I cannot provide proof of the future. Is it true that we're simply out of luck? Where should I turn from here? I'd be very grateful for any information you can provide to me or post on your website, so far this seems to be a unique dilemma...

You have run smack into the question at the heart of every loan: How are you going to pay the money back?

This is understandably a cause for concern for the lenders. They don't want to make loans that aren't going to be paid back, and in order to pay them back, you've got to have or be able to get money from somewhere.

What they are looking for is a regular source of income, and you don't apparently have one. You're not going to keep the one you have, and you haven't (officially) got a new one.

There used to be loans for people in such situations. They were called NINA or No Ratio loans, because there is no income stated or verified, and no debt to income ratio. However, (even when they existed) NINA loans had lower allowable loan to value ratios (100% financing was impossible to find for NINA loans, and I always did think such requests were over the top) and the rates are higher than full documentation or even stated income. Full documentation shows that you have had and are likely to keep a good stable source of income, and documents that you've made enough in the last two years. Stated Income (when it existed) showed that you at least had the same stable source of income for two years, and usually that you had some money in the bank. NINA loans were driven purely off the Loan to Value situation and your credit score. You were essentially telling the bank, "Here I am! Gotta love me!" You were not providing any kind of documentation that you are able to repay the loan.

(NINA loans have been regulated essentially out of existence. "Mostly dead" to quote Miracle Max in "The Princess Bride", at least for residential consumers. Commercial loans is another matter entirely, leaving me to wonder exactly how much of a favor regulations banning the residential item are doing the consumer. Yeah, they were badly abused - but now people in your situation can't get real estate loans no matter how careful and how responsible they are, no matter how much money they have in the bank or in other negotiable assets, etcetera)

Your husband's lack of credit history and the fact that your score is only about 620 do not help. There is no evidence in your email that you are working outside the home.

Now I understand how tempting it is, especially right now, to buy a home. The two of you are getting out and looking to start your post-military life together, and you want to move right in to your new home, and start your new lives all at once.

This is, unfortunately, the kind of desire that quite often leads to disaster. Have you considered what happens if you don't get work? What if you do get it, but delayed several months? Or what if they keep promising to hire you in a few months but it just never quite happens? Meanwhile, that mortgage have to be paid, and you're not likely to be able to pay them working fast food. Meanwhile, the fact that you have this house is tying you to that location and its commuting area, where maybe you could find something that would support your family if you were able to move.

The fact is that buying real estate is something to do when you're certain you are stable enough to make those payments - as in you already have the money coming in, or solid reason to believe it will be coming in. A written offer of employment might be such reason - it isn't always. Cousin Bob saying, "Sure, we'll take you on!" isn't. Even though he's family, Cousin Bob needs to feed his own kids before he feeds you. Friends, old military buddies, former employers - I've seen more than enough examples of people who thought they had a job but didn't than you'd care to know about. You might have a job when they're willing to promise it in writing - they can be held responsible for that in court if they fail to follow through. If they haven't given you such a written guarantee, there is a reason why they haven't.

The one thing that messes up your entire financial situation, worse than anything else is failing to pay a real estate loan on time, now and for the next several years, . I have seen credit scores drop by 150 points for one thirty day late payment. If it gets to the point of a notice of default, or foreclosure, the consequences last for years. Plus you still owe the money, even though you haven't got it.

Once upon a time I wrote an article called, "When You Should Not Buy Real Estate." You fall into the third category I mention, those without a sufficiently stable income. You might also fall into the insufficient time to benefit category. As much as I like putting people into houses and such, the fact of the matter is that you buying a property right now would be very likely to mess you up financially for a very long time. Move into a rental for a little while, unpleasant as it may be. That way, if you have to change your plan, you are free to pick and leave if you need to. Having a property ties you to it and it to your wallet until it is satisfactorily disposed of, something hard to arrange on good terms right now in large portions of the country. On a $500,000 property like most around here, you are risking $500,000. With purchase money loans, there are limits on your liability and the lender's ability to get a deficiency judgment in most states. Nonetheless, to go into a house purchase with the idea of sticking the lender for the difference if it doesn't work out is at least a close cousin to fraud - and it might be fraud itself. This sort of thinking is one of the primary reasons behind the bubble in many parts of the country - and is false to boot. One way or another, you will almost certainly pay for a lender's loss. Since I'm presuming you don't want to do that, better to just not do this until you are a little more stable.

If you could afford to pay cash, this would not be a concern. But if you could afford to pay cash, the loan would not be a stumbling point. Also, some folks might ask, "what if I can make the payments off of a minimum wage job?" which is not the case anywhere in California. To be fair, being able to make payments off minimum wage does change matters, but be careful that minimum wage jobs are obtainable in your area. If there's 26% unemployment except for four weeks per year, you may not be able to get a minimum wage job, even if you've got the time for it. Furthermore, be careful that you're not biting off more in property taxes than you can chew. California's property taxes are comparatively low, ratewise. Clueless renters come here from other states and think, "Wow, they're only paying $4000 per year on a $400,000 property!" and think there's plenty of room to raise property taxes. But somebody making California's minimum wage of $9.25 per hour makes $18,500 per year - and $4000 is 22% of that person's gross wages. Senior citizens will lose their homes in droves if the tax rates ever rise - not to mention property values would drop like a rock, thus turning it into a self-defeating measure. Nonetheless, other states do have much lower property values - and much higher property tax rates. Clueless politicians also think "Property tax rates are too low - let's raise them!" - there hasn't been a year since Prop 13 passed in 1978 that some group of elected idiots haven't tried something or other to get around it and crash property values. This thinking that makes it difficult for investment properties to cash flow is also one of the reasons why there is upwards pressure on rents and an under-supply of rental properties.

Caveat Emptor

Original Article here

Every so often I'll say something about misplaced improvements. You may be wondering what a misplaced improvement is.

Simply put, it's something that stands out above the surrounding properties so far that they pull it down. Like having a mansion in a neighborhood of shanties. Yes, it's still a gorgeous house and yes, the functionality is exactly the same, but as soon as your walk out the front door you feel like you're in a third world country.

Repeat after me: Real Estate is only worth whatever I can get someone to pay for it. Real Estate is only worth whatever I can get someone to pay for it. One more time, with feeling: Real Estate is only worth whatever I can get someone to pay for it.

Got that? Good. Now ask yourself, would you be willing to pay more for a beautiful mansion surrounded by other beautiful mansions, or would you be willing to pay more for a beautiful mansion surrounded by cardboard boxes? The vast majority of the people out there want to look out of their beautiful mansion and see other beautiful mansions. I understand that even in the areas of the world where most folks live in shanties, the mansions of the wealthy are clustered together.

Probably the most egregious example of a misplaced improvement I've ever seen was this turkey. Yes, ladies and gentlemen, a Realtor really is making fun of a property. Beautiful brand new 2000 square foot home - actually an entire development of about 30 of them - less than a quarter mile off the departure end of the main use runway at a busy general aviation airport. That airport is open 24 hours per day, 365 days per year, and it has to by the terms of the land grant. I love small planes, and I couldn't have lived there. Plus you have to drive through a white trash neighborhood to get there, and there's now a freeway within about 75 yards. I have zero idea how the developer sold most of them. There shouldn't have been a housing development there at all. If they had to put something in, they should have run a road in off the other side and put in an industrial park or something, but I know of at least two crashes in the field where this development used to be. A travel trailer hook up would have been a misplaced improvement.

Misplaced improvements aren't always that much of a waste. Matter of fact, if a buyer isn't looking at a property for its investment value, but rather for something like housing five or six kids as cheaply as practical, they can be a good way to find a property that meets your needs less expensively than comparable properties. Why? Because everything around it drags it down, where most like properties are surrounded by other properties of comparable features. You never want to buy the best house on the block if investment is your criterion - but you might want to if you're just trying to find housing for a family of seven and you don't make two million dollars per year. The drawback is that it won't be in the best neighborhood.

For instance, I found a gorgeous 5 bedroom 3 bathroom property in a sixty year old business route neighborhood, surrounded by trailer parks and older offices and apartments. Some nincompoop had wasted at least $60,000 fixing it up to look like some big executive's entertainment house - but the chance of some big executive buying the property was nil. Across the street was an old office building with chunks out of the stairs, the neighbors all look lower middle class, and there's a trailer park entrance at the end of the block. So I can guarantee that the target market wasn't interested, which is too bad, because it really was a nice place. The guy was asking $80,000 above what I thought the market might actually support, and he eventually lost the property because he couldn't afford the payments on a vacant property and nobody was willing to pay what he wanted. If he had asked what the neighborhood would support, it would have sold quick to some working family who needed somewhere for their kids to sleep. But the brand new kitchen and travertine floors were just wasted money on the owner's part. Before you improve a property, if selling for a profit is your intention, always look around at the rest of your neighborhood to see if there's anybody else with that level of improvements and general quality of material. If not, you're wasting your money. Don't waste your money, because I guarantee you that potential buyers are going to look around before they make an offer.

Some misplaced improvements aren't as extreme. Just before I wrote this, I found a beautiful property for a couple of my clients that was nonetheless a misplaced improvement. This was beautifully refurbished 3 bedroom 1.75 bathroom home in a neighborhood where those go for $450-460 thousand. The ask was a little over 550, and let me tell you, it was gorgeous. It might have been the nicest kitchen I'd ever seen in a property of that price range, the public areas were beautiful and open, and had a nice mountain view. The bathrooms were new and extremely attractive, not to mention a downright cozy place to take baths, and the bedrooms were great, too. Everything was just wonderfully laid out, and it even had an atrium that lit up the middle of the house. The owners did everything right except one: They didn't consider the neighborhood, which really was a pretty good neighborhood, but houses in this configuration and with this square footage just weren't selling for anything like 550. I consulted an appraiser, who said that if everything was as I described, they might have been able to justify as much as 510 on the appraisal. My clients were looking for a nice place to live and entertain for the rest of their lives, and they had a large down payment, so the fact that it wouldn't appraise for 100% of purchase price was not an insurmountable obstacle, like it would be to someone without much of a down payment - which is to say 90% of everyone out there looking. Furthermore, it had sat vacant for seven months with no action (typical for misplaced improvements). We put an offer in, trying to jaw it down to something not too hugely above the neighborhood, and despite all of the evidence I cited, the owners blew us off. I understand that nobody likes to take a loss, but it's not the buyer's problem if you do, just like it's none of their concern how much you might be making. Residential properties are only worth what they are worth, and whereas this one didn't have many of the usual mandatory deductions, there really is no way to make a silk purse out of a sow's ear. The neighborhood is the neighborhood, and this one wasn't Rancho Santa Fe, but rather an early sixties upper middle class development that had not updated with the times.

Misplaced improvements can be frustrating as anything to sell. Even if you do get an offer for $550,000, when the appraisal comes in at $490,000, that's all the lender will loan on. In fact, the vast majority of lenders won't fund if the total encumbrances are more than the appraisal, so even if you are in a position to offer a seller carryback for part of the price, it's just not going to work unless the down payment is at least equal to the difference between the appraisal and purchase price with a normal down payment left over. How many people do you think want to put down $60,000 of their own money just so they can go through the hassle of obtaining 100% financing (when 100% financing could be obtained), plus the additional money lenders are now requiring for a 5% or more down payment? How many people are even going to have $60,000 extra to put down if they wanted to? Vanishingly few right now. What happens to most accepted offers is they waste 30 to 60 days in "pending," and then they fall out of escrow and you are back to square one. It's just a cold hard fact that if the proposed down payment won't at least cover the difference, you almost certainly don't have a transaction.

The way appraisers find comps is not by going out five, ten, or fifteen miles to find the comparable properties. Comps almost always have to be within one mile, and lenders prefer with half a mile, sold within the last three months. Further out, the appraiser is going to have to justify picking those properties as opposed to closer ones. The character of the neighborhood has to be very similar as well as the characteristics of the properties.

Often, in the case of misplaced improvements, someone suggests appraisal fraud. By some strange coincidence, this is almost always the owner, the listing agent, or both. Find an accommodating appraiser (The one good thing about the new HVCC standards is that I don't get this request as often). Except that appraisal fraud is, well, fraud. Not to mention a violation of fiduciary duty, unless the buyer is stupid enough to choose to be unrepresented, and even there a good case can be made in law that this nasty seller and their agent took advantage of this poor ignorant buyer. No. Thank. You. There are reasons why there are limits to the lengths good agents will go to to make a transaction happen, and this is one of those cases where those limits are short, sharp, and crystal clear.

So we have seem that misplaced improvements are a disaster for the seller, while being a limited opportunity for a certain class of buyer, but they are tough transactions to make happen for a listing agent, and there is no glory in them. The seller is not going to be happy with the sales price, and it's almost certainly going to take longer than everything else around it to sell. I'm brutally frank with owners of misplaced improvements, because if they don't want to listen to what I tell them, they're not going to price the property appropriately or negotiate in the proper frame of mind, both of which are classic ingredients of a failed listing. Failed listings don't do anything good for anyone, and I prefer not to be a part of them. I'm not going to get paid, and everybody's going to end up angry at everyone else, which means it's likely to cost me some future clients also. I'd rather walk away before it gets started.

Caveat Emptor

Original article here

"overpriced house offer rejected what next"

(Before I get started, I want to make it clear that I am using the same definition of worth found in this article. The property is worth what the seller can actually get a buyer to pay.)

Well, the seller obviously didn't feel that it was overpriced. Given that they were unwilling to sell for that, consider the possibility that you didn't offer enough.

It's human nature to always want to blame the other side. Given the state of real estate prices here in San Diego, I have considerable sympathy for buyers these days. On the other hand, if you look at the sales log, sales are still being made. This means willing buyers and willing sellers are coming to an agreement that both feel leaves them better off, and they are doing it at market prices.

Even if you made what really was a good offer, you can only control yourself - you can't control the other side of the negotiation. You have to decide how much the property is worth to you. Is it valuable enough to you to warrant a higher better offer? In some cases, properties offering something you want (or need) that is rare can command a premium over what a dispassionate analysis suggests.

The fact is, there are always at least two possibilities when an offer is rejected, and the truth may be a mixture of the two.

First, that the seller is being unreasonable. This happens a lot - usually around a third of the listings in my market are significantly overpriced. Somebody thinks their property is worth more than it's worth. The agent may be encouraging it in order to get the listing, but that doesn't make the property actually worth more. When people can buy better properties for less, they're not going to be interested in yours. In this situation, you're not likely to get any good offers. You'll get people doing desperation checks - coming in with lowball offers to see how desperate you really are, and if you're desperate enough yet. A very large proportion of these are people in my profession looking for a quick flip and the profit that comes with it, or other investors. Anybody looking at properties priced where this one should be priced is likely not even going to come look.

Second possibility, the buyer is the one being unreasonable. Properties like that one really are selling for the asking price, and you offered tens of thousands less. Some buyers do this because it's all they can afford. Some buyers do this because they want to get a "score". And some are just the standard "looking to flip for a profit" that I talked about in the previous paragraph. There is a point at which I tell all but the most desperate sellers that they're better off rejecting the offer completely than counter-offering. It saves time and effort, and the prospective buyer either comes back with a better offer, or they go away completely. Someone offering $250,000 for a $350,000 property is not likely to be the person you want to sell to. Even if you talk them up into a reasonable offer by lengthy negotiations, they're far more likely than not to try all sorts of games to get it back down as soon as you're in escrow. Better to serve notice right away that you won't play.

Now some bozo agents think that starting from an extreme position, whether high list price or lowball offer to purchase, gives them more leverage, or that somehow you're eventually likely to end up in the middle. This is b*llsh*t. A transaction requires a willing buyer and a willing seller. Price the property to market if you want it to sell. Offer a market price if you want the property.

Now, the Quickflippers™ have had a distorting effect on this, and for several years a disconcerting percentage of the properties being offered for sale were owned by people who bought with the intention of the quick flip for profit, rather than buy and hold. Many of those looking to buy still fall into this same category, and I suspect this is much the same in other formerly hot housing markets as well. They've become addicted accustomed to the market of the last few years, when a monkey could make a profit on a property six months after they paid too much money to purchase it. That is not the market we face today. This market favors the buy and hold investor. Actually, if you remember the spreadsheet I programmed a while back, I've pretty much confirmed that the market always favors the buy and hold investor, it's just been masked by the feeding frenzy of the past few years, where John and Jane Hubris could come off looking like geniuses when it was just a quickly rising market and the effects of leverage making them look good. It's just that the support for the illusions of Mr. and Mrs. Hubris has now been removed.

Now, what to do when your offer has been rejected. There are two possibilities. The first is to walk away. If the home really is overpriced, and there are better properties to be had for less money, you made a reasonable offer and were rejected, you're better off walking away. I don't want to pay more for a property than it's comparable properties are selling for, and I certainly don't want my clients to do so either. The sort of people who go around making desperation check offers walk away without a second thought with considerably less justification.

The second is to consider that the property might really be worth more than you offered. Okay, a 3 bedroom 1 bath home did sell for that price in that neighborhood, but when you check out the details, that was a 900 square foot home on a 5000 square foot lot and the one you made an offer on is a 1600 square foot home on a 9000 square foot lot, and in better condition with more amenities. It's a more valuable property, and you can refuse to see that from now until the end of the world and you're only fooling yourself. The reason you thought the property was attractive enough to make an offer was that it had something the others you looked at didn't, and most of these attractors add a certain amount of value to the property. The more value there is, the more folks are willing to pay for it. This is why one of the classical tricks of unethical agents is to show you a property that's out of your price range, then figure out a way to get a loan where you qualify for the payment. This property is priced higher because it has features that add more value and a reasonable person would therefore conclude that other reasonable persons would be willing to pay more for that property than others. Landscaping, location, condition, more room, amenities. There's something that the seller thinks reasonable people would be willing to pay more for. It's kind of like taking someone who can afford a $10,000 car and showing them a $25,000 one, then telling them they can get interest only or negative amortization payments to get them into it. You only thought you could afford the $400,000 home, but they've got a way that you can get into the $600,000 home, which obviously is going to have many things that the $400,000 home lacks. They manipulate the payment until it appears as if you can afford it, and consumer lust does the rest. Cha-ching! Easy sale, and the fact that they've hosed the client doesn't come out until long after those clients made a video for the agent on move-in day when they're so happy they've got this beautiful house that they didn't think they could afford (and really can't), and they gush gush gush about Mr. Unscrupulous Agent, who then uses this video to hook more unsuspecting clients - never mind that the original victims in the scam lost the house, declared bankruptcy, and got a divorce because of the position Mr. Unscrupulous Agent put them into. You want to impress me with an agent, don't show me happy clients on move-in day. When I originally wrote this, emotional high of being brand-new homeowners aside, any monkey of a loan officer could get anybody with quasi-reasonable credit into the property. What happens when they have to make the payments? More importantly, what happens when they have to make the real payments? Given the environment at the time, the question was not "can I get this loan through?" but "Is it in the best interests of the client to put this loan through?" You want to impress me with an agent, show me a happy customer five years out "My agent found this property that fit within my budget, told me all about the potential problems he saw, got the inspections and loan done, and it's been five years now with no surprises, and the only problem I've had was one he told me about before I even made the offer."

Of course, the real value of the property may be beyond your range or reach. If your agent showed you something you could not reasonably acquire within your budget, you should fire them. I accept clients with a known budget, I'm saying I can find something they want within that range. If it becomes evident I was wrong (eyes bigger than wallet syndrome) the proper thing to do is inform the client that their budget will not stretch to the kind of property they want, and suggest some solutions, starting with "look at less expensive properties" and moving from there to "find a way to increase the budget" and finally to "creative financing options." That's a real agent, not "Start with creative financing options but somehow 'neglect' to mention the issues down the road."

There is no universal always works strategy for rejected purchase offers. It's okay to do desperation checks, but be aware that most sellers aren't desperate and that it's likely to poison the environment if the seller isn't that desperate. Poisoning the environment is okay if you're a "check for desperation and then move on" Quickflipper™, but if you're looking for a property you want and have found something attractive, it's likely to be counterproductive so that you may end up paying thousands more than you maybe could have gotten the property for if you'd just offered something marginally reasonable in the first place. Make a reasonable offer in the first place, and you're likely to at least get a dialog. And if the seller rejected what really was a reasonable offer for an overpriced property, the only one to lose is them. Move on. Their loss is someone else's gain.

Caveat Emptor (and Vendor)

Original here


Time was, a few short years ago, when I could reliably do a purchase money loan in two and a half weeks. That has now changed. There are three separate delays of one to two weeks that have been built into the process since then. I can usually get purchase loans done in 45 days - but it's not a solid bet.

The first delay is due to the Home Valuation Code of Conduct. I keep hearing rumors of repeal and efforts to repeal, but it's still there. Loan officers no longer have any control over the appraiser - who it is or who it isn't. Net result: the appraisal gets done when it gets done. Three days used to be a very long time. Now, I might get it in three days if I put a rush on it and am very lucky. Seven to ten is about what I expect, and if it's fifteen, that's what it is. Neither I nor any other loan officer has any control - or working relationship - with appraisers any longer. The appraisal is now a source for at least 20 times the problems it was a few years ago, and the new standards didn't stop what they hoped they would stop, but hey, this is the result of government work we're talking about here. The politicians got paid to create a new way to make more money off the system - mostly off consumers - and they did so.

I should also mention that where lenders would formerly accept loan packages with a pending appraisal, and even grant underwriter approval on them with a "prior to docs" condition for an acceptable appraisal, they are now generally requiring the appraisal be in the loan package before they will accept the package. Why? Because it didn't take them long to figure out how many problems the appraisal was now causing. Why should they do all that work when it's so likely the appraisal will render the whole thing moot?

The second delay has to do with underwriting. To cut right to the point, the current underwriting environment is super-paranoid. Underwriters are encouraged to dig for reasons you might not qualify. The lenders are judged and paid by the secondary loan market based in part upon default rates. If you've been paying attention, you know that there have been an awful lot of defaults lately. The lenders are determined to get the default rates down. Wall Street adds its own nonsense to the mix - many of the secondary market buyers have added requirements to the mortgages they will consider buying. Since the lender wants to be able sell these mortgage anywhere, they add all the requirements to their loan underwriting. Net result: Lots of delays to get to your file, extra hoops to qualify when they do look at it, and a very high proportion of rejected loans - many for absolute nonsensical reasons.

The third delay has to do with more direct government nonsense - Regulation Z and redisclosure of APR. Specifically, changes to the rules arising out of Dodd-Frank and a couple other congressional actions that claim to have been for the consumer but were in fact made to advantage large campaign contributors. There isn't a lender out there that doesn't force a recalculation and redisclosure of APR with a mandatory regulatory 7 day delay built in before you can actually sign loan documents. If they don't, they can be sued - but if they do they are legally covered - even if the old number was closer to what the correct answer is. Furthermore they can generate lock extension fees out of it, while incurring no costs. Nor is this the only possible delay caused by new government regulation - but this one hits Every. Single. Loan. Other potential regulatory delays can add three additional weeks to the time it takes to get your loan.

If I do my job correctly and manage everything just right, I can and usually do close loans in six weeks or a little less - those that aren't rejected in unpredictable ways, that is. However, that's a far cry from three weeks it used to be, and there are things beyond my control that can kick it over the 45 day mark. Furthermore, I have one of the lowest average closing times out there - the industry average is better than half again mine and a lot of the high volume places are more than double that 45 days it takes the good ones.

When I'm wearing my Realtor hat, I really hate this (actually I hate it as a loan officer too), but it's the way things are. I tell my buyers to write a 60 day escrow period into the contract. I'd rather the offer be rejected upfront due to the escrow period than have it accepted and lose the deposit when the buyers can't perform on time because the loan isn't ready. On the rare occasions I list one, I tell my sellers it's going to take sixty days for any buyers to qualify for a loan, and while the all cash buyer is certainly nice, restricting yourself to all cash offers will result in a lower sales price and less money to the seller. Furthermore, an offer written that includes both a loan and a shorter escrow period is a red flag in no uncertain terms that there is something wrong with the agent. Any agent who hasn't figured out that the 30 day escrow isn't going to work by now (at least for purchases with a loan involved) is incompetent or actively plotting something. There really is no third option. Sometimes I can tell which right off the bat, other times I need to call the agent. So if there is a loan needed to consummate, plan on a 60 day escrow for your purchase or sale of residential real estate.

Caveat Emptor

With housing prices having crashed in most of the higher cost areas of the country, many people who were formerly priced completely out of the market have become interested once again in purchasing property. The drawback is that because lenders are scared of zero down payment programs right now, if you haven't got a down payment you are just as solidly locked out of property as if you could not afford the payment. So I thought I'd go over the down payment requirements for purchasing real estate. Keep in mind as you read that these are minimums. If you have more of a down payment, that's better. You cut the amount you need to borrow, thereby cutting the payment and increasing affordability still more, and you also likely improve the loan you are eligible for.

More mortgage insurance companies are becoming willing to go 95% loan to value ratio, but the catch is they want to see at least a decent credit score (680+, with the best rates not coming until 740 or so) and a slightly lower debt to income ratio than if you had a larger down payment. If this isn't you, I would plan on having 10% of the purchase price for a down payment with conventional conforming loans - especially if you want to split your loan to avoid PMI. On a $400,000 property, 10% is $40,000, which is quite a chunk of change for most folks. This is the "no government involvement necessary" loan, up to $417,000 of loan amount (not purchase price, a critical distinction to make!). If you're putting 10% down on a $450,000 property, what you have is a conventional loan amount - $405,000 - not nonconforming, but a full on conforming loan, assuming you qualify on the basis of credit score debt to income ratio and loan to value ratio.

95% financing for conventional loans has become more available, making it more likely to work. When all that's available is one program from one lender, it can be withdrawn at any time, or you can fail to qualify, and that's it. Things that only one lender offers can vanish at any time, and there is no Plan B. If that lender pulls the program while we're in escrow, that's not Monopoly Money my clients are risking. But when there's multiple lenders and a couple different insurers, that's less likely to vanish like faerie gold. 5% of $400,000 is $20,000, which is a lot easier to get than $40,000.

FHA loans now require a 3.5% down payment as opposed to 3%. On a $400,000 property, that's $14,000. On the plus side, the funding fee (Currently 1.75 points) can now be added back in to the loan amount, yielding a 98.25% loan to value ratio when everything is said and done, but you need a 3.5% actual down payment or the deal is off. Furthermore, they have a financing insurance charge of 0.5 or 0.55% on top of your note rate, but better to pay the charge and get the loan you need than not pay the charge and not get the loan.

VA loans really have become the magic bullet. Not only do they not require a down payment at all, but closing costs of the loan (including the VA Funding Fee, if it applies) can be rolled into the loan on top of the purchase price. Furthermore, there's no financing insurance charge, and only very minimal loan adjustments, if any at all.

The good news, to counterbalance the increased down payment requirements, is that prices are much lower. The bad news is that if you wait for the lenders to lower down payment requirements again, prices will be much higher then. You see, it's the difficulty in finding people who can get a down payment that is partially fueling the fall in prices. They're not going to stay this low when that changes.

So how do you take advantage now? Where can you get the money for a down payment quickly?

I'll skim over the obvious and simple candidates: Savings, investment accounts, sell some of your stuff. If you have a spare Ferrari lying around you're not using, that's probably a peachy down payment for just about anything. Just because folks were all wanting to buy without a down payment, to the point where it became unusual for folks to actually have a down payment there for several years, does not mean that doing so is in any way mandatory. But if you are in one of these categories, you probably don't need to hear me tell you that money you have stashed away could be used for a down payment for the purchase of real estate. I'll bet you can figure it out on your own.

So let's look at the non-obvious ways.

Let's start at the least painful, at least personally: Retirement accounts. The tax code allows you to withdraw up to $10,000 from certain IRAs for the purpose of a down payment (talk with your accountant for details). Put two spouses together, and you've got $20,000. That may have been only 3% when properties were $600,000, but when the property is $300,000, $20,000 is almost 7 percent - more than enough for an FHA loan or even traditional financing now that PMI companies are back at 95% financing.

Second option: 401k and its siblings and cousins 403b, 401b, 457, etcetera. These are group retirement plans where you cannot withdraw the contributions for so long as you work for the company, government, or non-profit. But the majority of these have plan documents that allow those who have previously contributed to take out loans from their balance in the plan and repay those loans from future contributions. Let's say you've contributed $30,000 which has grown to $50,000. The mechanics do vary, but if you take a $30,000 loan and repay it $200 every two weeks from your normal 401 contribution, that's mostly a wash in most cases. Be careful for rules on interest rate charged and method of repayment, but the federal government's Thrift Savings Plan (among many other employer sponsored plans) allows loans for this purpose. Meanwhile, your original contributions may even continue growing. Once again, it depends upon your plan document and everything it lays out. There is a drawback: If you leave that employer, the loan may become immediately due and payable, or it may be converted into a heavily taxed withdrawal. Again, consult an accountant for details

If your family (or your spouse's family) wants to give you a gift for the down payment, that works. FHA rules specifically allow up to a 6% gift from family members, VA rules are similar even though they don't require a down payment, and even conventional lenders make it easy enough to use family gifts for a down payment. This may seem like a no-brainer, but many times Junior wants so much to do it on their own without help, that they refuse to see a very obvious solution even though it is the best and most painless way under the circumstances. You can always save up the money to pay them back even though it was a gift. Just because it's a gift doesn't mean you can't give them a gift back later; it just means that it cannot be a loan masquerading as a gift.

Many locally based first time buyer programs exist. There programs lend (not grant) you the money for a down payment. In some cases, 20% or more of the purchase price. Most of these take the form of a "silent second" mortgage where there are no payments due, and it you hang onto the property for a certain amount of time, the loans can even be forgiven. The drawbacks are several, but the usual elephant in the room is that these programs run out of money at Warp Speed every time they get a new allocation. I've heard of people who had tried three, four or more times at intervals separated by six months and still couldn't get into these programs due to budget limitations. It can be very difficult to get in on these programs. I applied for one back in April for some clients. Despite the fact that we were less than two weeks out of the starting gate from when the budget allocation had been received, there was nothing left in the program. So even though your loan person may be eager to participate in such a program, the fact that your application is competing with those of many other people may preclude it actually happening.

The final possibility is a personal loan. These can be either from banks and credit unions issuing a fully underwritten loan with market rate interest, or from family members deciding to make a below-market rate loan based upon the fact that they like you. Lenders take a truly large number of precautions to prevent the down payment money from being borrowed unbeknownst to them, but a fully disclosed personal loan, not secured against the title of the property, is perfectly acceptable in most cases. If does impact debt to income ratio, because you've got to make payments on the personal loan as well as the real estate loan, so it does constrict what you could conceivably afford in the way of purchase price. On the other hand, it does put the purchase money in your bank account today, when you need it, rather than two years from now, when there is an excellent chance prices will be much higher by then.

So there you have them, half a dozen possible ways to get a down payment quickly, while it really makes a difference to the home you can afford the payments for because prices are down. Which they are, in part, because people with down payments available to them are so difficult to find. If you need a down payment to buy and neither these not any other method of acquiring one will work, you're just going to have to wait it out until the guidelines are relaxed, or until you do manage to save up the money for the required down payment.

Caveat Emptor

Original article here

Got this search:
"should I get a buyer's agent if I've already found a house"

The answer is almost certainly yes, but I am going to examine both the pros and cons. Full disclosure: This is most of what I do for a living.

The con is fairly simple. If the seller isn't paying a buyer's agent, they may be willing to sell more cheaply. Then again, they may not. One of the reasons people sell For Sale By Owner is that they're a little too greedy. Even if they have a seller's agent, their listing contract may call for them to keep the buyer's agent's commission if the selling agent sells the property without a buyer's agent involved, and this may cause them to be willing to sell more cheaply. They are under no obligation to do so, however - and without someone who knows the market on your side, the difference in price and terms of the agreement you could get with a buyer's agent is almost certainly more than this difference.

Many think the buyer's agent's job is to say, "Here is the living room." That's like saying the president's job is to look impressive. Sure, most presidents do look impressive and I do say "here is the living room," where it's applicable and something causes me to think my buyer may not have figured it out for themselves. Nor is it about looking in the MLS and my connections to find my buyer a property they like. It's not even about making showing appointments with listing agents and occupants.

My real job as a buyer's agent is to find you the best property for your needs under your constraints and get you the best possible bargain on it while making certain that the seller and their agent aren't hiding anything.

Many folks call the seller's agents and use them as their agent. This is what is known as a mistake. That seller's agent has a listing agreement telling them and the seller what the responsibilities of the agent are to the seller. They may or may not sign a representation agreement with the buyer. If they don't sign one, all of their explicit legal responsibilities are to the seller. They are working for the seller, not for you, and they have a contractual obligation to sell that property at the highest possible price as well as financial motivation in that their commission will be larger. The buyer's interests do not enter into it. Perhaps they do an excellent job of representing your interests anyway, but the odds are against it. Their legal responsibilities are essentially limited to "don't tell any lies and don't practice law without a license." While I was working for the FAA, we found out about an agent who had made a real good living for a while as a seller's agent and how he had done it: By telling everybody he showed a house in the area to that the airport was going to close. Ladies and Gentlemen of the jury, that airport land was dedicated solely to aviation usages by an Act of Congress, and if the county had wanted to close the airport (they didn't; they were making enough money to pay for every airport in the county there, and socking up a huge fund if they ever figured out something else aviation related to spend it on), they would have had to have paid back tens of billions of dollars to the federal government. We got a call from one of his victims one busy Saturday, who asked, "When is this airport scheduled to close?" We advised him that any proposed closure was news to us, and explained the preceding to the gentleman.

Even if the seller's agent does sign a representation agreement with you, in approximately thirty percent of transactions (from my experience) a situation arises where the best interests of the buyer and the best interests of the seller collide, in addition to the unavoidable issue of their interest are diametrically opposed on price. When this happens, no matter what they do, an agent representing both sides is stuck on the horns of a dilemma. If they do A for the seller, they are violating the best interests of the buyer. If they do B for the buyer, they are violating the best interests of the seller. Here's a hint as to which way they are going to jump in the event of conflicting interests: If they violate the seller's interests, they don't have a transaction at all. If you don't buy, they can always sell it to someone else, but if they lose the listing agreement, they are completely out in the cold.

Before I even point a property out to you, or if you find it surf the internet and ask, "What do you think?" I am evaluating the property for fitness, suitability, affordability, how it stacks up to other properties on offer, how many other properties are on offer, and what the details of the property likely mean in the way of potential problem issues. Just a for minor example, a property built in 1975 has to be concerned about both lead-based paint and asbestos; a property built in 1990 still has those worries but to a far lesser extent, as most building stocks with those concerns were long gone, and a property built in 2005 is more likely built over Jimmy Hoffa's final resting place than a repository for asbestos and lead based paint (it could happen, but the odds are long against it). I am not an inspector or a tester, but I can and do alert my clients to safety and environmental issues, potential repair bills, and all sorts of other items before we've made an initial offer. "Best thing you could do with this building is 'accidentally' run a bulldozer through it," is something I told a client in a few weeks ago, in the context of telling him the value, if any, was the land less the cost of demolition and haul-away. Initially built almost 100 years ago and haphazardly added to as well as obviously not in compliance with code, my client would have been facing the possibility of the county condemning the building as unsafe, and quite frankly, I didn't think anyone would insure it outside FAIR requirements. You're not likely to get that kind of talk from a seller's agent. Instead you get words like "charming," "funky!" and the ever popular phrase "needs a little TLC!". If you have a buyer's agent, the sucker they're looking for shouldn't be you. You might decide you want the property anyway, but you'll be aware of the issues going in to negotiations. Most importantly, if the sellers aren't going to be reasonable, you have someone who should be willing to tell you when to walk away. A listing agent cannot do that.

When it comes to the offer, a seller's agent is looking to get the highest possible price. Period. They don't care if you could buy a better property for less elsewhere, their responsibility to the seller and desire for a larger paycheck are in perfect alignment. A buyer's agent is responsible to you, and whereas buyer's agents get paid based upon the sales price, same as the seller's agents, they at least have a legal responsibility to do their best for you. If there are any complaints, a seller's agent can take refuge in the fact that it is their primary duty to get the best possible terms (i.e. highest possible price) for the property. The buyer's agent has no such shelter. Which would you rather have as your representative?

Buyer's Agents do not usually cost you, the buyer, any extra money. I'm sure there are exceptions, but I've never run into one. Both the Exclusive and Nonexclusive Buyer's Agent Agreements used by California Association of Realtors state, in the absence of additional agreement, that any commissions paid out of the "cooperating brokers" amount on the MLS count against the buyer's obligation to the representing agent. This is typically agreed to be two percent in California, and I don't know the last time I saw a residential MLS listing offering less than that to the buyer's agent. The way the transaction is structured is that the selling agent gets the entire commission, but agrees via the listing contract and MLS to share a certain portion with the buyer's agent, if the buyer has one. Good buyer's agents typically beat the price down significantly more than two percent, especially in the current market. I am equipped to do value battle with that seller's agent in ways that members of the general public are not, and whereas it's true they don't have to negotiate with my clients, they've got to sell the property to someone. It's not like the real estate fairy is magically going to convert this property to cash.

If there's something you should know about a property, the buyer's agent makes certain the question gets asked and the answer disclosed to you. This eliminates a lot of potential surprises down the road.

Finally the agent knows how to respond to unexpected or unusual situations. They should know how to deal with little niggling details that aren't quite cookie-cutter. None of these issues are common individually, but when you look at the entire transaction, most real estate sales have at least one such issue. Many of these look minor or even insignificant to those who don't understand the implications, but can amount to tens of thousands of dollars in repair, or even things that make property not suitable for the purpose people want to buy it for. At least 80% of the people who tell me how well they did without an agent also tell me something that informs any working agent that in reality they got taken - and that's without me so much as seeing the property or even the listing page.

In short, buyer's agents are the professional on your side, they typically do not cost you any additional money, they usually save you a significant chunk on negotiations, and if you have one, you're more likely to find out about potential problems with the property before you buy.

Caveat Emptor

Original here

This is a reprint from an older article that talks about a very important distinction between an agent doing well for themselves versus doing well for their clients. It originally ran in August 2005.

Every day I pass by another real estate office where the agent has a big banner outside "I SOLD 101 HOMES IN 2004!"

This is what is called a production metric, and this one sounds fairly impressive at first glance, right? However, all that says is that they sold 101 homes, and cashed 101 commission checks, meaning their bottom line had a very good year. It doesn't make much difference to their paycheck whether the property sold quickly and for a good price. If it takes an extra six months to sell, all that does is push the paycheck into next year. More importantly, if it sells for only 90% of what they could have gotten, they still get 90% of that paycheck, as opposed to nothing. Makes one heck of a difference to the client, as that 10% could be most of their equity - the check they're counting on to help them buy their next property - or even all of it.

The question I want to ask is how good the price was for the seller. Anybody can sell homes quickly by pricing them 10% under the market. Last year's market was a hot seller's market. In some neighborhoods, a monkey could have sold it for $20,000 over the asking price.

Is there a generally available "did you sell it for a good price?" metric? Not really. The best I can come up with for a listing agent is whether the appraiser has difficulty getting value to support the sales price so the loan can fund. If the appraisal comes in less than the sale price, the loan will be based off of the appraised value, rather than sale value, and so whereas this is always a difficult situation to be in, that your sale in in this situation says that your agent really did get you a good price. It's comparatively rare, and with the buyer's market we have now, practically non-existent (at the update, it's common but for a completely different reason). But if the appraisal comes in close to the sales price, that says something good about the price. If the spread is appraisal forty percent higher than purchase price (like one property I recently represented the buyers on), not so much - but it does imply your buyer's agent did a heck of a job. Unfortunately for the sellers, the buyers aren't going to tell the sellers about the appraisal unless the value is lower than the agreed upon purchase price.

Production metrics of this nature are easy to game. When I worked in the financial planning business, the metric used was GDC - Gross Dealer Compensation. How much your firm got paid because of your work. Problem was, it always has two components: how much business you really brought in, and how much turnover there is in your clients accounts. I know people who work at the "no load" fund houses, also. That's their metric as well.

It's a good metric to have. Firms that don't get paid enough, don't stay in business. But, as a consumer, it's not precisely the sort of metric you want your financial planner to be judged on, and neither of these components measures anything important to you. Actually, I take that back. If there's a high ratio of turnover in the client account, it's always bad. There's always the temptation to call an existing client and sell them the "hot new investment" than it is to generate new business. If I was shopping for a planner, I'd look for a low ratio of Gross Dealer Compensation to total assets under management.

Matter of fact, there really isn't a metric in the investment world to measure how good an investment person is on any objective scale. What I'd really like to know is something like the return on investment of their lowest 25 percent of clients and highest 25 percent of clients, and compare that with market averages and each other. This would tell me things like "How much (of any gain or loss) is the environment of the market, and how much is them?" and "Are they giving consistent advice?" (Low spread = yes, high spread = no). And not one firm I'm aware of computes this information. Not to pull any punches, what they are all set up to reward is sales ability, not investment genius.

The same goes for real estate. Everybody is focused upon volume, when what's really important to the client is "How good a job did you do with the ones you got?" Not only does using the "volume of business" metric and pretending it's important help the established firms build a moat around their business, it distracts potential clients from what's really important: How good of a deal they are likely to get as individuals. There are any number of production metrics in real estate, but none the nature of "Did Agent A's selling clients get the best price?", or on the purchase side "Did Agent B's buyer clients pay no more than they needed to?"

Nonetheless, here are a couple of other ideas. If everything I sell is bought by real estate agents acting for themselves, it's not a good sign. The average real estate agent is buying property because the price is below market. They think they can re-sell for a profit, and it's usually not a little one. They're probably not interested in the property that doesn't have immediate equity built in.

If everything I sell is back on the market within a few months for a higher price, that's also not a good sign. That also means it was probably priced below the market.

The agent I talked about at the beginning of this article? I picked up a flyer listing about a third of those sales (thirty-two). Then I went to Multiple Listing Service and did a little search. Over half (18) were back on the market within 6 months for much higher prices. Almost forty percent (12) of total number of new owners identified themselves as being owned by licensed real estate agents on the listing. Seven have been subsequently resold for at least a 10% profit, closing within three months of the original sale, even in what became a softening market. Only three are still active. The rest have sold, all at a significant profit, even in what became a much softer market at the time.

So now tell me, does this agent's claim of "101 houses sold" seem like something that should make you want to do business with them?

Didn't think so.

Caveat Emptor

Original article here

I went out looking at properties for clients. From the showing attitudes I got, you'd think it was still 2003 and sellers were lords of the earth, not in a buyer's market where competition for buyers is fierce. One wanted two hours notice. Another wanted four. Two others another wanted twenty-four. Another was "make appointment," and one was even "property shown with accepted offer," which added a little humor to my day - but caused me to un-check it from my list of properties to view, and this won't change until that does or the asking price goes so low that my clients can't help but get a deal. Can you say, "Pig in a poke?" I'm pretty certain that's not the message the owners wanted to send, and their listing agent should have explained it to them. You want me to recommend my clients buy something sight unseen, it had better be priced for the worst case scenario. Sixty to seventy percent of comparable properties is about the most I might consider.

Ladies and gentlemen, when I'm scouting properties I want to go now. I have the time now, the properties are on the active list now, which means they are hoping to attract buyers now. If I print a list of fifteen properties to scout, that's because there's something that drew me to them now - not yesterday, not tomorrow. I go scouting where and when I have a need - a buyer's desire - and time. Sometimes this happens on not much notice. Always, there's the possibility the property gets withdrawn, expired, canceled, or goes pending between now and tomorrow. The kinds of properties I'm looking for are susceptible to all of these. I used to try printing out my lists day before - and it wasted so much of my time that I stopped. My time is valuable - I've only got 24 hours per day, same as everyone else. You want my attention in the form of eyeballs and footprints checking out your property, you'll make it easy for me to do so. Do not give me any wasted breath about virtual tours - what I'm looking for usually isn't there. What I'm looking to avoid certainly isn't there despite it being in the property. I hope I don't have to explain to anyone reading this about photographic manipulation or a listing agent's descriptions of the property. There is no even vaguely acceptable substitute for physically looking at the property. My buyers are hiring me because they trust my judgment, and they want me to weed out the turkeys before they waste their valuable time. There is nothing so precious to my business as the time my buyers give me to show them good stuff. I have learned the hard way to go out and inspect the property myself before I take my buyers.

So when I can make the time, out I go. I choose them now, and I go now. If I leave the office at noon and have to be back at 3 pm and the optimum route puts me past your place at 1 pm, you're not getting four hour notice. If you require 4 hour notice, I'm not dropping by. I may hit your neighborhood again next week or the week after, but if in the meantime I've found my buyers have found something they like, then they're not in the market any longer and I'm not looking for them - not to mention I've still got the conflicts between the constraints you imposed and my own. One thing I guarantee you is that when a buyer wants to make an offer, it takes a spectacular bargain and a rare agent to say, "But you haven't seen this other one yet," and I'm not going to say it if I haven't seen your property myself, because by saying it, I am risking my credibility to zero beneficial effect should it turn out to not be so spectacular. Furthermore, when you're looking for half a dozen buyers, you have zero time to waste. It takes literally every second I can find, make, beg, borrow, or steal to find good appropriate properties for that many at once.

Whether you realize it or not, showing restrictions are part of the whole attractiveness of the property, and they hurt your sales price. Every time they cause someone like me to bypass your property, they cost you money in terms of a delayed sale and missing potential buyers. If prospective listing agents do not explain this to you, toss them out. I strongly suggest my listing clients relocate anything so valuable that they're worried about it to someplace where people looking at your property can't get to - Mom's, storage, a safe, any place you consider safe. Anything else that might wander off will cost less than making your house less accessible. With modern lock boxes, a record is made of which agents were in the property, and we're pretty damned careful about our good name - with buyers or without.

If you're so nervous that you're going to have to hover in the background, your property is a lost cause. Been there, done that. I refuse to deal with aggressive sellers or listing agents while I'm discussing a property's virtues and faults with my clients. There is nothing to be gained for either one of us. I don't have a responsibility to either the listing agent or the seller, even though the seller is paying me. I'm not going to be quiet, I'm not going to agree with you, and if I have to wait until later to discuss your property, you can bet I'm going to include overly aggressive sellers among the downsides to this property. It might give me reason to counsel my buyers to do a low ball desperation check. It won't enhance the value of your property in either my eyes or that of my clients.

This is just as much the case for the do it yourself buyer, the "phone the listing agent now" buyer, and any other sort of buyer or person with the attention of prospective buyers. Most folks act now because they want to go now, and if your property is not available to view now, they will go view other properties now. If they find one they like, you missed out. If they don't view your property, they're not going to make a good offer. Every missed opportunity is a potential buyer you're wasting, and right now, good qualified buyers are scarce, at least in my neck of the woods. It doesn't take many missed buyers to make a failed listing, and if it happens, you did it to yourself. People aren't looking for a reason to buy your property - they're looking for reasons not to buy your property and "They wouldn't let me see it" is one of the best by any rational measure.

By making your property unavailable, you are raising the cost of doing business with you higher than the model match down the street with an asking price $10,000 higher. The hoops someone has to jump through to view your property are as much a part of the asking price as the dollar value you put on the listing. Restrictive viewing can cut your traffic and prospects more than adding $20,000 to the list price. Sometimes $40,000, and it can be six figures at the higher end of the market, but I'm aiming this at the average seller. So ask yourself if requiring 4 hour notice is worth that much money to you.

It's not easy to have your home always ready, I know. It's a real pain to always be on guard, never leave something out of place, never leave dishes in the drain or a full trash can in sight. If you've got a pet, particularly a dog, it's difficult to keep them cleaned up after and confined to the appropriate area every time you leave the house. May The Force Be With You if you've got children, because you're going to have to be a superhero to make it work. But even if your home isn't perfect, better that potential buyers see it in an imperfect state than that they don't see it at all. Agents like me learn to look past transient stuff like toys on the floor, and to help their buyers do so as well. If the buyers see it imperfect, it's possible they'll make an offer anyway. If it's likely to be a less attractive offer, it's still an offer, and you can choose to accept it, negotiate, or blow it off. Advantage: yours. If they don't see it at all, you're not getting an offer, or at least not any kind of offer worth considering unless you're desperate.

Sales is a game of inches, if not millimeters or microns. Particularly big ticket items like real estate. Sometimes sales are won or lost over incredibly trivial differences - and viewing restrictions are not a trivial difference. It's like the difference between a fourteen foot wall and an open door. Many people can't get over fourteen foot walls at all, others think it's too much effort, and still others see no reason why any effort they do make will be rewarded. So you want to present an open door to all potential buyers. Every little increase in the barriers you put in their way will cause a certain percentage of prospective buyers to not want to bother - and you'll never know if that's the one that would have made the best and highest offer for your property.

Caveat Emptor

Original article here

I got a phone call from some out of state relatives looking to buy their first home. They want to buy a lender-owned property, but the only loan they have the down payment for is FHA. FHA has a few requirements that other loans don't about property functionality. It has to do with what they see as reasonable protection both for them and for people they lend to. One of those requirements is that if there is an air conditioner, it must work. It doesn't have to be able to actually cool the house, but it must function. The one in the property my relatives are interested in doesn't. Not only does it not work, it's been torn apart in order to sell the copper wiring inside. There is a loan that the FHA does that is aimed at this situation, called a 203k, but the sellers - a bank - are insisting upon a 21 day escrow. In blunt terms: Not Gonna Happen. I used to be able to reliably fund purchase money loans in less than 3 weeks. Dodd-Frank, however, has added at least 3 weeks to that, and government type loans take even longer.

Their alleged agent has made a suggestion: Pay to fix the air conditioner themselves, prior to purchase, so they can do a regular FHA loan. I have a suggestion for her, but it's not family friendly.

I do have to admit, it might work. But that's not the way to bet. Let's say they pay to fix the air conditioner, and escrow falls apart for any other reason. That money is simply gone. No realistic recourse is possible. If the equity was there to support recourse, the equity would be there to support the owner fixing it themselves. That's what should happen.

Escrows are falling apart these days for all kinds of nonsensical reasons, none of which agents or loan officers can prevent. Most of them have to do with underwriter paranoia on the loan. Because Wall Street has been so thoroughly burned by bad mortgage loans they are inserting extra requirements into loan underwriting. Furthermore, loan underwriters have become the lender's internal whipping boys so they have become extremely reluctant to pass anything that might strike them as a little bit out of the ordinary. Problem is, almost everyone has something out of the ordinary going on with their finances. It's the way things are. Net result: lots of loans denied for no reason the loan officer could have predicted.

Perhaps the inspection reveals more things wrong with the property. The seller obviously doesn't have the money to fix them, so the buyer has a choice between walking away - leaving their repair money behind - or accepting further defects and repair bills.

Perhaps something in the disclosures is a reason why the buyers decide they don't want the property. Maybe someone died there. Maybe someone was killed there. Maybe something related to religion pops up. Again, they're out any repair money they spend.

Things that need fixing on a property are the owner's problem - period. They are responsible for bringing the property into the condition required - not the buyers. If the sellers cannot or will not do this, that property is not one these buyers should consider. Similarly, if the buyers need a loan where the sellers are demanding things that preclude that loan, that particular property might as well be 100 times the price and located on the moon - it's not going to happen.

If there's a necessary repair that the buyers are willing to accept the property without the sellers making that repair - and their lender has no problems with it - that's perfectly fine, so long as everyone knows about it, it's fully disclosed and agreed to, etcetera. I have never seen a situation where such a needed repair didn't impact the price by more than the cost of the needed repair, but that's what negotiations are for. The bottom line is: Buyers should never spend money to repair a problem that belongs to someone else.

Caveat Emptor

Every once in a while, a listing agent will get an offer in where the Buyer's Agent did their research, got lucky, or both, and the offer indicates that the buyer is aware of one or more problems that really do exist in a property.

Contrary to most people's immediate reaction, this is a good thing, as I am very happy to explain to my listing clients. It means they know about it and are want to buy the property anyway. Not only can you build a serious case that this means there is no contingency period applying to that particular defect, it means that these buyers are willing to deal with the defect. As opposed to the buyers who discover the problem during escrow, there's a much higher chance of that transaction going through, and going through at the contracted price.

Matter of fact, a good listing agent will disclose that problem in the listing itself.

Why in the world would you do something so stupid, you scream? It's really very simple. Pretty much every problem is going to be discovered even if you don't disclose it, and selling a property has a major component of managing buyer expectations. They come to the property expecting a beautiful turn-key property, and when they actually lay eyes upon the thing, it's got this problem. Kind of like picking up what you think is a gold nugget, and finding out it's really donkey droppings. The predictable reaction is revulsion. This is one reason why there may be a lot of showings, but no offers.

You're going to have to price the property for the fault, of course. But if you don't do that, it's not going to sell. Prospective buyers are looking for reasons not to buy your property. Whether they look at it as overpriced or priced correctly but with a fault they don't want, they're not going to put an offer in. No offer, no purchase contract, no sale. It's that simple.

Suppose, as with a property I looked at yesterday, it's not an obvious problem. This thing had been made seductively attractive on the surface, but it was really a cash-sucking vampire property ready to pounce upon an unsuspecting buyer. If you do get an offer where they don't understand and you do get an offer and negotiate a contract, what happens? I'll tell you what happens. Their inspector tells them about the problem. Okay, so they've committed maybe $400 for the inspection, so there's some buy-in, but now they find out about this problem that you should have told them about that's going to cost something in the five figures (possibly six) to deal with. You've just been caught leading them down the primrose path. What's your level of credibility? My experience is that the average buyer is just going to bail out at that point. If they are willing to re-open negotiations, the prognosis is not good for a new agreement. Net result? You've taken the property off the market for a couple days to a couple weeks, and anybody else who may have been interested has crossed it off their list. Furthermore, when it returns to the market, it shows as having been listed that much longer ago, making it less attractive to new buyers coming into the market.

What if it actually gets through escrow and the purchase is consummated without the buyer finding out? That's the worst situation of all, because now the courts are going to get involved when the buyer does find out. Otto von Bismarck said that people who like treaties and sausage shouldn't see them made, but if he had ever been involved in a twenty-first century US lawsuit, that would have been first on his list. You're probably going to pay your lawyer more than whatever extra profit you made, and you're going to end up paying their lawyer plus damages as well. Plus, you might very well be ordered to buy the property back. No. Thank. You.

Now, suppose you disclose the problem, and price the property accordingly. You might not get Mr. and Ms. Yuppie looking for the perfect little place for them - but you can quite likely get Mr. and Ms. Yuppie looking for an investment opportunity. You've obviously decided that fixing the problem is not something you're willing to deal with, for whatever reason, but perhaps they are. You have decided you want it sold, and here's the opportunity for that. They know about the problem, and they're interested anyway. It's a matter of managing expectations. Remember up above, where I talked about revulsion? But if your prospective buyer is expecting the problem and prepared to deal with it, they're much more likely to make an offer when they visit. No, you're not going to sell for the same price as the showplace up the block. But you wouldn't sell to that buyer anyway, and trying to do so is one of the biggest wastes of time and money that would-be sellers of real estate talk themselves into.

So an offer where the prospective buyers indicate that they are already aware of an existing problem is not an offer to be blown off. It's a serious offer from interested parties. It is a lot more likely to get the property sold, and it pretty well vaccinates you against later lawsuits on the issue. You can waste your time trying to find and sell to the Suckers of the Century, or you can decide to accept that the property is what it is, and sell to someone who understands the situation from the outset. You're a lot more likely to end up better off in the end result from the latter - because even the Suckers of the Century can get themselves a good lawyer and sue you when they do discover the problem. They are on the hook for several hundred thousand dollars. They're not just going to blow it off and say, "Oh, well," and when they do get that lawyer, they're going to get a lot more out of you than the difference between what you got, and what you could have had without trying to pretend the issue doesn't exist..

Caveat Emptor

Original article here

Copyright 2005-2015 Dan Melson All Rights Reserved

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