Recently in Buying and Selling Category

Lots of people ask about first time buyer programs, government assistance, and other assistance. Mortgage Credit Certificate, municipal first time buyer programs, FHA, FHA Secure, even the VA loan.

The one thing they all have in common is that they require full documentation of income. You have to prove you make enough income to afford not only the loan, but the other costs of homeownership and your other debt service payments. Even ACORN. I may have a deep and abiding dislike for their politics, the partisan nature of how they use some of the money they get from the federal government, and the fact that they won't do business with small people like me, but they are sane enough that their loan guarantees require full documentation of income. The FHA allows a little irregularity on sourcing and seasoning of borrower funds, but it's hard as nails about documenting borrower income. You don't have to prove every penny you make, but you do have to prove you make enough.

All of these programs, without exception, are in place to encourage long term home ownership. The MCC and municipal programs (funded by federal funds) have an explicit goal of stabilizing neighborhoods. FHA and VA have the goals of expanding home ownership among those who need a little help on down payment. If you can't afford the payments, you're not going to be a homeowner very long. That wouldn't stabilize neighborhoods, and it wouldn't encourage long term home ownership - in fact, it would create problems that would likely follow you long enough to delay or discourage home ownership altogether. Therefore, they want to know that you can at least theoretically afford the loan you are biting off. Hence, full documentation of income.

What is acceptable documentation? Paystubs and W-2s or copies of income tax forms, depending upon exactly which profession you're in. The option of bank statements that exists with subprime loans is not acceptable, as they are too subject to manipulation and padding. Lenders accept paystubs and W-2s because there is a third party attesting to the fact that they paid you this money. They accept income tax forms because it's perjury to lie on tax forms, and more importantly, because declaring this income costs you money, in the form of taxes. $50,000 of income costs you more in taxes than $45,000 of income - and therefore you'd have to be pretty silly to declare more income than you actually make, because you'd be out the taxes without the income.

You also have to have a history of making the income. One paystub won't do. The usual standard is current and previous year, and your income is averaged on a monthly basis over that time frame. In some programs, they require three years of tax returns, even though you may be able to prove your income via paystubs and w-2s.

What does this mean? It means that they have a reasonable assurance that at the time of purchase, you can actually afford the payments on this property and all of your other debt, and be able to continue to afford them. Doesn't mean you won't lose your job tomorrow. Just means that as of the moment you have a documentable history of being able to afford what you're buying - and that even if you do lose your job, chances are good you'll find something comparable.

This frustrates the heck out of tax cheats, but also the self employed and other folks with large legitimate deductions, because it's adjusted gross income that is used, after all of the deductions and expenses and everything else.

It also means that when you're shopping for a property and hoping to use one of these programs, you have a hard ceiling on what you can afford under program guidelines, based upon loan rates, property tax rates, insurance, how much of a down payment you might have, and what your other debts are. Lenders pay a lot more attention to debt to income ratio than anything else when making a lending decision.

Suppose you're trying to plan ahead so you can afford as much property as possible, what's the best way to increase affordability? Usually, existing debt is the biggest obstacle, and paying down debts is usually the best way to increase what you can afford, providing you still have the necessary cash for closing costs and the required down payment. Basic money management advice: live within your means, don't charge anything you don't need to, and pay it off as quickly as possible. In California, $500 per month in existing monthly debt payments reduces the purchase price you can afford by roughly $75,000. By comparison, that's roughly the monthly payment on a $30,000 car or maybe $15-20,000 of credit card debt. This isn't a popular message - people don't want to hear about bad consequences or decisions they've made. It is nonetheless a fact of life.

So if you want to take advantage of any of the various governmental assistance or loan programs, you need to stay within a purchase budget. If you want to increase that budget, earn more money and declare it on your taxes, spend less, save more, and pay off any existing debts you may have.

Caveat Emptor

I keep getting search result hits for the string "fsbo horror." It's an amalgamation because I haven't done any postings on this specific subject.

Both buyers and sellers have problems relating to For Sale By Owner issues.

For sellers, the largest issue seems to be properly disclosing all relevant items to satisfy the liability issue. There are resources available, but the question is whether the you took proper advantage of them and made all the legally required disclosures on any issue with the property there may be. If you have an agent that fails to do this, you can sue them. If you are doing it yourself, the only one responsible is you. You are claiming to be capable of doing just as good a job as the professional, and if you didn't do it right, the buyer is going to come after you. You have all the legal liability.

Now I'm going to leave the marketing and pricing negotiating questions out of the equation, because with a For Sale By Owner most folks should understand that in return for not paying a professional to help you, you've got to do it yourself. What many For Sale By Owner folks seem to fail to understand, however, is that if you haven't met legal requirements, the real nightmare may be just beginning when the property sells.

Let's say it was something fairly innocuous, like seeping water from a slow leak you didn't know about. A couple years pass, and now there's mold or settling. Perhaps the foundation cracks as a result of settling. Bills are thousands to hundreds of thousands of dollars. Your buyer goes back and finds that your water usage went up by fifteen percent in the six months before the sale. He sues, saying that even though you didn't know, you should have known based upon this evidence. Court cases are decided based upon evidence like this every day. A good lawyer paints you as maliciously selling the property as a result of this. Liability: Steep, to say the least.

Now, let's look at it from a buyer's prospective. You have a choice of two identical properties. In one, a seller is acting for themselves, in the other, they have an agent. The price may be a little cheaper on the for sale by owner one, or it may not - usually not. One of the reasons people do for sale by owner is they are greedy. But when I'm looking at a for sale by owner, the question that crosses my mind is "Are they rationally greedy, or are they just greedy?" Are they going to disclose everything wrong or that may be an issue with the property? At least here in California, the agent has pretty strong motivation to disclose if something is wrong that they know about. If they don't, they can lose their license, and even if they don't, they have potentially unlimited personal liability. If they did disclose, they're probably off the hook, and even if they aren't, their insurance will pay for the lawyers, the courts, and any liability. If there's one thing all long term agents get religion about, no matter their denomination, it's asking all of the disclosure questions.

This is not the case for many owners selling their own property. Some are every bit as good and conscientious as any agent. A good proportion, however, are intentionally concealing something about the property. What's going to happen when it comes to light? If there's an agent, there's a license number, a brokerage who was responsible for them, and insurance. The latter two are deep pockets targets for your suit, and you can find them. Once that owner gets the check, you can find them unless they're dead, but they may not have any money. Even if they do have money, it may be locked up and inaccessible via Homestead or any number of other potential reasons.

One of the reasons that I, as a buyer's agent, am always leery of a for sale by owner property is that I have to figure that first off, there's a larger than normal chance that this property has something wrong that's not properly disclosed. When that happens, my client is going to be unhappy. When my client is unhappy, they are going to sue. The first target is the seller, but if they're gone or broke, who does my erstwhile client come after? Me. So I have to figure that not only is there a larger chance of there being something wrong, I have to figure there is a larger chance of me being held responsible for something I took every step I legally could to avoid. For Sale By Owner properties usually have to be priced significantly under the market in order to persuade me that not only am I doing the right thing by my clients in trying to sell them this property, where my clients have to pay my buyer's agent fee out of their pockets rather than out of the selling agent's commission, but also that the heightened risk of future problems is worth more than the price differential to my clients. Unless the answer is a strong solid "yes" that I can document in court if I have to, I'm going to pass it by in favor of the agent-listed property next door or down the street.

Caveat Emptor (and Vendor)

Original here

This has always been a portion of the market, but right now, more and more people are emphasizing it, or at least the ones who are able.

Actual Rent to Own is rare these days, a sign that the market is being driven by sellers, selling to poorly advised buyers. I can't remember the last time I heard of one happening, because there is an actual ownership interest right away, and the buyer is entitled to a share of the money put into rent, whether or not the deal is actually consummated. On the other hand, Lease Option seems to be a common Idea of the Moment, because the prospective buyer basically gets nothing if they don't want to buy, or if they cannot qualify for the loan.

Just like any other purchase contract, everything about these is negotiable, but the basics are thus: Buyer and seller reach a purchase agreement, with the date of actual purchase delayed by some amount of time. In the meantime, the agreement is for for the buyer to rent the property, usually for an above market rent. Part of each payment gets set aside for the buyer's down payment if and when the option is exercised. The difference between Rent to Own and Lease with Option to Buy is that in Rent to Own, a part of each payment is actually due back to the buyer if they decide not to buy, whereas in Lease with Option to buy, that money is just gone if the option to buy is not exercised.

Why do this?

For the prospective buyer, it's a way to engage in forced savings for a down payment. If rent is $2000 per month, with $1000 being credited to the buyer and $1000 in rent, over a period of two years, you've got a $24,000 down payment, and this is treated exactly like any other down payment, except that the seller already has it, so you only have to come up with the purchase price less this down payment money. This is useful for people with rotten credit and/or poor savings habits, especially if credit is expected to improve withing the time frame of the agreement. It's horridly inefficient, and I've never seen a residential situation where it wasn't better to buy outright, but if you have a problem qualifying for a loan or saving for a down payment, this is one way to go about dealing with that problem. With 100% financing currently dead except for VA loans and a few Municipal first time buyer programs that run out of money at warp speed every time they get a fresh allocation, this is one way for people to get their foot in the door of property.

For the seller, it's a way to create a captive purchaser. These buyers have rotten credit and/or zero dollars for a down payment. Nobody else can do business with these buyers, because the buyers will not qualify for the necessary loan. They have Hobson's Choice: This one or none at all. This creates bargaining power for the seller even in the strongest of Buyer's Markets, because most sellers in such markets do not have the ability or willingness to offer a Lease with Option to Buy. They're not as powerful as offering a Seller Carryback, but they definitely give sellers pricing power they would not otherwise have. You can get an above market rent and an above market price, to boot, and the prospective buyers are more motivated than your average tenant to take good care of the property.

So why isn't everybody doing them?

First of all, the reason the seller has the property on the market is because they want or need to sell now, not two years from now. With either rent to own or Lease with Option to Buy ("Lease Option"), they aren't getting any equity out of the property now to enable them to buy their next property. Furthermore, they've still got all of the expenses of owning that property. Finally, the reason that buyer can't buy anything else is because the most generous assessment of their financial skills possible is "Needs improvement." Bad credit does not, generally speaking, happen like a lightning strike out of a clear blue sky. It happens because they don't pay their bills on time. There are some exceptions - mostly people who had major unexpected medical expenses, but there are limits to how badly one account can hurt your credit. Chances are high that they'll be late with the rent - which is money you're counting on to pay your mortgage, your property taxes, your insurance, etcetera. It takes a certain financial solvency to be able to offer these. Not to mention that until the tenants exercise the option to buy, you still own that property, which means you've got all of the headaches and obligations of being a landlord, or you're going to have to pay someone else to take care of them. Repairs, maintenance, etcetera.

For buyers, the prospective pitfalls are even worse. First, you're paying above market rent and agreeing to a price that is usually significantly above the current market. It might be below market when you actually exercise the option, but right now, it's almost certainly a goodly premium over the price that you can get similar properties for - because they're offering something extra that most sellers are not willing or able to offer, and if you didn't need it, you wouldn't be willing to pay for it, right? If you don't exercise the option to buy, the extra rent money you fork out is basically gone. There has to be equity in the agreed upon sales price, and there has to continue to be actual equity. No lender in the known universe is going to approve a short payoff for a Rent to Own or Lease Option, no matter how ironclad your contract. If the current owners lose the property to foreclosure, you're basically SOL. And it wouldn't be the first time sellers pocket the rent while not paying the mortgage, or even taking a cash out refinance. I'm not certain what the law is on this point, but I don't see a way to keep the current owners from doing any of this. It's a good idea to record the option, but that doesn't mean anything if the lender forecloses or is owed more money than the strike price. You can sue, but suing broke people is throwing more money down a black hole from which you're not going to recover it. Finally, and here's the rub that kills a very large proportion of the prospective buyers who enter into these agreements: You're still going to have to qualify for a loan for the rest of the agreed upon purchase price ("strike price") before the option period expires. Usually the market goes up, but sometimes it does go down, and the appraisal is less than the purchase price. If you can't make up the necessary difference between the biggest loan you can get and the strike price, you're not going to be able to buy. For that matter, if interest rates go up significantly, you could find yourself unable to afford the payments on that loan. In fact, these two phenomenon usually go together. Rates go up, therefore payments and cost of interest on the same number of dollars rises. People in the aggregate cannot afford to pay as much for real estate as they could formerly, and therefore, prices fall. Basic economics.

There usually is a significant deposit made, as well. Not as much as a regular purchase contract, but just because there's a time delay involved doesn't mean the seller isn't going to demand a deposit they can keep (maybe), or rent to a tenant without a deposit. The rules on whether they can keep a tenant's deposit are also somewhat different and more advantageous to the current owner than California's renter-landlord law generally is (Don't ask me - I'm not a lawyer. I'm mostly parroting what I've been told on this point).

The prospective seller is entitled to do all the due diligence than any normal prospective seller or landlord is, and ditto the prospective buyers/tenants. Personally, I would want that inspection contingency period to run the full duration of the option period, and there really isn't an effective loan contingency period, as the owners already have the prospective buyer's money, and most Lease Option contracts are pretty solid upon the point of not getting it back. This point is negotiable, but usually that money has already gone to pay mortgage, property taxes, etcetera. What did I just say about suing broke people?

Rent to Own real estate and Lease with Option to Buy real estate are always a risk for both parties. The tricks are myriad, at the very least. This is not something to try without a very sharp agent representing your interests, and as for dual agency in this situation, I have it on excellent authority that slow roasting yourself while basting with acid is less painful for prospective buyers. With that said, if the situation is right and both parties act in good faith, it can be a way to make both sides of such an agreement very happy, when otherwise they would both have been very unhappy. The seller gets an above market price, albeit delayed, and a much improved cash flow in the meantime. The buyers can buy property, where otherwise they would not be able to.

Caveat Emptor.

Dan,

Okay, so now I'm in the process of just making an offer on a house and it's already getting confusing despite all my reading. It would have been worse has I not spent all this time reading but just when I think I have a solid grasp of this process something else springs up.

The agent is saying that with the offer we have to say who the lender is and if we change lenders we have to ask the seller for permission, basically, since it's a part of the offer. Is that normal?

It's a short sale (seems like everything we look at is!) and on the home there are two loans. This is what I heard from the sellers agent. The first lender signs off on just about any offer (and so far I'm told there are offers all the way to $189k) because for the most part they're going to get all their money back. The second lender has not signed off on any offer so far but the sellers agent says if you offer X (it's $199k in this case) they'll take it. First of all, how can the sellers agent even go into details like that? (And he told ME because I called him after I talked to our agent because I couldn't believe she knew all those details about first and second loans and what the second lender would settle with.) Second, how would he know how much they would settle for and third, why would that lender tell anyone what the lowest they would take is? Seems to me this is all speculation on what that second lender might do.

Okay, so the asking price is $199k and my agent knows we have about 3.5% saved, that's it! So we go and get pre-approvals from lenders for $200k. So far so good. Then we find a house we like and the asking price is $199k. And we lean that if we offer the asking price chances are it'll get accepted (usually we learn that there are 3 offers already and we need to offer more . . . yes, even in the down market!). Once I finally get over the fears and decide to do it the agent tells me we should offer $204,500 to cover closing costs. WHAT? I'm confused again.

Any light you can shed will be greatly appreciated.

I don't know much about your market and its current state. Some things are appropriate in some buyer's markets, but will only get the door slammed in your face in seller's markets. On the other hand, some things are necessary in seller's markets, but are giving away far too much in buyer's markets, and there is an entire continuum between buyer's markets and seller's markets. Handling offers and negotiations in a manner inappropriate for the current market will pretty much guarantee failure, either by asking for something so outrageous that the door metaphorically gets slammed in your face, or by giving away all sorts of things including money that there is no need for. To know what is and is not appropriate, you need an agent who knows your local market, who's willing to really work on your behalf, not just fax offers back and forth.

As far as the lender goes, I have NEVER named a buyer's lender in a purchase offer, and I'm not about to start, for precisely that reason - and the fact that its none of the seller's business. But it might conceivably be part of the standard contract in your state, for reasons I don't understand, being a California boy. Some state laws are a bit, shall we say, different? On the other hand, some lawyers I'm aware of could build a serious case that this particular item, however, is a RESPA violation, which is federal law and applies everywhere in the US.

It's easy to figure out approximately how much they owe. The original dollar amount of existing liens is public record, everywhere in the US. From there, you can make a pretty good estimate of how much they owe. Not that it's generally a good idea to focus on what is owed. Whether it's free and clear, or upside down, the property is only as valuable to you as it is. You're not going to pay $400,000 for a property that's only worth $200,000 if they're upside down. Neither is there any reason to be willing to pay less if they own it free and clear. It's still worth what it's worth, and failing to understand that, by either the seller or the buyer, is a recipe for failure. Buyers do not care what a seller "would like to get," and sellers don't care about what a buyer can afford except as it applies to the question, "Can they afford this property?"

A short sale is a short sale is a short sale. Unless there are reasons like "pretty much everything is a short sale", buyers should avoid short sales. Even done right, it's a month and a half or more process of the lender trying to beat everyone up for more money by wielding a VETO. If you do decide that you want that particular property badly enough to fight through the short sale process, I wouldn't start by accommodating the lender. They're still going to try to beat you up, only they're starting from a better point for them and a worse one for you.

As far as over offer to cover seller paid closing costs: We do live in a net world. Are you asking for seller paid closing costs? You shouldn't if you don't need to, but if you are, it's kind of like an equation. If X, a price they will accept on an offer without seller paid closing costs, equals $200k, then X plus $5000 for closing costs is $205k. Actually, since they pay commissions on the higher amount, you should feel lucky if they agree to a price that doesn't add anything more than the closing costs cost them.

The critical questions I usually ask are: Suppose you get it at that price. Happy or sad? Suppose you don't get it at that price, but someone overbids you marginally and does. Angry, or don't care? Finally, how many real competitors for your business are there? Is this property head and shoulders above everything else with a comparable asking price, or are there hundreds of others just as good, that you could just as easily make an offer on and be happy with? The answers to these questions will help a good agent determine what a good offer is, and what it isn't. A bad offer can poison the well, and a too good offer gives away too much. You want the property on the best terms possible, but you do want the property. If you're a flipper looking to score on a low ball offer, you don't care if you poison the well (you're pretty going to walk away if they're not desperate enough to take the first offer or something close), but pretty much everyone else does.

From your email, I'm getting suspicious there's some tendency on behalf of that particular agent to inflate the price so they get paid more, and possibly even collusion. But there's no way to be certain, and no way to tell that it's even the way to bet without knowing more about your market. Only another agent in your market would know about that, which is one reason why any specific negotiating advice you're going to read in a forum with a national audience is so much wasted breath at best. There are possible exceptions to everything I've written in this article, and I know what they are and where they would be applicable, but it all has to do with a given local market at a given temporary time or specific situations where you're going to be getting something extra in exchange for giving up something that isn't normal. For anything beyond a particular local market under particular market conditions that apply in a very time limited fashion, detailing these would be so much wasted space on the page. All of this is one more reason you want a good buyer's agent on your side before you start looking at property. Dual Agency is a recipe for disaster for buyers.

Caveat Emptor

I had made a request to repair that included $3700 credit for closing costs. I wanted to get things done like safety issues and more critical maintenance issues done. Our estimate said that it would be about $4900 to do all the maintenance we were looking for. The seller was doing a bit, but not all.

The seller apparently balked at giving us any credit. He felt they conceded all they could. Anyway, my agent convinced them to at least counter. I was a bit angry at the initial balk. (the emotion part of the deal). After the initial anger, I went looking for problems and found one that frightened me. My agent had given me the inspection report from the seller's purchase of the home six years ago. There were things on there that were still a problem two years later. Primarily, high water pressure in the house (with the dire warnings of damage to pipes and fixtures as the potential side affect). Secondly, ants. The report six years ago had mentioned ants. Every time I looked at the house, (we visited it 5 times), I always saw ants not many usually only 1 sometimes 2. So, my residual anger ballooned these concerns way up. My ignorance was on the pipes. I have since talked to one plumber and an extended family member who is a retired contractor, home builder and home inspector. It was his comments that alleviated my fears about the pipes and allowed me to calm down a bit. He basically said, "Wow, six years of a pressure test - and it passed. Great! We usually only do two hours." He also said, get a regulator on it, but you shouldn't have a problem.

So, emotions, ignorance and too much time to think - nearly killed the deal.

Sometimes, people get all worked up over the little stuff.

On the other hand, sometimes people don't get worked up when they should. This person wasn't clear, but I'd get upset if my agent tried to placate me with a six year old inspection. If it's just compare and contrast with a brand new inspection, fine. But if someone else paid that inspector, they may not have any responsibility to you, and you want them to be responsible to you. I wouldn't accept the inspection that the previous prospective buyer had done. Sometimes, agents trying to make sure a transaction goes through will try to give you an existing inspection, because they know what problems that will show. This is always the hallmark of a commission grabber, and you should fire them. Then start looking for something else.

An inspection around here will almost always reveal some defect which wasn't dealt with in the first round of negotiations that resulted in the purchase contract. Usually, they're dinky little stuff. Replace one light bulb, brace the water heater, maybe replace the garbage disposal. Sometimes, however, it is major work: rotting substructure to the roof, foundation damage, etcetera.

It does not matter if it is major or minor. It needs to be fixed. The way I usually explain minor stuff to sellers is, "You don't want to lose a $500,000 sale over $30 in repair work, do you?" It does sound rather silly, doesn't it?

If it's major, it still needs to be fixed. Here's a new defect in your property that causes it to be worth less than the agreed upon price. You can often get the buyer to accept the property for a lesser price - estimated cost of repairs plus an allowance for them being the person who has to deal with it. You're not getting out of major repairs on the cheap unless the buyer's agent hoses their clients. I want a reliable contractor out there to give my buyers an estimate for major repairs, and you'll find that's about par for the course. As the seller, you can have your choice between fixing it, giving them an allowance that makes your buyer happy, or losing the transaction.

Lest you think, "I'll just forget about that prospective buyer," even in seller's markets the next one that comes along is likely to find exactly the same set of defects and want exactly the same set of repairs, which is going to cost - you guessed it - pretty much the same amount of money. The only differences are one, in the meantime, you've spent some money on your mortgage, taxes, etcetera, and two, the earlier offer is usually the better one. In other words, same situation, but you're out more money.

Somebody's going to ask about "as is" sales. They really don't make much difference to this fact. I'm not going to let a buyer put in an offer on an "as is" property without an inspection contingency. The inspection shows something major that we didn't already know about, the choice is going to be give us an allowance, fix the problem, or lose the transaction. It's only an actual "as is" sale if the inspection doesn't reveal anything new and major. Matter of fact, selling "as is" is a red flag that tells me the seller probably knows about something major, unless it's a lender-owned property. If it is lender owned, "as is" and "without warranty" are the ways that business is done. Otherwise, it really doesn't mean a lot beyond that you are indicating that you would rather give an allowance at close of escrow than pay for repairs.

For buyers, you don't need to freak out about every last little thing. If you're getting a screaming deal, the fact that you need to put a handrail up in the stairway at a cost of a couple hundred bucks shouldn't cause you to pull out of the deal. If the owner doesn't want to make repairs, be willing to accept the cost plus something reasonable to represent your time and the decreased utility in the meantime. Don't demand triple the cost of major repairs unless you really are going to have to spend that much sitting in hotels and eating out until the work is done.

A reliable contractor is your best friend in subsequent negotiations. First off, it should tell you what it really is going to cost. If they've said that it's going to cost $7500 to fix, that's better information than any agent or inspector can give you. This does wonders for peace of mind, knowing that it's going to be $7500 to fix the problem after you're in title, not $75,000.

An allowance for construction work from the seller can be a great opportunity if you've got some cash left in your pocket after the sale. For example, if you're going to have to replace the green board in the bathroom anyway, it doesn't cost that much more to add some nice updates and upgrades. An extra $500 for better materials can really go a long way. When you go to sell, more money in your pocket. In the meantime, a much nicer bathroom. Even more to the point, one much more aligned with your personal tastes.

Every negotiation after the initial purchase contract is at least as dependent upon the good will of both parties as the initial purchase contract. If one party or the other thinks they got the worst of the initial negotiations, you can expect that to be reflected in how far they are willing to go for you when the inspection reveals defects. You want the person on the other side of the transaction to be thinking they get a decent bargain, one that they would make again. That way, they won't want to blow it off before it happens, by being unreasonable about the repair negotiations. Yes, this is one more reason that you want a buyer's agent to help with negotiations.

Caveat Emptor

Original article here

With the current popularity of pursuing a "green" lifestyle and some sustainability (garden plot, edible landscaping, micro-orchard, etc.) in one's yard area, I value your input about what to look for in an older subdivision with larger lots that aren't "vampire properties." And how do you factor in local ordinances? Thanks!

First off, I want to say that it's not my place to pass judgment on anyone's housing preferences. This person wants more green, so I'm going to help them with that.

If you're really looking to be green, there are a lot of reasons not to buy a single family detached home. In heating and cooling, materials, and most especially land use, single family detached homes are about as un-green as it comes. Talk to the sustained use experts, and they'll tell you that single family detached housing is horribly wasteful of everything involved. The "greenest" housing is high rise condominiums and apartment buildings. Not what everyone wants to hear, but nonetheless the truth.

With that said, there are degrees of "green". Small sized plots are not agriculturally efficient - that's one reason why Zimbabwe (to name the worst example) has gone from breadbasket to starving in a few years time - they broke the big farms up into little farms supporting one subsistence level family each. So you're not going to produce enough to offset what the land could do as part of a commercial farm or large public park, but you can do fairly well if you check with your local greenery experts. Locally, Kate Sessions (our most famous landscaper) was known for gardens that were both beautiful and water efficient - to the point where the City of San Diego doesn't water large portions of Balboa Park at all. Pretty much every greenhouse locally has someone whose advice to make the landscaping efficient is worthwhile. Even townhomes can be worthwhile - I know folks with dwarf fruit trees in the back yards of their townhomes, and if a homeowner's association was to make an effort, most of them would make far more more difference than a single plot owner - because while it is a common interest development, when you put them all together, you usually have several times the land available of most single family detached urban dwellings. Trees provide shade in summer and keep it cool - and they help break the wind and lower heating bills in winter. Obviously, check with someone local to you for specific recommendations because I'm pretty sure orange and lemon trees don't do so hot in Minnesota winters. Grass is nice, and good for resale, but it's a big user of water - a no-no for Green living in most of the west. It wouldn't be such a big deal to water grass with 'gray' (used water, no longer potable) if lawns weren't so notoriously un-"green".

For heating and cooling, double or triple paned windows and good, tight weatherstripping are pretty much mandatory for greens. Newer housing has this sort of thing already installed, and lots of older ones homes do, as well. Given the cost, it probably is not worth while to replace existing windows with modern ones for that reason alone, but that doesn't stop a lot of people. I'd think wood floors - replaceable, polishable, durable - would be superior to anything else, but I can't cite chapter and verse. I know a lot of beautiful hardwood floors that are the better part of a century old - while even travertine starts looking dingy in less time than that. When wood starts looking old, it can be re-polished to its original shine more easily than anything else I'm aware of. Finally, wood is a much more renewable resource. Trees grow back. Quarries do not. Petrochemicals do not.

Good insulation is a feature of eco-friendly housing as well, but be careful: Too much can actually be a health hazard, as it can cause Radon gas to build up to levels that are illegal in uranium mines.

Modern air conditioning units work without CFCs. R410a ("Puron") is what home systems are in the process of converting to, as CFCs and HCFCs are being phased out. I don't have any first hand experience with this, but if you're replacing your system, it appears to be worthwhile to consider replacing with a high efficiency modern system. The difference in price is smallish, and the difference on your monthly bill significant. The upshot is that you'll pay for replacing your prior system with a high efficiency system a lot more quickly than a low. I'm also told that simply running the ductwork underground for a certain distance can negate the need for heating and air conditioning altogether - all you need is a good fan to pull the air through. Be careful that the static ground temperature in your area will support this first - check with a local expert. Needless to say, that last suggestion about burying roughly 100 feet of ductwork isn't really an option for the owners of anything but single family detached housing, even though it needn't be in a straight line..

The square-cube law is always in effect. Heat and cold leak in and out via surface area, while you're heating or cooling cubic volume. The smaller the surface area, as a proportion, the longer it takes for heat and cooling to leak out. A featureless cube (or better yet, sphere) is more efficient than a rambling single story ranch house. Nonetheless, it's more efficient to heat a small structure than a large one, and body heat from the inhabitants helps more in winter. A 1200 square foot dwelling is more "green" than a 3000 square foot dwelling for the same family. Is that going to stop me from showing 3000 square foot dwellings to those who want them? Absolutely not. Once again, this is "other factors being equal."

If you really want to go green, especially in the west, you're going to get into recycling the water you use. Laundry water can be used for a lot of plants, as can bath water. The ultimate instances of this are pretty disgusting if you think about them, but people do go a lot further than this, and every drop of water on this planet has gone through such a cycle multiple times. It's all pretty much dependent upon how far you want to go on your own hook. My main objection to the City of San Diego's water recycling plan was that it wasn't good enough to get out all contaminants, and people weren't going to get their own discharges back, so they could drop stuff into the drain like old engine oil, and be confident it wasn't coming back to their tap.

Green construction is no better and no worse, as far as intrinsic durability and aesthetics go, than non-green construction. It can be more expensive (How many hardwood floors have been laid down these last ten years?), but quite often, you can actually save yourself money in the end if you're willing to make the up-front investment. How far you want to go is a function of your preferences, pocketbook, and your area of the country.

Caveat Emptor

Once we figure out when we are going to be ready to buy, how early is too soon to get a buyer's agent and start looking.

You are ready for a Buyer's Agent when you are ready to act on it if that agent finds you something that meets enough of your criteria. By act, I mean put in an offer and consummate the purchase. If you're not ready to act, you are just wasting everyone's time. If you are ready and willing to act, then there's no reason to wait.

If you are not willing to act, you're engaging in mental onanism. Kind of like fantasy stock market traders. Doesn't matter how well you do, it's not real. As Sir Sidney Poitier once observed, it produces nothing. If you don't understand the difference between playing with real money and playing with meaningless number scores, get a guardian.

Being unwilling to act frustrates the agent and wastes the time that they might spend prospecting for you, and productive agents have to be jealous of their time. If you waste their best efforts when you aren't ready to act, don't be surprised if you're not their top priority when you are. You avoid this trap by not approaching them until you are at least willing to act.

It does no good to store up "prospects for later." Good stuff doesn't last for months. It probably won't last for weeks. It may not last to the end of the day. It only lasts until one person who is willing to act discovers it. If you're not willing to act, you are wasting your time looking at property for sale. Six months from now, when you are ready to act, that property won't be there, the market will be totally different, and interest rates may well have moved to where you cannot afford what you could afford today.

Markets change over time. The market today where I am is a very different market than two months ago, which was different from two months before that, and also different from the market as it's going to be two months from now. This is one of the many reasons why attitude is worth more than experience in an agent, but it also means that market research you do now is worthless a few months from now. The markets vary not just with macroeconomic factors, but also with time of year. The upshot is that the market today is different than it will be in two months, different than it will be in late summer, and is already different than it was a few months ago. You try to look at your fifteen to twenty-five properties today with an eye towards buying in six months, you are doing worse than wasting your time. You are actually confusing yourself with data that is very likely to be outdated by the time you go to apply it.

Furthermore, there's a well-known comedy schtick routine in the industry: Q: How often does the deal of the century happen in real estate? A: About once a week. The point of the matter is that if you are looking for a property that's a real bargain, they aren't that hard to find. The more difficult skill is recognizing them when you see them. The average buyer is looking for something that is both perfect and a bargain - and the intersection of those two sets is pretty universally null. The reason the current owners spent all that time, effort, and money fixing them up is because they expect that effort to be handsomely rewarded by buyers who don't understand or don't care about the economics involved.

You probably want to talk to someone who does loans before you talk to a buyer's agent. Find out from them what real rates are that can really be done for you. This, together with how much you make, gives you your budget. It may change, going down if rates rise or up if they fall, but this way you know how much you can afford to spend. I have said this many times, but it's a good idea to repeat it: Shop by purchase price, not by payment. If you shop by payment, you are laying yourself open to all kinds of games by unscrupulous lenders and agents looking for quick, easy sales. Of course, if you find somebody who does both, that's fine, as long as they pass the tests you'd administer to both. Among which, of course, are Questions You Should Ask Prospective Loan Providers and being willing to work on a non-exclusive buyer's agent basis.

Caveat Emptor

Original Article here

(This is a companion article to What Sellers Need: What Buyers Should Want to Supply)

Quite often, I hear people talking about the real estate market as if it's all some amorphous blob, and buyers and sellers are no more different than they are in the stock or bond market, or for that matter, people using the bank to make deposits or withdrawals.

I cannot agree with this concept. Real Estate is not liquid, and real estate is not commoditized, and in the absence of some future world government building precisely one identical housing unit with precisely the same environment for everybody, I daresay it never will be. Since the chance of the rulers of that government limiting themselves and their cronies to the same housing everyone else has are nil, you can take it from there.

What do buyers need? They have the cash the seller (that would be you) wants, or the ability to get it via a loan, which comes to the sellers as cash - providing they can actually qualify, hence the preceding paragraph. What they need in exchange for that cash is the the assurance they will be getting a clear title, unencumbered by outside interests who may come after them later. They also need an assurance that the building - which is what 99.99% of all buyers are really interested in - is going to continue standing in good, inhabitable condition for the forseeable future. If there is a loan involved, the lender will want reasonable assurance that they can recover their investment if something goes wrong with the loan. Just as seller's issues become buyer's issues, so do buyer's issues become seller's issues.

This makes delivering clean title imperative. If there's a possibility buyers are going to put every penny they saved for three years into purchasing a property, together with putting themselves into debt for thirty years, and end up not owning that piece of property after all, it shouldn't be difficult to figure out that the property is worth much less to that buyer - or any other prospective buyer. There is a profitable niche in clearing title on real estate, but you've got to really know what you're doing, and you've got to be prepared to lose everything invested in a given property. There's a reason the standard California purchase contract requires the seller to purchase the buyer a specific very broad policy of title insurance, and why it allows and requires negotiation as to which title insurance company issues that policy. I want a good solid company that only insures good risks, because I want them to be around and able to pay the claim if one happens forty years down the line, as opposed to Fly Tonight Title that disappears as soon as it has the premium payment. If a good reputable company won't insure title, there is a reason, and title insurance that isn't there and solvent years later is useless. Actually, it's worse than useless because without that title policy that turned out to be useless, nobody in their right mind would have paid that anywhere near that price for that property. So yes, a good policy of title insurance costs money. However, without that title policy the property is worth a fraction of what you might get for it with that title policy - and this fraction is well under 50%. Paying for a title policy is part of the cost of getting as much cash as possible for the property. Examined in terms of return on investment, there's nothing that even vaguely approaches it.

As far as the building's structural integrity, inspections cost money: hundreds of dollars. It's not cost-effective for buyers to perform inspections on every property they want to make an offer on, and the owners - or their tenants - might have a little something to say about an inspector invading their personal spaces for three hours or so. But it is necessary that the inspector have legal responsibility to the buyer, and that's the reason why sellers are wasting their time getting an inspection. Yeah, it can help you fix problems before you put the property on the market. But no competently advised prospective buyer is going to accept such an inspection, because if there's something wrong or something missing, that buyer has no recourse to sue an inspector that was, after all, working for the seller. But if their inspection reveals problems, the buyer is going to want the ability to negotiate repairs, compensation, or to get out of the contract entirely, hence, the inspection contingency. This is one reason why sellers misrepresenting the condition of their property are not only fooling themselves, but costing themselves money as well. Furthermore, the general inspector can recommend further inspections if there is something beyond their competence. Until somebody pays you the necessary cash to purchase the property, the problems that may exist aren't buyer problems - they're seller problems. Buyers can always (at least until the inspection contingency expires) choose to instead walk away and make an offer on the identical floor plan down the street without these issues. It's up to the seller and their agent to motivate them not to do that. Consider that if this prospective buyer's inspector found the problem, it's likely that the next prospective buyer's inspector will, as well. Actually, a good
buyer's agent will probably spot things before it gets to the point of an offer. Until you have that escrow check in your hand for the equity, these problems are the seller's problems. Remember, that prospective buyer can simply decide they don't want the property. Until the property is successfully exchanged for cash, all of those problems are part of owning that property, and you need to find a buyer who's willing to deal with these issues in order to sell. Delivering what buyers need, a solid property without objectionable issues, is a seller concern. Good agents will help, but bottom line, it's the seller's profit or loss.

With the exception of all cash sales, a very small proportion of real estate sales, there is going to be a lender involved, and when there's a lender, the issues that buyers have with lenders become seller issues as well. It may be precisely the opposite of the inspection situation: It's always the seller's choice as to whether to work with a given prospective buyer, and buyer issues in this regard are subject to finding a seller willing to deal with them. Nonetheless, the vast majority of all buyers don't have the cash to buy your property without a loan, and if you want to restrict yourself to prospective buyers willing and able to offer all cash for your property, that's your prerogative. Doing that, however, restricts your pool of potential buyers far more than anything else. Drastically lessened number of buyers who could choose to offer all cash drastically reduces the sales price. Even those buyers who have the ability to pay all cash often do not want to, for various reasons, and this unwillingness on your part means that they will be willing to offer less for your property.

Every loan does have the real possibility of being turned down. I can do everything from verify all the buyer's information to checking the prospective loan against lender guidelines for issues, but if that underwriter turns down the loan, or (more commonly) puts conditions on an approval that the prospective borrower can't meet, that's pretty much the end of the loan. There is one vote that counts, and it belongs to that underwriter. The loan officer can reason, wheedle, and appeal, but the bottom line is that if the underwriter can't be swayed, the loan is dead. They don't reject loans very often when a loan officer has done the work beforehand, but it does happen, and is the reason that nobody except a loan underwriter for the lender you're submitting it to can guarantee the loan will be approved. Since no loan gets to the underwriter without a fully negotiated purchase contract and no borrower ever communicates with an underwriter directly, there is always a very real possibility that the loan the borrower is counting on will be turned down. For most loans, there's other places that will do the loan, albeit upon slightly different terms. Occasionally, though, there are loans where it's this lender or nobody, as nobody else has loan guidelines that will allow that loan to be funded. These two terms add up to the necessity for a loan contingency. If the buyer can't find someone to loan them money on terms that satisfy this purchase contract, they don't want to lose their deposit, and definitely don't want to be obligated to purchase the property. If you, as a seller, do not want to allow a loan contingency, that is certainly something you can choose to do - but it's going to cost you in terms of the proffered sales price, probably a lot more than the amount of any deposit. If a seller doesn't have good evidence prospective buyers can qualify for the necessary loan, I don't know any reason why they would agree to work with those buyers at all. If they do have such evidence, I don't know of any reason why they would want to focus on the deposit instead of the purchase price. The deposit is iffy at best and takes paying legal costs to get, not to mention it's usually not going to pay for the costs of the escrow period. The purchase price, once you get it, makes those costs stop, and it's a lot more probable than getting that deposit.

What the lender is looking for (absent evidence of impending fraud) is two things: Evidence of borrower ability to repay the loan, and evidence that they'll get their investment back if the borrower defaults. It is to this end that lenders require an appraisal from a licensed appraiser who has some demonstrated ability to (insurance or a bond) to repay them if the property does not, in fact, possess that value. Now, here's the kicker: If the appraisal is too low, you can pretty much bet that any lender on earth will reject that loan. There really isn't a need for a separate appraisal contingency, and if I and my buyer clients don't see the value in the property, we're not making an offer in the first place. Even in those rare instances of "all cash" purchases, that appraisal should be nothing more than a confirmation for the lender of something I and my buyer client already know. I'm willing to counsel my buyer client to offer that much because I believe that property is worth that much for their purposes. If they're intending to "flip" the property, we should both have looked at that situation and decided we're comfortable with it before making an offer. If my client intends to hold the property some number of years, that appraisal has absolutely zero bearing on what it will be worth at some indefinite date in the future. And even if they are that rare "all cash" buyer, if the value isn't there in front of your own eyes to justify that price, why did they and their agent make that offer? Therefore, there really isn't a good reason for a buyer or a competent agent who knows what they're doing to object to dropping the appraisal contingency. When I'm listing a property, I'm very cognizant of the fact that insisting upon an appraisal contingency is a sign of an uncommitted buyer, overly cautious or overly opportunistic, who's insisting on having everything exactly their way and is likely to chip and chisel at every opportunity. Such a buyer is also likely to bolt at the first chance of a better deal. It's also usually a sign of an agent who doesn't understand the process covering themselves in CYA to a pointless degree, because they should explain it to their client when the issue comes up if not before. This kind of agent is analogous to someone who calls themselves a paratrooper because they wear a parachute - even though they've never actually used it and have no intention of making a jump. Both such a buyer and such an agent are signs of a deal that's likely to not get consummated.

Just like sellers and everyone else involved, buyers would really like a nice smooth transaction that moves from fully negotiated purchase contract to complete consummation as quickly as possible without bumps, burps, or deal killers. There will be bumps in most transactions that can't really be avoided, but most bumps are caused by problem personalities on one side or the other of a transaction. Unfortunately for sellers, there's a lot more information on their attitudes (and those of the listing agent!) in a typical listing than there is information on the buyers and their agent in a typical offer. Don't raise the barriers to a successful transaction any higher than you need to - and don't let your listing agent do so, either. Quite a lot of them will insist upon useless pre-qualifications and pre-approvals from their favorite loan officer. Not only is this steering, and therefore illegal under RESPA, but it doesn't do you any good on determining whether or not they actually will qualify for the loan, and this notation can warn potential buyers with competent agents off your property until that property has been on the market so long that you're desperate. Listing agents will often insist for no good reason "seller to select all services." What's going on is that they want to select all services so that certain specific title and escrow companies are happy with them. You didn't tell them you wanted to select the services, did you? Even if you did, the law is quite clear that it is subject to negotiation, not that this stops that sort of agent. Wander into their office at random intervals, demand a listing agent copy of your property listing (You are entitled to such on your own property) and if it has any of these notations, fire that agent and their brokerage immediately. You've got all the justification you need in the fact that they're not only violating the law, but your best interests as well.

Now that we've gone over what sellers need, let's look at what seller's want. As any good salesperson knows, wants are far more important to making a sale than needs. People are funny that way, and one of the harder parts of a good buyer's agent's job is keeping the actual needs front and center with the wants. Most people would not believe how many buyers will ignore faults that will cause them to hate this property in about two months in favor of really neat, but unnecessary amenities.

What buyers want is the perception of a bargain. Notice I didn't say they want the bargain - but they do want to believe that the property is the best bargain they could have bought for the price they could afford. Quite often, the appearance is more important than the actuality, and I've certainly experienced more than a few people who thought they got a deal and couldn't wait to brag to me - but here's the kicker: They never want to hear the evidence against the brag they're trying to make - and there's always evidence against as well as evidence for. Every last negotiating coup I've pulled off had evidence on the other side - that's what a good negotiator uses to convince the other side to deal. If they don't want to hear the evidence against, that's a pretty good indication it's stronger than the evidence for, and that they didn't get a very good bargain.

One of the ways in which this manifests is buyer behavior. If your property is more expensive than another one that's essentially similar, those buyers are not going to want your property. You have to convince those buyers that there is a rational reason why they should want to pay more for your property than for the competing properties. If you cannot do this, your property will sit unsold. This is the reason every competent agent in the known universe counsels against overpricing a property. It's not like all the sellers in your local MLS receive offers in turn, strictly in accordance with order of listing the property for sale. Quite predictably, buyers make offers upon the properties that are most attractive to them at a given price. If you cannot convince your own agent that the property is more valuable than the competing properties, that agent is doing you a favor by telling you to reduce the price. I guarantee that not only that your agent will be kinder than any prospective buyers will be, but that they're trying to save you money as well. It's always a balancing act between too expensive to interest anyone, and not expensive enough so that you lose money you could have gotten. But remember that it's the appearance of a deal than most buyers want, far more than the actuality. Most have no clue what stuff costs and how easy or difficult it is to accomplish a given upgrade. They only know that they didn't have to deal with accomplishing it, and for that, they're willing to pay quite a lot under the right circumstances. A good agent will help you with all of this.

Caveat Emptor

(The companion article is What Buyers Need: What Sellers Should Want to Supply)

Quite often, I hear people talking about the real estate market as if it's all some amorphous blob, and buyers and sellers are no more different than they are in the stock or bond market, or for that matter, people using the bank to make deposits or withdrawals.

I cannot agree with this concept. Real Estate is not liquid, and real estate is not commoditized, and in the absence of some future world government building precisely one identical housing unit with precisely the same environment for everybody, I daresay it never will be. Since the chance of the rulers of that government limiting themselves and their cronies to the same housing everyone else has are nil, you can take it from there.

Let's ask: What do sellers need? Cash, the universal problem solver. As much of it as possible. Why? Because there is something about this property that no longer fits their needs, and it would be more trouble, and more cash than it's worth, to change the property. If it was cost effective to convert the property to the configuration desired, nobody in their right mind would want to go through the process of a real estate transaction twice in order to sell this one and buy something else. The only thing they can really transfer from this property to that next one is the equity. More equity means they owe less on the next property, they can afford a better property, or they have more money left over after buying the next property. Most sellers want more money than is possible or likely, going to far as to shoot themselves in critical locations in pursuit of it. If they are not ready to be rational about it, there is nothing you can do to force them. You can decide you want the property bad enough to pay the extra or you can move on to other properties. Of course, in the former case, the property wasn't really overpriced, was it?

There is nothing sellers want so much as as much cash as possible. If the transaction doesn't get completed, they don't get their cash at all - so if the transaction doesn't complete, they don't get any of what they really want: cash. In fact, they spend cash for every day that property is on the market, or in the process of the transaction. If you don't understand this, whether you're a buyer, a seller, or an agent, you had better act as if you do. Even if they're in a short sale or other distress situation, time is important to sellers. I would rather have no offer than an offer a buyer cannot or will not make good on. Every day that property sits unsold costs that seller money - and this time does not end with entry into escrow and a pending sign. It ends only with a successful sale.

When sellers enter into a purchase contract, they are essentially closing down the prospects of any other buyer. A real estate purchase contract gives one particular buyer the sole and exclusive right to purchase that property until it is properly terminated. It not only gives that buyer the right to buy that property, it requires the owner to sell it to them on specified terms. If someone else comes along and offers a better deal, the current owner is not free to take that deal - they are contractually bound to the existing one.

Buyers therefore need to convince property owners of two very important things: First, that theirs is the best offer that they are likely to receive. Second: That they are capable of consummating this transaction, as proposed, in a timely fashion with as few uncertainties as possible. Many listing agents want to take this way too far, into the illegal territory of steering, but their client, the seller, does have a legitimate need to know that prospective buyers can consummate this transaction in a timely fashion. That seller is making a decision whether to grant a buyer credit, just the same as the lender. They are entitled to ask for information that paints a coherent picture of the prospective buyer in fact being able to carry through on their end of the transaction. Sellers are not entitled to steer the transaction, and unless they're agreeing to a carryback loan, they are not entitled to information of a level sufficient to enable identity theft, but they are entitled to ask for and receive information as regards actual FICO score, verified income, current debts, source of down payment. In other words, an attestation where the person making it can be held accountable for any misstatements. The standard pre-qualification and pre-approval letters are a joke - not worth the paper they are printed on. I do them because lazy and irresponsible listing agents ask for them, and it's easier (and more profitable for my clients) to comply than argue them out of it. But the seller's issues become the buyer's issues, because if the prospective buyer cannot convince the seller that this is the best offer they're likely to get, the seller won't agree to sell to them.

One more thing sellers want. Actually, both sides want this: a nice smooth transaction, that moves from accepted offer to consummated transaction without any problems, hangups, or deal killers. If there's anybody who's willing to stand up and say they want all of these obstacles, I've certainly never met them. Here's the issue: Even the biggest problem personality in the known universe wants a smooth transaction. It's just that their definition is where they proceed to chip and chisel away further concessions the entire time. When a good agent submits an offer, they want it to move as quickly as possible and without the need for any further negotiations to a consummated transaction. Ditto a good listing agent on the counteroffer. Every time there are further negotiations, there is the possibility that intransigence on someone's part send the whole transaction south, and the reason you agreed to that contract in the first place was that you thought it was a good bargain to be making, and therefore, you should want it to close. There are good reasons why there are further negotiations after the contract on most transactions, but there shouldn't be multiple sessions, let alone one every couple of days when the other side thinks of something else they want.

Unfortunately, there is no method known to man that can guarantee to detect such twits before entering escrow. A good agent can know what the signs are, and at least as important, what they are not, but sometimes the warning signs aren't there, and sometimes they are there for someone who really is going to play it straight. The only real way to deal with these twits is upon confirmation of their nature. You don't want to refuse any transaction that very well might lead to a consummated sale, but you do need to be prepared to exit the transaction when such twits reveal their true nature, and if you don't understand when and how to do it, a good agent will really save your bacon - from a suit for specific performance, and paying their legal fees as well as your own.

Needless to say, you don't want to be one of these problem personalities either. So when you agree to a contract, it should be with full intent of carrying through on exactly the terms agreed - no chiseling allowed, only specific solutions for concrete issues that happen despite anyone's best efforts. The best way of preventing problems later is to come to an agreement in the first place which the other side should be pleased to honor.

Caveat Emptor

do you agree that a non recourse loan on a single family home is loaned with out financial risk to the borrower... if they do not want to keep their home when the market drops below what they owe, they can walk away with immunity to any financial loss & the most the lender can do is take back the home, & if the borrower has made all their payments on time & have returned the home in the same condition as when they moved in, their credit will not be negatively, by the lender??? my reference is http://wwlaw.com/forecl.htm

Yes, it is true that purchase money loans are largely non recourse in California. However, I do not agree that there is no financial consequence.

First off, there are credit repercussions for up to ten years. Among other things, this will make it more difficult for the buyer to rent the next property they will live in, as well as making it more difficult to obtain financing on the next property they want to purchase, when they really are ready to join the grown-up world.

Second, just because the lender cannot seek a deficiency judgment does not mean that the IRS will not tax them for debt forgiveness. If the lender loses $50,000 in debt forgiveness, they will report it to the IRS, because they want that deduction from income. The IRS will then tax the former owner whatever tax would be due upon the residence. Income from debt forgiveness is ordinary income, and it is fairly likely to boost the taxpayer up in tax bracket in such a case. So now they have to come up with thousands of dollars. If they had those thousands of dollars, they probably wouldn't have lost the property. So now the IRS is looking for other ways to get their money: attaching wages, confiscating other property, etcetera.

I should also note that there are all kinds of exceptions to the law limiting deficiency judgments for purchase money loans. Fraud is one such limitation; if the buyer had to state more income than they in fact make, that would certainly prove to be an interesting case. I don't do it, but that doesn't mean it never happens. Furthermore, just because the buyer doesn't fall into one of the exceptions does not mean the lender will not contend in court that they do. The law doesn't actually prevent the lender from seeking a deficiency judgment; what it says is that they're not entitled to one if certain conditions hold. Proving that proposition in court is expensive, and the lender can always hope that you simply default by not showing up or something similar.

There are very definitely negative consequences. Buying a property is a complex decision, and should not be done lightly, on the basis of "Walk away if it doesn't work out." The consequences, even if not direct, spread out like ripples in a pond when you drop in a stone. Real estate is a fantastic investment, properly approached. With the tax code and the way leverage works, among other things, it trivially beats anything of equivalent risk for potential reward, or alternatively, beats anything of equal potential for reward as far as low risk. But that risk is not and never will be zero. Indeed, it cannot be. Real estate isn't liquid, and you never get to play with someone else's money risk free. Those are two of the many reasons why you need competent professionals on your side.

Caveat Emptor

Original article here

From an email:

I was in the process of buying and selling the house when we saw a FSBO house we liked was for sale. But sale fell through, which is a good thing anyway because of contigency on our house. But I also suspected it failed because the seller refuses to pay commission to our buyer agent.

My question is that this real estate agent that would represent us as a listing agent is also a buyers agent. However, I had another friend look into the contract and the buyer's agent agreement is valid until December 31, 2005. So that means anytime we find a house, he will be paid? We do the work to find a house and he gets paid? It didn't strike to me as ethical or fair. It will simply takes us off the real estate market until January 1, 2006 when we can start all over with a clean slate. Correct?

We don't think it should've been in effect until December 31. It should be in effect only for that FSBO house we liked, and if the deal falls through, then his job as a buyer's agent also stops.

Am I dealing with a greedy real estate agent or is this typical?

Can I have one agent to sell our house and another agent that represents us to buy a house?

This depends upon the nature of the agreement you signed with him. I use non-exclusive buyer's agreements, which basically say that if I introduce you to the house you decide to buy ("procuring cause"), then I get paid when you buy it. Others use exclusive buyer's agreements, where they get paid no matter who finds the house.

If I have an exclusive buyer's agreement with you, then I am going to get paid on any house you buy. If I have an non-exclusive agreement, I will only get paid if I introduce you to the house, and you may have any number of non-exclusive agreements in effect as long as you are careful to inform each agent you are working with that you have previously been introduced to a given property, and therefore, any commission that takes place will be paid to the other agent. All of the forms used by California Association of Realtors state that you will pay a commission to the agent if the seller won't, so an agent has comparatively little stake in which house you buy, as long as you buy one through them. This gives them the largest possible incentive to work on your behalf, without binding you to one particular agent who rather be working with another client who came along with a bigger budget, and therefore a bigger commission in the offing. When looking for homes to show, ethical agents won't seek out a For Sale By Owner (FSBO) for reasons I go into near the bottom of this article (basically, protecting your pocketbook), but these do not apply if you, the client, choose to make an offer on a FSBO.

I suspect that you signed an Exclusive Buyer's Agent Contract with him, something I would not do unless he's providing you with lists of foreclosures or something that costs him money on an ongoing basis. Once such a thing is signed, that agent is going to get paid no matter what house you buy during the agreed upon period. I would never agree to either a listing or buyer's agents period longer than six months. This gives the agent plenty of time to sell your house or find you one. So if the agreed upon expiration is December 31, 2005, then if you buy before then, that agent will be paid - out of your pocket, if not the seller's.

There are two competing factors here. One is your desire not to pay for services not provided for this particular transaction, versus the agents desire to get paid if they actually do the work anyway. If they serve as your negotiating agent, or help expedite the transaction by providing services, they are ethically entitled to be paid whether or not they introduced you to the property. On the other hand, if all they do is obstruct, there is neither a legal nor an ethical reason why they should be paid. Depending upon the nature of their obstruction and how much it cost you, you may wish to contact an attorney to recover, or your state's Department of Real Estate

Sad to say, there are agents out there looking to line their own pockets in any way they can. A better agent wants to get paid, but realizes they will make an excellent living - better in the long term - by putting your interests first. Without more evidence, I cannot say for certain, but it appears at first glance that this agent had you sign an exclusive buyer's agent agreement in order to represent you in a transaction you found. I am not aware of any regulation prohibiting this, but it does seem like it's excessive from a neutral viewpoint. It is probably not voidable, however.

There are standard California Association of Realtors (CAR) forms for both exclusive and non-exclusive buyer's agents agreements, and this applies in every state I'm aware of. Look up at the title of your copy. If it says "Exclusive", you are stuck with this person. If it says "Non-exclusive" you may do business with anyone you please, as it applies only to those properties this particular agent works on. Of course, many agents and brokers use non-standard forms for this, as the standard CAR forms are readable and understandable by anybody. If they want to throw curves, non-standard forms are one of the best ways to do it.

As to whether you are dealing with a greedy agent or if this is typical, the truth lies somewhere in the middle. As in all sales occupations, the idea of locking up your business creates powerful motivations for them to have you sign exclusive agreements. There are nonetheless, people such as myself who feel that if I am not helping you, I don't deserve to be paid, and let someone else have a shot. But if I've got an exclusive agreement with you, I should be providing daily foreclosure lists, copies of all new listings with personal feedback from having visited, or at least something that goes above and beyond sitting on my hands.

Many agents want you to sign an exclusive buyer's agent agreement before they do anything else. Unless you're getting something special out of it, you shouldn't sign one at all. Offer to sign a non-exclusive buyer's agent agreement - that way you have leverage over them, not them over you. They are motivated to work for you and find you a property that is attractive to you at a price you want to pay, because if they don't, someone else will. Even the best agent can't find stuff that doesn't exist, like a 3 bedroom home in La Jolla for $250,000, but if it does exist I'm going to work to find it first, and I will get paid for it because our agreement says I will get paid if I introduce you to it. If you have signed an exclusive agreement, there is no particular hurry for them to help you.

Finally, listing agreements for sale are (in general) individual agreements for a particular piece of property for a particular period of time. As long as there is no more than one listing agreement per property in effect at a time, you can have any number of different agents for sales, even if you have signed an exclusive buyer's agreement for purchases. Furthermore, I would never consider using the listing agent as my buyer's agent - all the agents legal responsibilities point towards the seller in such a case.

Please let me know if this does or does not answer all of your questions.

Caveat Emptor

Original here


real estate consumer education buyer's agent exclusive

This woman made herself a victim

stayed in a hotel for 7 weeks looking for my "Dream Home." And, when I found it, even though it wasn't in my price range, I knew I would do anything I could to get it. I was vulnerable, emotional and became a victim.

Actually, that is not quite accurate - I made myself a victim.

First mistake: shopping outside your price range. Assuming that you get it, the bottom line is that you are going to have to make the payments, every month, from here on out. I can get you the loan, any competent loan officer can get you the loan (or at least we could when the article was originally written), but I would not even look at any home not in my price range. First, it's a useless exercise. You can't afford it. Why torture or tempt yourself? Second, the reason it's outside your price range is because it has something extra. So it's going to be more attractive to the average buyer than the ones you are looking at. Many agents will capitalize on this by showing you such a property, knowing that a large percentage will fall in love with the property right there, and bingo, they've got a higher commission for an easy sale. Despite their highly touted "code of ethics" the proportion of Realtors® who do this is every bit as high as non-realtor agents. "Well, it's just a little bit. I can handle the extra." Demand to know the asking price before you agree to view the property, and if it is outside your range, refuse to go. Fire any agent who suggests this to you more than once. I'd fire them the first time, myself.

Being self-employed, (actually at the time, I was on disability from hand surgery), the only loan I could qualify for was a Stated Income Loan. That's where you just tell them what you make, and it is not verified except through two years old tax records and your FICO score

This is not correct. You do sign a 4506 form, but the whole idea behind a stated income loan is that the bank agrees not to verify your income. Maybe the lender wanted her to feel psychologically more comfortable, or something, but if you can show the income on current tax returns that's not a stated income loan - it's full documentation. And the lenders don't care what you made four years ago - they want documentation for what your making to be as current as possible - starting now and going back maybe two years. For Stated Income loans, they verify only that you have a source of income, and the amount you claim you make must be reasonable for someone in your profession. If you can show income via two years of tax returns, that is a full documentation loan, and you get better rates (See this for information on documenting income). However, documenting income via tax returns is tougher because whereas the bank loves doing it, the number they will accept is the number that is after all the write-offs, often a significantly lower number. This is the reason for the stated income loan in the first place. Many business people, particularly small business people, are earning a heck of a good living but they find legal ways to pay for most of it with before tax dollars that they then are actually able to deduct. So they're living as if they make $10,000 per month, which they do, but the tax return only shows $3000 per month. Stated Income is intended to serve this niche, not the niche of people on weekly paychecks who don't really make enough money to justify this loan. Finally, it looks like Stated Income loans are about to be essentially banned - something that's really going to chap the hide of a lot of self-employed businessfolk.

six months later, when the interest rate changed, my payment went up. But I still had some disability money, so I didn't think about it - I just knew work would come.

What she is saying here is that she had to accept a short-term adjustable rate mortgage in order to get a rate low enough to qualify. Or that she was sold one on the basis of "low payment" and she didn't bother to check the fine print.

There are loan officers and real estate agents and realtors out there who make one heck of a living off the fact that people buy loans (and homes) on the basis of payment. They have "interest only" and even negative amortization loans out there. I'm not going to say you should never buy a home with a negative amortization loan, but it's a good way to get yourself in serious trouble. Let's just say that of all the home loans I've done (and I've done a lot of loans) I've never seen a situation where I would recommend it.

Look for terms that are going to be stable for at least a couple of years, preferably five, particularly if this is your first time in a home or the payments are going to be near the upper edge of what you're comfortable with.

I:

• Did not shop lenders (I felt I wasn't in a position to).

• Did not tell the truth about my income.

• Took the first loan they offered me.

• Didn't read the fine print.

• Did not fix a budget and stick to it.

• Bought way too much house.

Fact: If anybody tells you not to shop lenders, what they are really telling you is that their loans are not competitive and that they are afraid of the competition. The National Association of Mortgage Brokers got a law through congress a few years ago that all the mortgage inquiries within a thirty day period count as one inquiry on your credit report, so it no longer hurts your credit score to shop around. I tell everybody who comes to this site to apply for a back-up loan if they can find somebody willing to do it.

There are issues out there with loan providers who will tell you with a Good Faith Estimate or, in California, Mortgage Loan Disclosure Statement, that they can do the loan on a given set of terms when they have no intention of and no ability to actually deliver those terms. Certainly the HUD 1 form at the end of the loan process is nothing like the earlier form. Furthermore, many loan providers cannot or will not deliver within a stated time frame, which is critical when you're buying, and still important when you are refinancing. So look for someone who's going to stand behind their quote with something that says they mean it.

(It's hard for anyone you'll actually be able to talk to to use the word "guarantee" with regards to a loan. It's not just loan providers who pull unethical tricks. People attempt fraud regularly. Furthermore, there are "nobody's fault" impediments that happen regularly, and they always change the transaction. That property doesn't appraise for enough value is probably the most common. Only an underwriter can give a loan commitment, you as a loan applicant will never talk to your underwriter, and until you've got that commitment, there is no guarantee it can be done at all. So the real guarantees from a loan officer are always conditional).

Here is a List of Red Flags, real estate and loan practices that should have you running away, and here is a list of Questions to You Should Ask Prospective Loan Providers. Those who are doing business honestly should be happy to answer these sorts of questions - it gives us assurance that we're not going to be competing with somebody blowing sunshine and wet sloppy kisses at you. Because the fact that you're asking the questions means you're not going to do business with those who give you unsatisfactory answers. Finally, here is an article on What to look for at Closing, to make certain all of your due diligence paid off and determine if you should go with your backup loan provider.

Caveat Emptor

(and I'm always happy to get suggestions for additions to the lists)

Original here

Hi Dan,

Your blogsite is great; I stumbled on it and find you very credible and knowledgeable.

I have two questions for you, if you are looking for things to write about:

1) What are your views on the DELETED area? That market is so high, and I wonder if it will follow the pattern that San Diego sets for price adjustments in the market this year. I'm looking to relocate there from San Diego, so I've started researching that market. And I thought San Diego was expensive... the DELETED area is unreal.

2) As a law student, I've had five professors mention that it's a good idea to get a broker's license in order to represent ourselves as our own buyer's agent when buying our homes (if we can ever afford to with those huge students loans to pay off!). The upside is getting back the buyer's agent commission as a sort of "rebate." To support this, a couple of professors framed the issue as roughly: "most agents you would work with only have a high school degree and a few real estate courses under their belt... and could know nothing about property law. Do it yourself, control your own contract, save a lot of money." What do you think about attorneys who get real estate licenses to represent themselves, having lots of knowledge about legal issues and contracts, but no practical experience and training?

Have a great weekend!

In theory, it's a really great idea.

In practice, unless you're out there in the market all of the time, learning all of the tricks that get played or attempted, learning what the market is actually like, etcetera, you will fall into that group of persons known by the technical description "sucker."

Some lawyers apply for their broker's license and use it constantly. Those folks do fine. They know that being an agent is not just about that subset of lawyer functions that agents are allowed to perform, and if they learn about the rest of the business and keep their finger on the pulse, they are formidable.

Those who just use it to do their own occasional transactions, on the other hand... Let's just say I've had to explain to lawyers who took that kind of professorial advice exactly how they got "taken" more than once. Loans are also the same license, but there probably isn't enough money in the average loan to interest the kind of lawyer that does well in the real estate market, and what clue do they have who are likely to be the best lenders who give the best rate for a given client if they won't spend the time learning the loan market? Truth be told, they can make more money with the same time representing those who've been raked over the coals than they can working their own transactions.

The lawyers that the good agents know about and go to when there's a question or a problem? They strongly tend to use agents and brokers for their own transactions. My last boss did half a dozen transactions in the year I worked for him for one of the best regarded real estate lawyers in town.

Your professor appears to me to be making a "does not follow" error. By the logic of "not much education", he'd be fixing a car himself, rather than using a professional mechanic. Once upon a time I was a pretty fair amateur mechanic. I haven't done more than an oil change in twenty years. I know better. These days, mechanics have to know an awful lot - it's just not reflected by a diploma or advanced degree from prestigious institutes of higher learning. They can take courses, but they've got to learn most of their profession through practical application on the job. The situation with competent real estate agents is the same.

The real problem here is confusing general education and specific expertise.

A lot of people, many of them with advanced degrees, seem to think this translates into general competence in all areas of life. Not so. That degree means you've demonstrated expertise in that one field. You can have a doctorate in mathematics, law, or any other area, and still be a babe in the woods outside of that field. In order to be a good agent, you have to spend time constantly keeping up with the state of the market - there aren't any schools except experience for what a good agent needs to know. If you think a given property is worth less than it is, no transaction. If you think it's worth more, your client is wasting money.

It's true that some agents are just barely high school graduates. Others have MBAs. More important than level of education, more important than how much business they do, more important even than experience, is attitude. Just as important as attitude is market knowledge. And right up there with both of them is negotiating skill in the context of real estate. None of these three skills is certified by a law degree, passing the bar, or anything else in the way of formal schooling.

The result? Lawyers who work at real estate make formidable agents and brokers. Lawyers who get their broker's license because they think they're going to save themselves money by doing their own transaction are fooling themselves. The amounts at stake in real estate are large enough that items which are small differences relative to the size of the entire transaction are nonetheless, significant amounts of money. Getting paid all of a three percent cooperating broker's concession can end up costing you ten percent easily, if you don't understand the market or any of a dozen other things. And that is in addition to the costs of doing real estate (MLS access, agent keys, licensing fees, etcetera) and the economic costs of the other money you could be making if you were doing what you're really trained for. Making three percent of a $750,000 transaction sounds great at first glance: $22,500 in your pocket! But look at the other side of the equation: not knowing and understanding the market meant that you paid $60,000 too much in this particular instance (to use a recent example), and the week or two of billable hours, minimum, that you exchanged for that $22,500. It could be a lot more, since you're not using an agent to preview property, either. Not using an agent to preview also means you have a lot higher chance to miss reasons not to buy a particular property, and it could very well mean you end up with the wrong property for a trivially preventable reason. On the selling side, do you know what an appropriate price is for your property in the current market? Getting it wrong has severe consequences for your sales price, or whether you sell at all. Do you know how to market the property effectively in order to appeal to your target buyers? Do you know how to present it? Do you understand how these three major factors and a host of minor ones influence your attempts to sell the property?

When you look at the whole situation, the benefits from representing yourself in a real estate transaction don't look so hot.

Caveat Emptor

Original article here

Let's do a thought experiment. Any market in any commodity has two components: The demand, or willingness and ability to pay for that good, and the supply of that good.

Let's consider the demand half of that first. Specifically, ability to pay.

According to the most current credible statistics I could find, San Diego Demographics & Household Information, we have 421,952 workers in San Diego.

Let's consider what this means, first in terms of how much they make, and how many dollars they can afford to lay out:

Column 1 is the range, column 2 is how many workers reported that income, column 3 is percentage of workers in that bracket, column 4 is taking the middle of the range and translating that into dollars per month, and column 5 is what percentage of the total working population can afford that much or better.

Here's the income ranges and frequency:

Range < $10,000 $10,000-$14,999 $15,000-$24,999 $25,000-$34,999 $35,000-$49,999 $50,000-$74,999 $75,000-$99,999 $100,000-$149,999 $150,000-$199,999 $200,000+

number 8463 25,745 54,563 54,499 70,654 87,022 50,494 43,452 13,558 13,502

pct 2.0 6.1 12.9 12.9 16.7 20.6 12.0 10.3 3.2 3.2

midrange monthly $416 $1041 $1666 $2500 $3541 $5208 $7291 $10,416 $14,583 $20,000*

afford pct 100 98.0 91.9 79.0 66.0 49.3 28.7 16.7 6.4 3.2

Now, let's stop a minute here. Someone making less than $10,000 per year is not a full time employee. Minimum wage is $8.00 per hour in California, times 40 hours times 52 weeks is $16,640. So the folks in the first two ranges are not working full time. Period, end of discussion. I think they should have housing, but I have my doubts whether we should be concerned about whether they can afford detached single family residence type housing on their current wages. In most cases, I would posit that they're either teenagers working for pocket money or retirees working for whatever reason strikes them as sufficient. Also, I should mention that I arbitrarily used $240,000 per year as midrange for those folks making over $200,000. Such an estimate is probably too low, but let's face it: Those folks are doing fine.

Now, let's look at what these folks can afford: I took the midrange monthly for that salary range, and assumed they bought, with 5% down, a condominium with HOA dues of $225 per month, or a single family detached home with insurance of $100 per month. This assumes they do all their own maintenance for the detached home, but someone sufficiently determined can at least approach this. I assume property taxes of 1.25% per year (slightly high for most of California), and a fully amortized FHA type loan at 6.5%. For purposes of this exercise, I didn't stress about Jumbo or conforming, as I used the FHA as a basis, nor did I concern myself over whether it fits within FHA limits, as the point of this is simply to perform a thought experiment: How much house people can afford under these assumptions, which are quite reasonable. Once again, it would break down at the higher end of the scale, but folks on that end of the scale are doing fine. I was mostly after was Joe and Jane Average can afford. These numbers given are in terms of the loan amount, not purchase price, which the loan amount was assumed to be 95% of (in other words, $95,000 loan amount means it was $100,000 purchase price).

Column 1 is once again, that monthly midrange, Column 2 is 45% of that, the traditional back end ratio. Column 3 is the maximum condo loan they can afford, under the conditions described, Column 4 is the single family residence, and Column 5 is, once again, what percentage of all workers can afford this level or better.

Let's take a look at the results:

midrange monthly $416 $1041 $1666 $2500 $3541 $5208 $7291 $10,416 $14,583 $20,000*

Housing+debt serv $187 $468 $750 $1125 $1593 $2343 $3280 $4687 $6562 $9000

condo limit n/a $32,000 $70,000 $121,000 $184,000 $285,000 $412,000 $601,000 $854,000 $1,183,999

house limit na $49,000 $87,000 $141,000 $201,000 $302,000 $428,000 $618,000 $871,000 $1,199,000

afford pct 100 98.0 91.9 79.0 66.0 49.3 28.7 16.7 6.4 3.2

So even though someone making $12,500 per year is not a full time worker, they can still afford roughly a $70,000 condo if they want to own badly enough to do what it takes. I'm assuming fully amortized 30 year fixed rate loan, which when the loan is paid off, gets your monthly cost of housing down under the inflation adjusted equivalent of $300 per month in current dollars. There may be only 35 of these currently for sale as I log onto MLS, but I can't tell you why there are any.

Put two of these folks together, a married couple or two friends, it doesn't matter. Remember, neither of them is working full time, and they can afford a $250,000 condo loan under conditions described (Remember, there's only 1 HOA fee, and taxes are only collected once). Insist it be a minimum of two bedrooms, even. There are 3600 Active Listings right now that are asking at or under this price, and almost 3000 have sold in the last twelve months in San Diego County. No, these places aren't right by the beach or in downtown La Jolla, but they are affordable, they're livable, and they put your housing situation and cost forevermore under your own control.

Someone making $15 per hour, in the middle of the fourth range, is about where most folks would start saying, "This is someone who should be able to buy something," and they can: $129,000 worth of condo loan. 594 Actives asking that or less, 383 sold in the last twelve months. Get a roommate, friend, or spouse making the same amount, and you're looking at $273,000 worth of condo, more or less, or $290,000 worth of house. 4100 actives are asking $273,000 or less, even if you restrict your search to two bedrooms or more, and over 3700 of them have sold in the past year. Even if you restrict the search to detached housing, there are 1700 actives where the asking price is $273,000 or less. Two-thirds of all workers can afford this level of housing. In a market where the restrictions on building artificially limit the supply of housing. They may not have travertine floors and granite counters, but the majority of the people in the world would jump at the chance to live in them.

Let's consider someone in the middle of the sixth group, with a spouse in the middle of the fourth. By themselves, that professional can afford $285,000 of condo loan, $302,000 of house loan. Add in the spousal income, and you've got $437,000 worth of condo, $454,000 worth of house. Now, we're just talking over-inflated expectations, unwillingness to economize in other areas of your life, or some combination of the two. In any case, it's no longer affordability - it's that the folks don't want to do what it takes. My Gran had a standard answer for children like that, humiliating and painful, but a lot less so than missing this opportunity will be. Tough old gal, my Gran. Raised a family of six by herself through the Great Depression after second husband died, and she didn't take nonsense or whining from anyone. There are 9500 Active listings where the asking price is under $437,000. I can find you a fairly nice piece of property in pretty much any area of the county for those prices. Just under half of all workers, including part timers, are at this level or better, and the breadwinner (or main breadwinner) is smack dab in the middle of the most common earning range for all workers, and the secondary worker, if we're using one, is two income groups down. People have the ability to pay these prices if they want to. The ones who want to will find themselves sitting very pretty in a few years.

Why do I say that? Because of the supply situation. It's not like we can expand indefinitely in all directions. The Pacific Ocean is wonderful, and it brings a lot of people to visit and most of them want to stay and it helps moderate the climate, but you can't build housing in it. Lots of San Diegans like visiting Mexico, and quite for a number of them, the proximity of Mexico adds a lot to being here in sunny Southern California, but once you cross that border, you're no longer living in San Diego