April 2007 Archives

Beautiful Older Home with Large Lot on Quiet Street!



General: Urban East County, 3 bedroom 2 bath, and two extra rooms. Asking price between $475,000 and $500,000. I think an offer of $460,000 net would get it sold.



Why you should be interested: 1) It's gorgeous 2) Quiet Neighborhood 3) Large back yard 4) Great Schools 5) It's close to just about everything.



Selling Points: Throughly modernized kitchen and bathrooms, water efficient front yard, back yard is large enough for kids to play. The ceiling is a little low on the extra rooms for them to be legally bedrooms, but people have obviously used them for that.



Why I think it's a potential bargain: This is one of those pleasant surprises you find every once in a while if you look at enough properties.



Obvious caveats: I do want to slap whoever it was that put pergo down on top of hardwood in the front section of the house.



Why it hasn't sold already: The listing agent is basically acting like a bump on a log.



If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $460,000, the property would be worth approximately $750,000. If you held it those ten years before selling, you would net about $360,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $2100 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $190,000 ahead of the renter, after the expenses of selling.



Fact you should be aware of: Evidently, school buses use the street in the morning.



Obvious way to enhance value or appeal of property: Other than get the pergo off the hardwood, not much.



This property does not appear to be eligible for a first time buyer Mortgage Credit Certificate provided your family income is not more than $82,800 or $96,600. Ask me for more details, on this or any other property.



I'm a buyer's Realtor®. I find places like this that can be gotten at bargain prices. I save you money while getting paid out of the listing agent's commission, not costing you a penny. Nor are these the only bargains I find. In order to protect everyone's best interests, I require a Non-Exclusive Buyer's Agent Agreement. This is a standard California Association of Realtors form that leaves you are free to work with other agents, but if I find the property you want, I'm the agent you'll use. That's fair, and there is no reason not to sign such an agreement unless you're an agent yourself.



Contact me: Action Realty 619-449-0723, ask for Dan or email danmelson (at) danmelson (dot) com. Ask me to find a bargain that fits you!

An email:

Greetings,

I've recently been pitched the idea of refinancing my home and investing in apartments, or more precise, a four-plex. The idea is to refinance and get a negative amortization loan on my house. With the money I pull out of my home, put a down payment on a four-plex, also with a negative amortization loan. That way, I am told, my payments would stay relatively the same on my home and I can have a positive cash flow from the four-plex. Along with the pitch I am told that I can refinance after five years and get another plan, or sell outright, the apartments. Their belief is that in five years, the apartments and my home would have gone up enough to offset the interest that I will not be paying in a negative loan.



I've read, on this site and elsewhere, that negative loans are not the way to go for most people. I'd like some more input as to what to do in my situation.



Here are the specifics in my case:

Home --- owe - 200k

worth - 600k

would get around 200-215 from refi

Apartments --- worth about 900k

downpayment would be 20%, or 180k

keep the money left over from refi in savings for emergencies



loans for both properties is a five year fixed rate of 7%

paying only 4.25% of it, with the rest being added to debt



Is it too good to be true?

Now I know how Hercules must have felt fighting the Hydra.



This situation can be called many things, but "Too Good To Be True" is not among them. It not only isn't true, it isn't good.



Let's go over what's going on in the situation as proposed.



You would have a loan on your home for about $420,000, including closing costs. This is just over the conforming limit of $417,000, but negative amortization loans are not A paper and pay no attention to the conforming loan limit. A real principal and interest payment on that loan is $2794.28, of which you are paying $2066.15. Over the course of three years, your loan balance would increase to about $435,327.16, at which point that $15,200 and climbing pre-payment penalty is no longer hanging over your head. After 5 years, you owe $447,480. Total of payments to that point: $123,969.00.



On the apartment building, you would have a $720,000 loan at 7%. The real payment on that is $4790.19, of which you would be paying $3541.98. After three years, you would owe $746,275, at which point that pre-payment penalty of $26,100 (to start, and climbing) is no longer over your head. After your planned five years, you owe $767,109. Total of payments is $212,518.80.



Now, I'm going to compare and contrast with two other loans I really do have as I'm typing this, but will be out of date by the time anyone reads it. I should mention that I have difficulty believing that the investment property, especially, would not be at a higher rate than you have been quoted. I don't believe that these are zero points loans, but I'll even assume that they are, in order to have a fair compare and contrast. I know for a fact that this isn't even the best I can do, but I'm just picking the first rate sheet that comes to hand. This is with all costs included: loans I could lock and write a loan quote guarantee on. A 30 year fixed on $417,000 (maximum conforming) at 6.25%, and I can even give you about $750 to help cover your closing costs, but let's say net total cost to you is $3000, and therefore your net is $214,000 when all is said and done. The payment on this is $2567.54. There is no prepayment penalty on this loan. After 5 years, you owe $389,216.30 and your payments totalled $154,052.44.



The loan on the apartment building would be bumped all the way to 7.375% because it's non-conforming, and so that the yield spread covers the adjustments for investment property and 4 units. Every lender has these charges, and these are on the mild side. So you see why I do not believe the real rate on the investment property loan would end up being 7% without they charge you some pretty stiff figure in points. I'm not sure your real rate can be bought as low as 7% on such an Option ARM. This lender does both A and Alt A, and their adjustments on the Option Arm are a half point more expensive, which means even the highest rate on their sheet only buys your net retail points to one, but let's run with our assumptions as stated. Payment is $4972.87, after 5 years you will owe $680,400 and your total of payments will be $298,371.66.



Let's look at the end of those five years.

HOME Balance Total paid Net

Neg Am 447,480 123,969 571,439

30 fixed 389,216 154,052 543,268

difference -58,264 +30,083 -28,171

So you see that every dollar you saved on cash flow cost you two dollars in real terms. Lenders love this kind of math! Nor am I certain that this is really a fair comparison between the loans, but it's what I have to work with.



Now, lets do the apartments. As I said, I am as certain as I can possibly be that this is not a true and fair comparison between loans. I'm restricting myself to "no points" loans, and if that lender told you there were going to be no points on an option arm at 7% on a 4 unit investment property, I'd call him a liar to his face.

Apartments balance payments total

Neg Am 767,109 212,518 979,627

30 fixed 680,400 298,372 978,772

difference -86,709 +85,854 -855

So you see that, even giving this person every possible benefit of the doubt, you come out better on the thirty year fixed, even though I don't believe their loan really exists.



Now I'm have not, thus far, allowed for the possibility that you wouldn't qualify for both loans, (with all the lovely potential for gain on the apartments) with both sets of fully amortized payments. There is a pretty serious monthly income zone ($3800 wide) where you would qualify for negative amortization but not fully amortized, at least "full documentation." It is to be noted, however, that these loans can be done independently of one another, dropping the monthly income range gap where you qualify for at least one full documentation to just over $800. I am intentionally ignoring the possibility of "stated income" loans because stated income is a very dangerous game to play in these circumstances (or anything similar). Also keep in mind, however, that property values don't have to go up in five years. It's a pretty reasonable bet, especially right now, but I don't think we're going to see more than 5% annualized for a while.



People sell Negative Amortization loans based upon cash flow, not based upon how wonderful they are to your bottom line. When you consider them on anything other than a short term cash flow basis, their virtues become non-existent. They are popular because they are easy to sell to most people. Most folks think of cost in terms of the check they are writing every month, and that's just not all there is to it. There are also deferred costs - costs that have the potential to step out and grab you with a bill, in this case for another $85,000 that most people won't realize they owe. This is 2003 thinking in a 2007 world: "The equity increase will more than pay the difference." Except that it isn't necessarily so.



It's much easier to persuade people to give the bank tens of thousands of dollars in equity that they might have someday, than it is to persuade them to write a larger check or endure negative cash flow in the first place. Persuading them to write the larger checks remains the correct thing to do in 99% plus of all cases. You can't fault loan officers and real estate agents as sales folk for making the easy sale - but you can fault them to the extent they represent themselves as analysts, consultants, or advisers, and I just don't see a whole lot of people in either of my professions representing themselves as straightforward sales persons. I've got a property one of my clients is in escrow on with about eighty business cards on the kitchen counter - and mine is one of about three cards on that counter with anything like a sales representation ("Loan Officer and Agent"). Some say things like "Real Estate Consultant", while others say things like "Relocation Specialist" or "Financial Vice President". It's all very deliberate to convince people to drop their defenses, because "I'm not a salesperson," but if you are going to represent yourself that way, you have a responsibility to comport yourself in accordance with that representation - and all the evidence I'm seeing says that this is not the case. I would like to see some civil cases make their way through the courts which fault agents and loan officers on the basis of their self-representation as something other than sales folk.



Actually, let me take that back. If they're acting as your real estate agent, they do have a fiduciary duty to you no matter what they're representing themselves as. Loan Officers do not - which is one of the reason the loan side is so messed up - but Real Estate Agents do, and if they're also doing the loan, they have a responsibility to advise you that this appears to be beyond your means, and exactly what risks you may be taking with this purchase - something I'm seeing more evidence in contradiction of than in support of.



Negative amortization loans can serve a valid purpose as refinances in certain limited circumstances. They can help people avoid worse consequences than necessary, when the numbers are right for it. But as purchase money loans, they are like playing Russian Roulette with your financial future. Sure, the market might take off like it did a few years ago - but it also might sit stagnant for the next several years, or even decline a little. Even if it goes up, it may not go up enough to pay the extra money you now owe. Of all the scenarios listed, the market taking off at 10% plus gains per year is the least likely, in my opinion, at least for the foreseeable future.



Caveat Emptor

The only one I trust is one that I wrote.



I got this search engine hit:

pre-approved loan underwriter changes terms illegal

I have gone over these issues in discussing the pre-qualification.



Loan officers are salespersons. There is intense pressure on them from supervisors, brokers, stockholders and their own pocketbook to tell you what you want to hear. A large proportion of the people who ask me for a either pre-qualification or pre-approval already have a property in mind, and they get angry if I tell them it appears to be beyond their means. They should be kissing my shoes because I'm trying to keep them from making a half-million dollar mistake, or at least make certain they go into it with their eyes open, rather than just keeping my mouth shut and pocketing my commission. Most of these folks just go get their "Think Happy Thoughts" letter elsewhere.



Furthermore, if the loan officer is counting upon referrals from real estate agents for a living, now they're getting the agent angry to no good purpose. This agent thinks they have a commission check all lined up, and you're trying to talk the buyer out of it, threatening that commission check. Most Real Estate Agents do not respond well to this, I'm sad to report. I'm thinking, "Boy, I'm glad I found out now, before the default, when investigators and lawyers and courts get involved," but most agents see only the immediate check that just evaporated. One such experience is all it takes before they not only stop referring to that loan officer, but try getting any clients they may have in common away from that loan officer. This may be short-sighted, but it is also human nature.



Not to mention the fact that nothing about a pre-approval or pre-qualification is binding. In fact, until the underwriter writes a loan commitment, there is nothing that says you have a loan at all. Furthermore, it's rare for loans to be rejected outright. What happens far more often is the underwriter puts an unmeetable conditions on it.



Furthermore, there is nothing about any loan that says the terms cannot change unless there's a lock in effect. If the loan isn't locked, it's not real. Quite often, loan officers will tell people their loan is locked when it's not. Locking paperwork can be easily faked.



Finally, unless you have a written Loan Quote Guarantee, the loan officer can always decide to sock you for more in fees. The games that can be played with the Good Faith Estimate (Mortgage Loan Disclosure Statement in California), Truth-in-Lending, and all of those other forms you get when you sign up are legion. None of these forms means anything, really, in any objective sense.



Even with the best will in the world, I can't guarantee you've got a loan until I get the loan commitment from the underwriter. I can go through all the guidelines for a given program, and make certain the borrower meets every single one of them. It doesn't mean anything until the underwriter writes that loan commitment. I don't have the power to approve that loan - no loan officer does. Loan commitments are the exclusive province of the underwriter. A good loan officer can and does go through guidelines to ascertain whether there's an obvious reason that you will be turned down. If the underwriter rejects the loan, none of it means anything.



This is one of the reasons that I have written several articles explaining how to calculate what you qualify for, in terms of payment and in terms of purchase price, so that you will not be at the mercy of somebody who tells you, "Sure you can afford it," while qualifying you for a "stated income" negative amortization loan. The most mathematically correct and detailed of those articles is Should I Buy a Home Part I, while the most accessible is Can I Afford This Property?.



The stages in this process are first, the lock. If you don't have a lock, the loan is not real, and it will fluctuate with the market - every day for A paper. Once you have a lock, then it is possible to get a loan quote guarantee that means something. Even that is not absolute, however. A real loan quote guarantee is written contingent upon underwriter approval. The loan officer cannot really promise you that loan until the underwriter writes a loan commitment with conditions you can meet. What I can do, however, with a loan quote guarantee is say, "If the underwriter approves it, the loan will be on these terms" If the underwriter rejects the loan (or doesn't approve it), you still don't have that loan. You can choose another one, that you are likely to qualify for, or you can do without. I'll tell people that if the loan officer gets back to them within a week, it's likely that they're honest and they really thought you qualified for the loan they told you about in the first place. If it takes them three weeks or longer, or if they spring it on you at closing, I wouldn't believe they were honest with sworn testimonials from George Washington, Abraham Lincoln, and Mohandas Gandhi that they saw the whole thing, and it's not the loan officer's fault.



Only when you have a lock agreement, loan quote guarantee, and a loan commitment from the underwriter do you have a deal going that somebody might be able to stand behind, in the sense of being able to hold them responsible if they don't deliver on exactly those terms, and even then there are limitations. Of course, what really happens most of the time is that loan officers tell you about loans they have no prayer of being able to deliver. This is despicable, but it's the way things are. There are reasons why the situation is complex, but that's no excuse for loan providers to play any additional games to obscure or confuse something that is already complicated enough. Part of the reason that I'm writing here is that I would like to change this for the better, but the power to demand real change is in the hands of consumers, not any individual provider.



Caveat Emptor

The housing bubble is not the primary focus of this website, but to pretend it does not exist is plainly wishful thinking. One of the ongoing phenomenon that have been driving the bubble is the "Stated Income"loan, where the lender does not verify that the prospective borrower actually makes enough money to qualify for the loan, only that they have a source of income that could generate enough income. If you're working the night shift at 7/11, they're not going to believe you make $90,000 per year, but if you're a in a profession where some folks do make $90,000, you may be able to qualify "stated income" regardless of whether you actually make it or not.



Lest I be unclear on this subject, despite being known as "liar's loans" because people use them to lie about their income in order to qualify, it is not what they are intended for. Nor is "stated income" intended to help shifty or incompetent loan officers shaft lazy borrowers by not bothering to document income. They are intended for those who really do make the money, but because of the way that the income tax laws work and the way that lenders qualify people for loans based upon income, do not appear to. Business owners and the self-employed and people on commission get to legitimately write off a lot of expenses that the hourly or salaried employees do not. For instance, I write off a large percentage of my vehicle miles, office expenses, etcetera. I'm paying for business related expenses with pretax dollars, where most folks generally do not get to take this deduction. Being self-employed, if I was silly enough to want the home office deduction it would be easy enough to justify. Not to mention asset depreciation. All of these don't have much effect upon the money I have to spend, but they do have an effect on my tax forms, where it looks like I make a lot less than I effectively do. So instead of using my tax forms to qualify for a loan, sometimes I need to do a stated income loan in order to qualify for the loan, because the tax forms show a lower number than people making comparable amounts who are salaried. This is what stated income is for.



On the other hand, I'm sure that most of the adults reading this have seen the potential for abuse. When I can just tell the lender how much I make and they agree not to verify it, a certain number of people are going to say they make more than they do, and indeed, both stated income and NINA loans are often informally known as "liar's loans". Furthermore, since if the person getting the loan does not qualify, there is no loan and the loan officer does not get paid, there's a certain amount of pressure on the loan officer to get the loan done even if the prospective borrower does not qualify. Let's say they don't qualify, but the loan officer wants to get paid. So the loan officer puts them in for a stated income loan, says the clients make more than they do, and voila! funded loan. Clients get the loan where they would not have qualified by documenting their income, loan officer gets paid, bank gets a loan, and if it was a purchase, real estate agents get paid for their transaction and the seller goes happily on their way because they got their money.



A few years ago this kind of practice was an occasional thing. Of late, however, it has become endemic. And although if the clients really do make the money there is nothing wrong with it, if they don't make the money to qualify but they get the loan they are still going to have to make the payments. This reflects the reason for the rise of the negative amortization loan, where the minimum payment does not cover the interest charges. Either one of these is something a good loan officer does with a trembling hand and a lot of care. I always make certain that these folks really can make the payment they're going to have to make, but the vast majority out there do no such thing.



Well, it looks like everyone is going to have to, because of IRS Form 4506. Form 4506 is an item the clients sign, usually at the end of the loan process, that gives the lender and anyone they may sell the loan to access to your tax returns. IRS form 4506-T is basically the same thing, except that it gives access to a transcript (the numbers) rather than an actual copy. Signing form 4506 is mandatory. No signature, no loan. It's that simple.



Now it take the IRS about sixty days to respond to this request, so this has zero effect upon funding your loan. If your loan isn't funded withing thirty days of you signing the loan application, there's something wrong with that loan unless something external to the loan is holding them back and you should go apply for a back up loan. But for later on, it can have an effect.



One of the ways it can have an effect is on the loan provider's subsequent business. Traditionally, as long as the borrower made the first three payments on time, a loan broker was off the hook as far as borrower default. Lenders who have recently become much more nervous about their loan portfolios have recently started to change this, whereby a broker who put through a stated income loan (or any loan, for that matter) which is not subsequently borne out by the evidence of form 4506 is liable for the loan for the loan's full duration. Since form 4506 is never borne out by any stated income loan, else the client should be getting the better rates for full documentation, this means that every time any broker puts through a stated income loan, they are liable for the consequences to the lender.



Well, it shouldn't take much of an imagination to figure out the effects this is having upon the loan market. With the shifting of the consequences to the broker, the brokers are having second thoughts about doing stated income loans. Make no mistake, stated income was way out of control over the last couple of years. I've always been religiously careful about them, but that made me a member of a tiny minority of loan officers. Most of the loan officers out there have no clue as to what is an appropriate stated income loan, which has to a large extent put the brakes on stated income here locally. I'm not certain what effect this is having upon loan officers at direct lending houses, and there are a certain percentage of broker loan officers that are too clueless to understand what this means to them so they are going to keep right on doing them until the lawsuits pile up, but it's really starting to put the brakes on stated income loans here locally.



Now stated income loans have been a large proportion of what drove home prices upwards. It was an easy way for loan officers and real estate agents to get people into loans, and therefore properties, that they really could not afford and did not qualify for. Both easier sales and bigger commissions, as people want the better house with the higher price and tend to reward the agent and loan officer who can get them in, regardless of whether they can really afford it or not. People who did not really qualify, but this gets them the loan, and therefore that beautiful McMansion they've got their heart set on, despite the fact that they cannot really afford it. It really is easy to sell people on too much house, and very few of them really understand the implications. I've sat people down, taken them through the math, and they still signed up with the agent who promised to get them into the McMansion because they wanted it so much.



Well, with the lenders getting aggressive about enforcing financial consequences, every loan officer with the brains to understand that heavy objects fall is suddenly taking a hard look at their business practices. Now it's not just a question of "Get paid or don't get paid," it's a matter of whether the money they get paid right now is enough to balance out the money they are going to have to pay later to buy the loan back, and the answer is largely coming back "No!" Furthermore, there could be actions taken against licenses by lenders and not just by clients. That brings a completely different trade-off into the picture, and a lot of loan officers aren't liking what it says.



Now because the prevalence and easy availability of "stated income" loans has been one of the things driving the increase in the price of housing, essentially killing the stated income loan is not going to have a beneficial effect as far as sellers are concerned. It decreases, by some amount, the potential market of people who can afford to buy your property. Where before, the bottom line with most agents and loan officers was that anyone who wanted the property could probably be qualified for the necessary loan and was therefore a legitimate potential buyer, that is now changed. Since anytime you constrict your market of potential buyers, the equilibrium price of the market is going to fall, expect this to have a further deflationary effect upon property values. Indeed, there are a lot of factors that are conspiring against highly appreciated property values right now, but this one small item could well be what starts housing prices more notably downwards. Because it attacks a way of doing business that was at the heart of the run up in prices, this relatively small measure may be the pin that pops the housing bubble.



Caveat Emptor.

One of the things the place I work does to attract clients is advertise foreclosure lists to our clients. Several times a week, people call and ask for the lists, and we say, "Great! Just come on down, fill out a loan package and an agency agreement, and we'll get them to you fresh every morning, and when you see one you might be interested in, we'll help you get it!"



Before the end, over 95% of the people have stopped us, saying they are already working with someone. "I just want the foreclosure list. Can't I get it?" Well, we pay money for that. Why should we give it to someone who is not our client and has the ability to pay for it on their own? Why didn't their agent get it for them? (Everyone can get a weekly list for free from the county - but that list is worthless except as a timewaster, because that list is three to ten days out of date and they've already been swarmed.) If they want to work the foreclosure market, they should have signed up with an agent who has daily foreclosure lists. They haven't even found a property they are interested in yet, and already they know their agent isn't cutting the mustard for their purposes. But they are still stuck with them.



Another trick high margin ("expensive") people use is social groups. Nothing wrong with social groups and using people you know there, but make certain you're not paying three or five times the going rate for a loan, and that your agent really knows what they are doing before you sign on the dotted line. Church groups, soccer coaches, scoutmasters - I can't tell you all of the social acquaintances I've rescued people who became my clients from. These predators look at other members of the group as a captive audience. It isn't so, of course, those people have the option of going elsewhere - it's just difficult socially, and many of them are unwilling to make the effort.



One of the worst of these is family. Your brother, sister, aunt, or nephew is in the business, and your family makes it difficult not to choose them. "You simply must use your sister Margaret!" Well, if subsidizing Margaret to the tune of two points more than anyone else would get is your cup of tea. Around here, that's $8000 or so for the average transaction. You are not writing the check for the extra to Margaret directly, but you're paying her just the same.



Lest I be misunderstood here, there is nothing wrong with using friends, family, members of your social group. Please do check with them. The mistake is not in giving them a shot; it lies in giving them the only chance. That's what you call a monopoly situation, and the chances of you getting the best possible treatment are horrid. But if Aunt Marge or Uncle Bob know you're shopping around, they have more incentive to do their best work. If they know you're not, well I hate to break it to you, but the average person is looking for a bigger paycheck for the same work, and this includes friends, family, and social acquaintances, particularly because you are not the one writing the check, but you will pay for it, guaranteed. The worst mess I've ever had to clean up was caused by my client's uncle, who had been in the business twenty years, and was trying to extort just a little too much money for the deal to work.



On the other hand, when my cousin calls me out of the blue, I can cut him a deal because here is a transaction that I didn't have to spend time and money on wrestling it in the door; it walked in of its own volition. This is far and away the toughest part of any transaction, and one of the most expensive to any real estate practitioner - getting a potential client into your office. It's why the "big names" spend so much on advertising nationally, and give their folks half (or less) of the cut a smaller place will give them. (Hint: just like in financial planning or any other service, what's important is always the capabilities and conscientiousness of the individual performing the service, not the company).



So here's how you live up to the social expectations. Give them a shot, but not the only shot. If you are looking to buy and they are an agent, sign a non-exclusive buyer's agreement with them. This gives you free rein to work with other folks as well; just don't sign any exclusive agreements. Most agents, unfortunately, want to lock up the commission that your business represents and so they will present you with an exclusive agreement. The harder they argue for an exclusive agreement, the more you should avoid them. All an exclusive agreement does is lock you in with one agent. If they are a lazy twit, you either have to wait until the agreement expires, use them for your transaction anyway, or hope you can get them to voluntarily release you. There is no way for you to force them to let you go. I get search phrases like "breaking an exclusive buyer's agreement" hitting the site every day. The only two ways to break an exclusive agreement are 1) wait for it to expire, or 2) get them to voluntarily let you go. I've never heard of the latter happening. So don't sign an exclusive agreement in the first place. Sign a non-exclusive agreement. This puts all of the motivations for work on your side, where they belong. The one who finds the property you are interested in will get the commission, but they have to work for it, as your business isn't locked up.



This also gives you an out if Aunt Marge or Uncle Bob doesn't cut the mustard. You can tell anybody who gets their nose out of joint, including them, that you gave them the opportunity to earn your business, and somebody else did a better job. The other guy saved you money, the other guy found you the property you wanted, the other guy got you a better loan. You wanted to do business with them, but they didn't measure up. Case closed, and Aunt Marge or Uncle Bob will drop it if they are smart, because the more stink they raise, the more likely it is that another family member, friend, or social acquaintance will pass them by in favor of "Could you give me the name of that guy who helped you?"



The only exception to the non-exclusive buyer's agreement is if they are giving you a service that you would otherwise have to pay money for. I am not talking about Multiple Listing Service - those are free and plentiful. I'm talking about real time information not available to the general public - like daily foreclosure listings. Our office pays hundreds of dollars per month for that as a way to bring in business. It is reasonable for someone working the foreclosure market thusly to be asked to sign an exclusive agreement, because otherwise there may be no way to determine who introduced you to the property (Lawyer's Full Employment Act strikes again!)



For sellers, unfortunately, you've got to make a commitment to list with one agent. It's just the way it has to be, economically, in order to get them to commit to spending the kind of money it takes to get a good result. But you can interview more than one agent. What are they going to do to sell your property for the highest possible price? Put it in the contract when you do sign. Everybody can put it in the MLS, and during the bull housing market we had for years, where unless the property was obviously overpriced you'd get multiple offers within a week, a lot of monkeys masquerading as agents made a good living doing that and only that. That doesn't cut the mustard any more. I work more with buyers than sellers, but there are venues that sell the property, venues that bring people to open houses, venues that generate people looking for the cheap bargain (which you don't want) and venues that generate people looking for property like yours in your neighborhood (who is your ideal buyer). Especially in a major city, these are all different venues, and the agent who knows which one is which is worth more than you will pay them, and the cheap agent who doesn't is likely to cost you a lot more money than their cheap asking price saves you.



For loans, I've written about this before, but shop around, ask questions of every loan provider you interview, beware of red flags, and stick to your guns. Try and find someone to act as a backup loan provider if you can, and do the work so both loans are ready to go when you need them. If you get multiple volunteers for backup provider, that would tend to indicate that they know that the loan you're telling them about isn't real. That's the question I ask before I volunteer to put in the work of a backup provider. "Could the loan they are telling me about be real?" If the answer is no, I volunteer to act as backup. Every single time, it's been my loan the person ended up getting. Your prospective loan providers should know the market if they are competent. Make use of that knowledge. And lest you be tempted to quote something at those loan officers that is not real, it's a self-defeating strategy. Honest loan officers will tell you point blank they can't do that, while the scamsters are going to get into the spirit of the situation, by which I mean saying anything it takes, no matter how fanciful, to get you to sign up. And those who are knowledgeable about the state of the market always know what is likely real and deliverable, and what likely is not.



Caveat Emptor.

2 Bedroom House with Office on Large Lot!



General: Urban East County, 2 bedroom 1 bath. Asking price between $375,000 and $400,000. I think an offer of $360,000 net would get it sold.



Why you should be interested: Cottage on large lot with room for expansions. Quiet street in a decent neighborhood. Detached 2 car garage with finished office or crafts space above.



Selling Points: Solid two bedroom starter home with room to grow on a large lot. No Association, no Mello-Roos, just you and your property.



Why I think it's a potential bargain: You can't get properties this cheap in this neighborhood. Except for this one.



Obvious caveats: Most of it is dated to one degree or another.



Why it hasn't sold already: It's not modern or beautiful. But it does look solid, and seems to be in good condition.



If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $360,000, the property would be worth approximately $590,000. If you held it those ten years before selling, you would net about $280,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $1400 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $80,000 ahead of the renter, after the expenses of selling.



Fact you should be aware of: Just that it is older.



Obvious way to enhance value or appeal of property: Paint the walls, buff the floors. If you want to do something big, add a master suite.



This property does appear to be eligible for a first time buyer Mortgage Credit Certificate provided your family income is not more than $82,800 or $96,600. Ask me for more details, on this or any other property.



I'm a buyer's Realtor®. I find places like this that can be gotten at bargain prices. I save you money while getting paid out of the listing agent's commission, not costing you a penny. Nor are these the only bargains I find. In order to protect everyone's best interests, I require a Non-Exclusive Buyer's Agent Agreement. This is a standard California Association of Realtors form that leaves you are free to work with other agents, but if I find the property you want, I'm the agent you'll use. That's fair, and there is no reason not to sign such an agreement unless you're an agent yourself.



Contact me: Action Realty 619-449-0723, ask for Dan or email danmelson (at) danmelson (dot) com. Ask me to find a bargain that fits you!

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

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

What should I do now?

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

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

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

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

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

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

What that means is that if the buyers are not putting at least $20,000 down, they are over 100 percent of the value of the property. Which means the borrowers loan amount will be reduced accordingly. In fact, as I have said elsewhere, it's better for both the buyer and the seller if they don't do this, because it is in both of their interests to use the lower purchase price.

In short, this whole charade is self-defeating if it is disclosed to the lender, as they will only lend based upon the net purchase price. If it's disclosed to the lender, I cannot think of a reason to do it, because whatever purpose you wanted to achieve with the cash back will be defeated. If the buyer wanted the cash to fix the property, they're either going to have to take it out of their down payment or, dollar for dollar, out of the cash they got back. $400,000 minus $20,000 is $380,000. So if they put $20,000 down, it's doable, but it's a 100% loan, and the net benefit they got out of their down payment is zero. Alternatively, they can just take the $20,000 cash and apply it to the purchase price, over and above the $380,000 the lender will base their loan calculations on. Net benefit to doing all of this: Zero. Furthermore, there are drawbacks for both the seller and the buyer. It actually hurts them to do this if they disclose it to the lender.

What was the purpose of that $20,000 again? If it wasn't a down payment, the buyers will need to come up with $20,000 from somewhere else. If it was a down payment, well, why not do 100% financing in the first place? I assure you that a lender to whom this is disclosed will see it this way. Why not just reduce the official sales price by $20,000, pay less in commissions, lower fees, less capital gains, and have the buyer have a lower sales price, which translates into lower property taxes in a lot of places?

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

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

Caveat Emptor

Post Probate Property In Great Neighborhood Cheap!



General: Central San Diego, 3 bedroom 1.75 bath. Asking price between $425,000 and $450,000. I think an offer of $390,000 net would get it sold.



Why you should be interested: Quiet street in a good neighborhood. Good schools in the area, easy freeway access.



Selling Points: Basically, this is a nice entry level family home in good condition, with a usable back yard. No Association, no Mello-Roos, just you and your property.



Why I think it's a potential bargain: Everything around it is much more expensive, plus it's post probate and been on the market for a year.



Obvious caveats: Some of it is a little dated.



Why it hasn't sold already: It's not modern or beautiful. But it does look solid, and seems to be in good condition.



If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $390,000, the property would be worth approximately $630,000. If you held it those ten years before selling, you would net about $300,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $1700 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $130,000 ahead of the renter, after the expenses of selling.



Fact you should be aware of: Roof has only a shallow slope.



Obvious way to enhance value or appeal of property: Re-do the garage.



This property does appear to be eligible for a first time buyer Mortgage Credit Certificate provided your family income is not more than $82,800 or $96,600. Ask me for more details, on this or any other property.



I'm a buyer's Realtor®. I find places like this that can be gotten at bargain prices. I save you money while getting paid out of the listing agent's commission, not costing you a penny. Nor are these the only bargains I find. In order to protect everyone's best interests, I require a Non-Exclusive Buyer's Agent Agreement. This is a standard California Association of Realtors form that leaves you are free to work with other agents, but if I find the property you want, I'm the agent you'll use. That's fair, and there is no reason not to sign such an agreement unless you're an agent yourself.



Contact me: Action Realty 619-449-0723, ask for Dan or email danmelson (at) danmelson (dot) com. Ask me to find a bargain that fits you!

This is going to be one of those occasional posts that gets expanded and reposted from time to time. This list is not exhaustive, although over time it is intended to become closer. If you have one, send it to me (danmelson at this domain name)



Any of these is sufficient reason, all by itself, not to do business with that company or person, to cancel your loan if in progress, or to go get another backup loan.







Any actual lie



Up front application fees, or sign up fees.



Up front lock fees.



Up front appraisal fees, as opposed to at the point of appraisal.



Any up front fee beyond credit report.



Requiring the originals of your documents.



Trying to sell you a Negative amortization loan, under any of its names, without explaining in detail all of the gotchas



Not locking your rate, or letting it float



On stated income or NINA loans, not giving a real idea of what the payment is going to be, and making sure you can afford it.



On full documentation or EZ documentation loans, needing to document more money than you make.



Requiring you to pay an "in house" appraiser (Who is receiving a salary)



Not allowing you to choose an appraiser if you want to.



Not allowing you to order the appraisal.



Consistently using the same phrase in response to a question. "Nothing out of your pocket" ($30,000 added to your mortgage) and "Thirty Year Loan" (note the absence of the words "fixed rate") are two that are sufficiently pervasive as to merit independent mention.



An answer to a question that is somehow similar, instead of to the question you asked. Especially if said obviously intended to distract and mollify you, or is a pat phrase you've heard them use before.



You check their calculations on a couple of calculators and the numbers are both consistent and different from what you were quoted as a payment. (Some web calculators lie, but they usually lie in slightly different ways, although note that an auto payment calculator uses different first payment assumptions).





Buying:



Use of non-standard forms when standard forms are available



Asking you to sign an Exclusive Buyer's Agent Agreement before they've shown you anything.



Asking you to sign an Exclusive Buyer's Agent Agreement at all without furnishing you something special (i.e. daily foreclosures lists, or some service you would otherwise have to pay for).



Not finding out what your budget range is and sticking with it. For example, if you've got $30,000 for a down payment and closing costs, can qualify for a $270,000 loan, they shouldn't show you anything that you cannot get for $300,000 total, including all costs you need to pay.



Not finding out what you actually make, and what your current monthly obligations add up to. This lets me, as the real estate agent, know what I'm really dealing with here, even though I have no real need to know if I'm not doing the loan. In case you haven't gotten the idea, there are a lot of mortgage folks out there who may not have your best interest at heart, and "stated income" loans allow for a lot of sins. You can get offended at invasion of privacy if you want, but I'd be grateful - This is one part of the system checking another, looking out for you, when they could just grab their commission and bow out of the picture.



Promising to find houses below market value. I do my best, but so does every other agent out there. This is something nobody can guarantee, and they're usually gone before the public even has a chance.



Telling you about "money in your pocket" when you ask about closing costs



Selling:



Use of non-standard forms where standard forms are available.



Excessive pressure to sign listing agreement immediately (Some pressure is normal and to be expected)



Not being upfront about their business model. I've got an article about business models in the real estate industry (there are 2 basic, and many variations). Each has situations they are best for, and situations they are not so great for. You want to know if it fits your situation.



Not running advertisements for your property. This helps them generate clients as much as it helps you sell your house.



Not holding at least one open house per month on a weekend date. Sometimes this is tough during the holiday season, but there's no excuse for the rest of the year. Especially during the summer, if they want to take a three week vacation, there should be someone else there to take up the slack. Perhaps it might be unproductive if you live in a thinly inhabited area, but anywhere within the commuting area of a major city, this is a minimum.

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All of the above loans are on approved credit, not all borrowers will qualify, based upon an 80% loan to value and a median credit score on a full documentation loan. Rates subject to change until rate lock.



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Please ask me about first time buyer programs, including the Mortgage Credit Certificate, which gives you a tax credit for mortgage interest, and can be combined with either of the above loans!



Call me. EZ Home Loans at 619-449-0070, ask for Dan. Or email me: danmelson (at) danmelson (dot) com

Remember how I said moths ago that I could see signs that the market might turn back this year, perhaps around the beginning of July?



That's looking to be a decent guess.



Making offers isn't quite the monopoly situation it was. Last week, I made an offer on behalf of a client, and the listing agent told me they got four offers on the property in a 24 hour period. I take those claims with a cynical mind, but my client's offer was good considering the market, and they have yet to counter. That agent is acting like somebody who does indeed have "offers to burn." If four people send offers to one of my listings, I send out four responses, whether they're rejections for hopeless low-balls or counters for everyone else. So far, it's just silence. Unless they're just going to accept one of the other offers as it sits, that's silly. An agent with more than about a week in the business isn't going to throw more money on the table without a counter from the owner.



However, the ratio of sellers to buyers is still about 30 to 1. Not as great as it was last year when the ratio hung in the 38 to 40 range for months, but buyers still have a lot more power than they had three years ago. And here's a critical difference: Properties that are properly priced to the market are drawing interest. I'm running into about two or two and a half times the number of other agents showing the same property I want to see as I was six months ago.



Condos, in particular, are starting to come back, where they were dead the last couple years. The seller to buyer ratio for condos is almost 10% lower than for detached housing. This is due, in large part, to the long delayed sub-prime lender meltdown. When you can metaphorically wave a magic wand and make it look like people with no down payment who cannot document the necessary income can afford the payment on anything they want, people are going to want single family detached homes. That's just the way it is. I lost at least half a dozen prospects that I can name to other agents because I was showing them the two bedroom condos they could really afford, while the other agents made it look like they could afford brand new four bedroom houses with negative amortization loans, often done on a stated income basis.



But now that lenders standards are in retreat, and some long anticipated legal action is starting to happen on Option ARMs, the loans people are being told about are a little less irresponsible. With most of the gonzo negative amortization 100% loans being gone, that means that agents have to sell something people can pay at least the interest on, or tell them they need a down payment. This existence of a down payment of 5% or more is black and white. People either have it or they don't. If they don't, no negative amortization loans. Since most people don't have it, and most negative amortization lenders are now limiting themselves to 80%, and most lenders don't want to stand second in line behind a negative amortization loan for some reason.



The upshot on all of this is that most folks have to make at least the interest every month, and that limits how far over their head unscrupulous agents and loan officers can go. Since it's difficult to make it look like they can afford a property three times more expensive than they should buy, now they are limited to properties no more than about forty percent more expensive than they can buy. Interest only loans are still just as available as they have been, as are short term hybrid ARMs. For people who can afford $300,000, most agents still aren't talking about the $300,000 condo - but they are talking about the $400,000 Planed Unit Development (PUD) instead of the $750,000 house.



Stated Income loans are going through most of the same things that negative amortization loans are. 100% financing has become far more difficult to pull off without a good credit score or ability to document that you make enough money - and "stated income stated asset" loans have been clamped down upon a lot harder than "stated income verified asset" loans. If you've got a down payment, a decent credit score, and money in reserve, you can still get a stated income loan. However, most folks that were buying properties fell into none of these three categories. Stated Income loans were never intended to be "anything goes." They were intended for commissioned sales folk and small business owners who really did make the money and could afford to pay their bills, but had a large number of deductions due to tax laws. With most folks having difficulty with newly tightened stated income guidelines, however, they're having to show they make enough money or go without. This means that they not only have to make the payments, but also that they are restricted to loans where they can prove they can afford the payments. In other words, if you want 100% financing, you may have no choice other than "full documentation."



All of this has consequences for sellers as well. I am going to make my computations off of top of the line A paper full documentation loans with no points, plus California property taxes, etcetera. For loans totaling $300,000 on a $300,000 condominium purchase, it will cost someone approximately $2500 per month for housing, which means they have to make $5000 per month in order to qualify, even if they have no other debts whatsoever. For a $500,000 home, the numbers are cost: $3875 and income: $7750 per month, assuming no other debt service. For someone who wants to buy a $750,000 home without a down payment, the numbers are about $5925 per month expenditure and $11,850 per month in income, assuming no other debts. For every $100 per month in debt service they have, raise the monthly income requirements by $200. How many people do you know with no car payments, no student loan payments, no credit card debt, no computer payments, no furniture payments, no payments at all? Furthermore, since Wikipedia has the median income as being $47,816 per year, or $3984 per month, the median person doesn't qualify for a $300,000 condo even if they didn't have any debt.



The farther up the price scale the property you are trying to sell is, the harder it's going to be to find a potential buyer. The upside is that people want to live in San Diego, and they will do what it takes to make it happen. The downside is that San Diego employers don't want to pay enough so that they can buy a house. You need to be realistic about how many people are competing for your property, and what their means is likely to be. To take the point of view that once you get paid for the property, it isn't your problem is not facing the entire scope of what's out there. Qualified buyers are scarce right now, if not quite so scarce as they were. Furthermore, most of the buyers at the upper end of the income range have already bought at least one property.



I think things are going to stabilize this year. Properties that are correctly priced are moving. Most of what's holding various properties on the market for months is denial on the part of sellers - trying to get more than the neighborhood will support. As a consequence, even though mean time on market is still high at 77 days, properties which are priced correctly are seeing strong activity, and even occasionally, multiple offers. Furthermore, if you're one of those that needs to sell, you are facing a financial deadline, and keeping your head in the sand isn't going to make it more likely you'll beat it. I can see two main tracks for properties out there: The ones that price correctly and get strong activity and a fairly quick sale, versus the ones that list. And sit. And eventually have to lower the asking price even lower than where it should have been to start with. The longer you wait to price correctly, the more it will cost you. In this market, just like any other.



Caveat Emptor

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

From a real estate web site listing recent sales in the area, I found out that the property last sold for 5% less than the asking price. Apparently the sale happened in October 2006.

The house is now listed in the local MLS service, and the text of the listing leads me to believe that the house was listed in December of 2006. It seems from what I have read on your site a foreclosure takes at least 3 months, and this house apparently was back in the hands of the bank and listed two months after it sold.

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

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

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

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

If you're looking at an REO, be aware before you even step onto the property that there are going to be maintenance issues. More often than not, there are even sabotage issues. Furthermore, because the lender doesn't live there and almost certainly knows less about the property than an inspection will reveal, they are exempt from transfer disclosures. They are not for Mr. and Ms. Upper Middle Class looking for the perfect house, they are not for Mr. and Ms. Just Barely Scraping Into The Property, and they are not for Mr. and Ms. Fumblefingers, Mr. and Ms. No Time, or even Mr. and Ms. Procrastinate. But if you've got the inclination and the skill or the cash to fix it, foreclosures can be quite lucrative. Foreclosures are always a risk. But if you've got the resources to make that risk a manageable one, you can pick them up well below the price of properties with similar characteristics.

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

Caveat Emptor

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

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

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

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

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

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

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

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

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

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

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

If you could afford to pay cash, this would not be a concern. But if you could afford to pay cash, the loan would not be a stumbling point. Also, some folks might ask, "what if I can make the payments off of a minimum wage job?" which is not the case anywhere in California. To be fair, this does change matters, but be careful that minimum wage jobs are obtainable in your area. If there's 26% unemployment except for four weeks per year, you may not be able to get a minimum wage job, even if you've got the time for it. Furthermore, be careful that you're not biting off more in property taxes than you can chew. California's property taxes are comparatively low. ratewise, which is one reason why clueless renters come here from other states and think, "Wow, they're only paying $4000 per year on a $400,000 property!" and think there's plenty of room to raise property taxes. But somebody making California's minimum wage of $7.25 makes $14,500 - and $4000 is over 27% of that person's gross wages. Senior citizens will lose their homes in droves if the tax rates ever rise - not to mention property values would drop like a rock, thus turning it into a self-defeating measure. Nonetheless, other states do have much lower property values - and much higher property tax rates.

Caveat Emptor

On a regular basis, I see advertisements for real estate offices that say "discount broker - full service".



This is nonsense.



A discount broker has consciously chosen a business model whose economics do not permit them to give the same service provided by a full service provider. Here's the rundown.



A discount broker's listing agreement typically calls for them to receive 1 percent of the sales price, and the "selling broker" to receive the area standard, whether it's 2.5 or 3 percent (perhaps higher in some areas). Some few will reduce the selling broker's commission if it's them.



A Full Service broker's listing agreement typically calls for both sides to get the same 2.5 to 3 percent.



So a discount broker is saving you 1.5 to 2 percent of the cost of selling your home.



But what does a selling broker or agent do?



They put your property on MLS and put a sign in the yard, of course. And when there is an offer, they serve as "go between" on the negotiations.



This is all a discount broker can afford to do. They have expenses of being in business. Rent, machinery, assistant's salary, etcetera. It's not like they get to freely spend every dollar they are paid, and you're not paying them enough that they can do more. Furthermore, their business model requires them to sell more properties than a full service broker, just to stay in service. The difference in their compensation between a $450,000 sale and a $470,000 sale is only $200. Which would you rather have - the high likelihood of a $4500 paycheck in a couple weeks, or the hope of a $4700 paycheck eventually? They're human too. They are much more likely to advise you to take the sale in the hand now even when you would likely do better to wait. Even though it would make a difference of nearly $20,000 to you (and that may double the money you actually get from the sale in many cases), it's not important to them. Full service brokers are hardly perfect either, but they tend to be at least somewhat stronger negotiators on your behalf. At least the $20,000 difference it makes to you means $500 or 600 to them.



A Full Service broker can afford not only the Multiple Listing Service and the sign in the yard, but also ads in the papers and other places that people actually see. MLS is the single best way to sell a house, but hardly the only one. Signs in the yard help me find clients and keep my fellow agents from bugging you for the listing, but rarely actually sell that house. Ads in the correct papers at the correct time are the second best way to sell the property, and full service brokers can not only afford them, but they are motivated to do them by the "carrot" of the doubled commission if they also find the buyer. Open houses also help significantly, and full service brokers and their agents have a business model which makes holding frequent open houses worthwhile and advertising them correctly a paying proposition. Furthermore, you're likely to see better offers off of these sale sources. MLS offers are more likely to be people looking to buy on the cheap, whereas advertisements and open houses target people who want to live in your neighborhood. Once you have an offer, full service types tend to be tougher negotiators. Finally, once you accept an offer, the prospect of getting a larger paycheck motivates them to work harder getting the sale consummated, including being at the property for inspectors so that you don't have to. Some discount houses do a decent job of this last, but full service do better.



Which of these alternatives is better? Well that depends upon the state of the market and your situation. In a white hot market where everything that gets listed gets four offers within three days and bidding wars break out between prospective buyers, a discount broker or agent is likely to be the way to go. If, on the other hand, the market is a much cooler one like most of the country nowadays, and it takes considerable effort to bring in any offer, or if your property has issues that make it undesirable (less 'curb appeal' than average), you're likely to want a full service broker or agent.



Your situation also plays a part. If you don't care if the property sells tomorrow, next year, or at all, a discount broker is more likely to meet your needs. After all, if you don't get a good offer, you'll just keep the property. On the other hand, if you need the property to sell fast, or if you need the offer to meet certain criteria, and most especially if it would be difficult for you to accommodate inspections yourself (for example, if you're now hundreds of miles away), a full service broker or agent is likely to be the choice for you.



I have seen many sales where paying a full service commission would have caused the seller to end up with more money in their pocket. See my article Production Metrics versus Consumer Metrics for more.



Discount Real Estate Brokers should also not be confused with Discount Mortgage Brokers. The "discount" part of a real estate broker's name usually refers only to listing agreements - people who want to sell a property. For customers who approach them as property buyers, these places usually receive the same full commission that anyone else does. There are exceptions where they rebate part or all of their commission for buyers, which should be disclosed and committed to in writing. But typically if you use them to buy, if it's 3% for the full service folks, it'll be 3% for them. Furthermore, I have directly encountered several of them who benefit from the presumption that any loans they provide will be as low cost as their real estate services, and this is far from the case. I've had direct dealings with very well known discount real estate brokerages, and their margin on the loan they got their borrower was much higher than mine - from triple to more than four times what mine would have been. My responsibility was to my clients, so I kept my mouth shut and got my clients their money for the sale of the property. But inwardly I was definitely wincing.



Caveat Emptor

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



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



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



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



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



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



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



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



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



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



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



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



Caveat Emptor

Half Acre Lot in Highly Desired Neighborhood



General: Urban East County, 4 bedroom 1 bath. Asking price between $375,000 and $400,000. I think an offer of $390,000 net would get it sold.



Why you should be interested: Half Acre lot in a highly sought after neighborhood - could conceivably be approved for a split. Most of the neighboring homes are at least $600,000 and on smaller lots



Selling Points: The value of this property is in the lot and the location.



Why I think it's a potential bargain: Half acre lots at this price are rare!



Obvious caveats: Waiting on Certificate of Compliance, and the house is old.



Why it hasn't sold already: It's not modern or beautiful. But the lot is worth the money.



If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $390,000, the property would be worth approximately $630,000. If you held it those ten years before selling, you would net about $300,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $1700 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $130,000 ahead of the renter, after the expenses of selling.



Fact you should be aware of: Lot was split 50 years ago and has not yet been certified legal.



Obvious way to enhance value or appeal of property: I'd just start over, completely replacing the house.



This property does appear to be eligible for a first time buyer Mortgage Credit Certificate provided your family income is not more than $82,800 or $96,600. Ask me for more details, on this or any other property.



I'm a buyer's Realtor®. I find places like this that can be gotten at bargain prices. I save you money while getting paid out of the l