May 2007 Archives

With many people pushing various "cash back to the buyer" schemes in real estate, a note of caution is needed. Actually, it's more like an entire symphony of caution. Because if there is a loan involved, you run the risk of committing fraud.



Some people reading this won't care. "What the lender doesn't know won't hurt them," is something I've heard and seen too many times to count. After all, that lender is just some nameless faceless megacorporation, not anybody they care about.



To those people, I say, "The FBI will make you care." Given the spate of abuses, and the current level of panic at many lenders and investment houses, even if your transaction comes off without a hitch and the lender gets repaid in full, you may find yourself on the business end of an investigation. The kinds of real estate and loan places that are willing to pull so-called "harmless" fraud are also willing to pull no holds barred fraud where the entire idea is to defraud the lenders. Where you have the lenders losing money, and a pattern of abuses, you have potential for the FBI to become interested in all of a businesses transactions, and once the FBI starts looking, rebate fraud is so easy to spot that my seven year old could probably do it. They find a known shady brokerage, and it becomes what military pilots call a "target rich environment." It's worth the resources to investigate all of that brokerage's transactions.



Here's what happens. A wants some cash to fix the property up, and so arranges with B to jack the price enough higher so that B can rebate the difference to A. A then procures 100 percent financing on the increased price, B gets the increased price, and rebates it to A.



Alternatively, A writes an offer with a real estate licensee who rebates part of their commission, while providing lesser "services". Usually, the question I want to ask those rebaters I encounter is "Why do you make more than minimum wage?" The answer is because suckers who think in terms of cash in their pocket don't understand what they're getting into.



In either case, this cash back somehow doesn't get disclosed to the lender, and it needs to be. Because if the official purchase price is $X, but B is giving A back $Y under the table, the real purchase price is $X-Y. If the lender knows about the cash back, they will treat the purchase price as being $X-Y. At the very most, for 100% financing, they will only lend $X-Y. Since this defeats the purpose of the cash back, the sorts of people who do this predictably will not disclose it to their lenders.



This is fraud. Even so-called "harmless" fraud where the people fully intend to repay the entire loan (and eventually do) is still fraud. The lender doesn't have to lose a single penny in order for you to have committed fraud. The definition of fraud is "An act of deception carried out for the purpose of unfair, undeserved, and/or unlawful gain, esp. financial gain." The legal definition is a little more complex, "All multifarious means which human ingenuity can devise, and which are resorted to by one individual to get an advantage over another by false suggestions or suppression of the truth. It includes all surprises, tricks, cunning or dissembling, and any unfair way which another is cheated," but essentially similar. Had you told that lender about the cash back, they would have treated the purchase price as being less than the official price. Hence, fraud.



Now there are all manner of crooks out there encouraging people to do this. I've seen numerous advertisements for various "real estate investment systems", and people who represent themselves as real estate professionals and real estate investors and real estate authorities and even real estate licensees who urge people to commit federal felonies for various reasons on the surface that always reduce to "So the crook can make money." Whether it's through a commission they wouldn't have because the client can't be persuaded to do it the legal way, or money they intend to make selling their "Foolproof System!" to thousands of pure deluded fools, they do a lot of damage. Nor does it get you off the hook if you were following the advice of alleged professionals, as lots of people in federal prison can testify. Even if you didn't know it was illegal, even if people you had reason to trust told you it was legal, you are still responsible.



The rebate itself is not illegal, according to my best understanding. Once again, I'm not a lawyer and I don't even play one on TV, so check that out thoroughly, but it is my best understanding. The illegality happens when you deceive the lender, either by omitting information a reasonable person would agree is relevant, or by actively saying something that isn't true.



It's more than possible to get cash back and be compliant with the law - it just defeats the purposes most people have in mind with cash back, which is to make the lender think they paid more for the property than they really did, and so lend a greater amount of money or on more favorable terms, or both, than the lender otherwise would have, had they known about the cash back.



If you inform the lender, they will treat the purchase price as being the official price less the rebate. So if the official price is $400,000, but you're getting $20,000 back, the price the lender will lend based upon will be $380,000, and it doesn't matter if the appraiser says it's worth $400,000, or $400 million. $380,000 will be 100% financing, not $400,000, $360,000 will be 95% financing not 90%, and I'm certain you can figure the rest. Lenders evaluate property based upon the LCM principle, which is Lesser of cost or market. You only paid $380,000 in real terms, which makes it a $380,000 property at most. It doesn't matter whether this rebate is direct from the seller, or some third party. They look at it in terms of "How much of your hard earned money are you actually going to part with?" If some cash is coming back to you, you aren't really parting with whatever number is on the purchase contract, are you?



Where most lenders will cut a certain amount of slack is in closing costs. If the money is not actually coming back into the buyer's pocket, but instead being used to pay for costs of the purchase transaction or costs of the loan, most lenders will give that their reluctant blessing. Because all parts of the transaction are subject to negotiation as to who gets what and who pays what, the lender will usually understand that in order to get that price, the seller agreed to pay this cost or that cost. I don't expect this to last forever because I can point to a lot of abuses that are happening, but it happens to be the case right now. I believe that sooner or later, lenders will clamp down on this practice and refuse to allow it, but for right now, most of them are still willing to do so.



Even the most forgiving of lenders, however, draws a bright and hard line if any of that cash finds its way back into the buyer's pocket. So make certain it doesn't. And make certain that the lender has been notified in writing of every penny that's paid on the buyer's behalf by anyone else for closing costs. Because you don't have to be directly involved in a conspiracy to get drawn into a fraud investigation, and once it gets started, you can never be certain you won't be sitting in a courtroom somewhere, charged with fraud and conspiracy and anything else they can think of to throw at you. Even assuming you win, it's going to be a big hit to your wallet and a bigger one to your reputation.



Caveat Emptor

The Best Loans Right NOW



6.25% 30 Year fixed rate loan, 0.8 total retail points, and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2463, APR 6.370! This is a thirty year fixed rate loan. The payment and interest rate will stay the same on this loan until it is paid off! 30 year fixed rate loans as low as 5.625%!



10 and 15 year Interest only payments available on 30 year fixed rate loans!



Zero closing costs loans also available!



Best 5/1 Loan trade-off: 5.625% 2 total points retail. Assuming $400,000 loan, payment of $2303, APR 5.853%. 5/1 ARM loans available as low as 5.25%! This is a real loan with a real payment that actually pays your loan down (not an option ARM!), and the rate is fixed for five years!



Interest only, No points and zero cost loans also available!



These are actual retail rates at actual costs available to real people with average credit scores! I always guarantee the loan type, rate, and total cost as soon as I have enough information from you to lock the loan (subject to underwriting approval of the loan). I pay any difference, not you. If your loan provider doesn't do this, you need a new loan provider!



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.



Yes, these rates are higher than last week. That's what happens when the stock market does well. It's likely to continue, so lock in now!



Interest only, stated income, bad credit and other options also available. If you need a mortgage, chances are I can do it faster and on better terms than you'll actually get from anyone else in the business.



100% financing a specialty.



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

I have questions to ask you about the loan for house. I have been work with one broker since DELETED and I just tell her on the phone that I chose her and that she can start to do the escrow but I didn't sign any application and papers for her. Two weeks later, the appraisal had been done. Can I stop to work with her because she promised me to look for lower rate later, but she didn't do anything about it. If I stop to work with her, do I have to pay any fees for the appraisal and bank approval for the loan and how much it may costs? (she had only done the bank approval and ordered the appraisal). Thank you very much for helping me.

This is pretty open and shut. Usually it's less clear. You haven't signed anything committing you to the loan. She probably has civil recourse on the appraisal - if she wants to spend thousands in lawyer fees to recover a few hundred. Since that's silly, I don't think it's likely she'll pursue it. Her case hinges on her having ordered it because of your verbal representation you wanted the loan. One more thing in your favor is that the date on the California MLDS needs to be within three days of the date she ran your credit report, not to mention the Truth In Lending Advisory and everything else. Not likely, if you haven't signed anything.

Most loan providers, ethical or otherwise, won't start work without a loan application package. Ethical ones because they've got legal obligations to meet, less ethical ones because there will be an origination agreement in there obligating you to pay their expenses if you don't go through with it.

If you have signed such an agreement, there's probably something in there obligating the loser to pay the prevailing party's legal fees. Since you're likely to lose if they push their case, this shifts the presumption as to what you want to do, which is pay the appraiser. You can fight it in court if you want to, but you're likely to end up paying for both sides legal expenses in addition to the appraisal bill. Since the chances of you winning in court are pretty miniscule, you would be well advised to just pay the appraiser.

I've said it before, but it's likely that lenders who promise to pay for an appraisal are going to more than recover those costs elsewhere in the loan. Suppose you've got a $300,000 loan. If all you see is the fact that you're not writing a check for $400, that loan provider can, by being willing to loan you the $400, trivially make two extra points on the loan, or $6000. Just because you're not writing that check directly doesn't mean you're not paying every penny of it via higher rates, or higher origination. Furthermore, they're not likely to pay for the appraisal without an origination agreement that obligates you to make good their expenses.

The true low cost mortgage providers won't pay for the appraisal. If you've got a low cost provider, they're either going to have to absorb the costs of the appraisals that don't pan out, or they're going to have to charge their clients whose loans fund for the ones who don't. In either case, this means a higher loan margin. Usually, there's a good margin there on top of the appraisal. I can point to providers who use the fact that they pay for the appraisal as a wedge to extract thousands of dollars in junk fees as well. Most of the people for whom that is a selling point only understand money when they write a check or fork over cash. They don't understand about how money they roll into their loan balance is every bit as real.

If you do decide you don't want a loan, the appraisal is the vast majority of the money you should be out, because that and the credit report (somewhere between $13 and about $30) are the only third party expenses. This doesn't mean that the less ethical won't try and soak you for other fees, because they will, and junk on top of those fees. Depending upon the origination agreement you sign, you could be on the hook for thousands of dollars - more than a low cost provider would make if they actually fund the loan.

I need to say this again, also: Just because you paid for the appraisal, and are therefore entitled to a copy, does not mean you are entitled to take it to another loan provider. The appraisal must be in the name of the correct loan provider, and if the prior loan provider does not release it, the appraiser will not re-type it. The games that are played by loan providers who refuse to release appraisals are legion. Most will want money to release it, money such that you may be better off getting another appraisal. Even the most ethical will not likely release the appraisal just because you find a better deal - or think that you have. They've spent anywhere from hours to days of time - time they have to pay for, even if they can't show a receipt - on your loan. Expecting a loan provider to release the appraisal without money is like expecting your mechanic to release your car without being paid. Therefore, you want to be the one that controls the appraisal, if you possibly can. Some appraisers don't like this, because it's in their interests for you to pay for more appraisals, but the law in most states isn't nearly so hard nosed as most appraisers would like you to believe.

One final thing: As of the date of this writing, rates have risen quite a bit in the last few weeks. I have a purchase client whose transaction hit a snag in a defect that has to be corrected before any loan can be funded, and it's much more cost effective for them to pay for rate lock extensions than it is to float the rate. A tenth of a point per five calendar days is a lot less than the almost half of a percent re-submitting the loan to a new lender would make in the rate. Any reasonable loan that's been locked for a couple weeks is likely to be better than anything available today. I can look for a lower rate all I want. It's not likely to be found, unless their current provider is pretty high margin.

Caveat Emptor

The answer is yes.



Consider the situation from the seller's point of view, and the answer becomes obvious. Here is someone who is proposing to not put any of their own money into the deal. What's their motivation to consummate the deal? Not much, when you come right down to it.



Mind you, no listing agent in their right mind is ever going to counsel their clients to accept a "zero deposit" offer. It costs money to give this person the only shot at a property for thirty days (or however long the agreed escrow period). At an absolute minimum, that seller is risking the money to pay their mortgage, taxes, and insurance for thirty days. On a $400,000 property, that's well over $3000. This is money that is gone and they are not going to get back, all based upon the buyer's representation that they want the property. If the buyer isn't putting any cash at risk, there's no disincentive for them in trying to try for a property there's no way they'll qualify for. Meanwhile, the seller is out money on a daily basis from the time they agree to lock the property up in escrow.



Some of you are no doubt asking about pre-qualification or even pre-approval. The problem is that whatever the loan officer said, there's no real way to back it up. It is dancing right on the borderline of illegality to ask that prospective buyers be pre-qualified or pre-approved with a given lender or loan officer - a strong case can be made that just the simple request is a RESPA violation. I have said repeatedly that the only pre-qualification or pre-approval that I trust is one that I did - but I can't require prospective buyers to do that, and any decent agent is going to learn to ignore the request.



The only thing that means anything to that seller in the way of a guarantee for buyer performance is cash - a cash deposit from the buyer that is at risk if they can not or do not consummate the deal in a timely fashion. This is even more the case than usual if the buyer isn't putting any of their own hard earned money into the deal itself. If a buyer is willing to put 5%, 10% or more into the deal, they ought to understand the effort that that money represents, whether it's through saving it or just through having it not earn 10 percent per year of thereabouts in the stock market. If you're putting up cash you've spent years saving, you understand what that money represents. If you haven't made the sacrifices to save such a down payment and you want to just waltz into a property without putting down a deposit, well, odds are that you've got a rude awakening coming. Because I'm estimating at least thirty percent of all purchase escrows end up falling apart. So if I'm acting on behalf of a seller, one of the first questions I'm going to ask is "What evidence is there that this person can consummate the sale in a timely fashion, and what are they putting up that they're willing to lose if they change their mind or can't qualify?"



Pretty much every agent who's ever had a listing has had offers come in that were rejected on the basis of "not enough deposit," or that were acceptable in every particular but that. The intelligent thing is counter for a higher deposit or fewer contingencies on it.



Some folks are going to ask about substituting a higher purchase price. The issue that you're going to run straight into is the appraisal. In most cases, offers that include 100% financing are a little inflated anyway. When you add still more money to that, a sufficiently high appraisal becomes difficult. Even if the appraisal comes in high enough, though, we come full circle to the obvious question, "What good is that higher purchase price if you never get it?" If the buyer can't qualify or changes their mind, you don't get that price, and since there is not much penalty for such an outcome, there is no reason for them not to tie the property up in escrow, where nobody else can buy it, either.



Caveat Emptor (and Vendor)

Of all the issues having to do with a mortgage, the appraisal generates more overblown problems than any other part of the process. It's also one of the most critical areas to handle correctly. There are reasons for this: It (along with perhaps the relatively cheap credit report) is the only thing a consumer has to pay for, as in money out of their pocket, before the mortgage is complete. Everything else is (or should be) done "on spec" by the mortgage provider. It is also a weapon used against the consumer by many mortgage providers.



In order to understand appraisals, you need to understand where everybody is coming from. An appraisal is a necessity for lenders. It tells the market valuation of the property in neutral terms. It is one of the essential anti-fraud steps of the process, as well as telling the lender how much the property might sell for in ideal conditions (which a foreclosure most certainly is not). It is the "market" part of the "lower of cost or market" valuation, which is driven into accountants and bankers starting with their first classes on the subject. Think about it. Just because you might be willing to pay $700,000 for the house next door to your parents (or for your parents old house itself) does not mean someone else will if you fail to make the payments. I have encountered at least two instances where a prospective borrower was definitely attempting to defraud a lender - and an appraisal caught it. There have been others where a reasonable person would have been less certain, but some of those instances were likely attempted fraud. Because of these, anytime somebody wants me to press for a drive-by or computer appraisal, a little blip goes off in my little bank of warning signal detectors. The lenders aren't stupid. They know that lesser appraisals are cheaper, and employing the more expensive alternative requiring the consumer to write a check for several hundred dollars is going to cause some people to go elsewhere. It is the judgment of these highly experienced people who have been trusted to loan hundreds of thousands of dollars at a blow that an appraisal costs them less than an increased probability of the things it is designed to prevent. And when a loan officer like me presses them for a lesser appraisal, a little blip goes off on their radar screen, also. I can't read minds, but I've had more success in getting lesser appraisals by keeping my mouth shut and letting the lender decide it's safe enough on their own, then I have by asking for one.



You should not expect a mortgage provider to pay for an appraisal, like many will for a credit report. Unlike a credit report, an appraisal is several hundred dollars, and they don't it get back if the loan doesn't fund. My attitude, born of experience, is "If this customer is not sold enough on the benefits of the loan to front the money for the appraisal when I'm putting in a much larger investment of my time and administrative and support costs, then this isn't a good investment." Other people you may never meet such as the title company, escrow company, underwriters, processors, etcetera are also working in the background - and nobody gets paid if you change your mind, aren't qualified, find a better deal, whatever. If they are hourly or salaried employees that do get paid, somebody else is investing the money to pay them. I may not have a fiduciary responsibility to all of them, but that doesn't mean I don't have any moral responsibility to see that their work is rewarded.



Furthermore, some lenders actually do prohibit brokers from paying the appraiser directly as an anti-fraud measure - and that's one pointless piece of information I can ignore by having the necessary attitude to succeed in business. This does not mean that your mortgage provider isn't doing their best to balance the competing interests - that of an appraiser's right to get paid for what they do, versus a consumer's desire not to pay for something that doesn't help them. And twice in my career I have refunded appraisal fees out of my own pocket to customers who told me the truth as they knew it, but didn't know to tell me something else (both fairly obscure points) that prevented the loan from going through. Because I didn't ask, I felt morally obligated to compensate their loss. (This is not a legal requirement, and is not common - I've asked literally dozens of loan officers from all kinds of loan providers whether they've ever rebated an appraisal fee for any reason when a loan didn't go through. So far, two others have said yes. Most look at me and answer "no" as if I'm some kind of alien from another planet. So go into the appraisal with a clear idea that if the loan fails, you're not getting the money back. Period. That way you may be pleasantly surprised, but you won't be expecting something unrealistic)



You should not expect an appraiser to work for free. It may not be rocket science, but it is an exacting field where in order to become licensed you must spend at least two years of your life as an apprentice, with an income of basically nothing. As a result, there is usually a shortage of appraisers. I'm often amazed that appraisals aren't more expensive. On the other hand, many of them want to get paid for work that sabotages the loan it's supposed to support. There is a Big Thing in appraiser's association circles about how they hate loans with a minimum appraisal required, and explicit minimum appraisals actually are illegal. The appraisers, being normal humans, ideally want to be able to run their appraisal off the easiest comparable property values and let the chips fall where they may. On the other hand, there have been literally dozens of cases in my experience where choosing different but still comparable properties for comparison and doing a little more work netted the value necessary to make the loan work - the appraiser just didn't want to be bothered, something that is against the grain of good business practice - and they are supposedly businesspeople. I have also seen this abused by a broker who wanted to make more on loans - if the appraisal came in for $40,000 more, this broker got a bigger rebate from the bank, and thus, made another $1200 on the loan. Lenders for their part do not want appraisals ordered where the appraisal is going to come in at a certain minimum no matter what the property is worth. But it isn't a sign of good business practice to expect to be paid where your work is going to sabotage a substantial investment that others have already made in a project, as a below value appraisal does. It is naïve to expect that loan provider to continue to supply you with business, when you've just cost their former prospect several hundred dollars and kept that prospect from getting their loan, as a result of which the loan provider's investment is lost, and furthermore you have left the loan provider to face all of the negative ramifications of an unhappy consumer. So some sort of compromise needs to be worked out among the competing interests of a consumer that doesn't want to pay for something he doesn't have to or that does no good, an appraiser that wants to get paid for the work, a lender that wants an honest appraisal, and a loan provider that wants an investment to pay off.



The one that I have found that works best is not a minimum appraisal. Besides being illegal, asking for a minimum appraisal is a violation of my fiduciary duty to the lender. Instead, what I'll do is write something along the lines of "If comparables do not support a value of $X, please re-confirm the order prior to performing the appraisal." It isn't bulletproof, by any means. But it gives everybody the best shot at a fair shake without giving anybody carte blanche, and it prevents the vast majority of the problems. The appraiser does most of his or her work before going out to the house in question, checking sales of comparable properties in the Multiple Listing Service that they subscribe to. If the "comps" don't support $X, and the loan collapses, he's lost some work time. For a businessperson, this should be no big deal, and what they've lost is a small fraction of what other people working on this loan have lost. Furthermore, I'm going to keep sending business to that appraiser. If the comps support $Y, which is less than $X, and I can re-work the loan or find another loan and get the consumer to sign off on it based upon $Y (something that is far easier to do before the consumer gets angry at writing a $400 check and not being able to get the loan on the terms promised), the loan proceeds and the appraiser gets paid, and everybody is happy. If the comps support $X and the appraiser gets paid, everybody is happy - unless the actual appraisal comes in lower, and this does happen where a property is not as well cared for as most, doesn't have standard features, etcetera. There's nothing that can be done. You thought your home was worth $X, and it isn't. End of story. The loan provider took every precaution they legally could. The appraiser took every precaution to protect you that they legally could, and now they're entitled to be paid. It's no fun for anybody - consumer, loan provider, or appraiser. I will put up with this a few times for an appraiser who makes a habit of calling me when the comps are low. I'll keep sending them business. Chances are it's not their fault. On the other hand, every so often I'll get a call from some appraiser who gave me three "hop, pop and drops" (as in "hop on over, pop the consumer for the bill, and drop a uselessly low appraisal on them") in quick succession, and wonders why his phone isn't ringing. And of course, the various appraisers organizations are trying to pass legislation or regulations that basically give them the right to come back with any old appraisal they want to, and make it even more difficult to ask them to perform in accordance with good business practice.



An appraisal is not what your house will sell for. There are any number of subjective factors an appraiser cannot take into consideration, or cannot account for fully. The types of things they look at are objective. Size of the lot. Square feet of the house. Number of bedrooms. Number of bathrooms, and so on. These have all got measurable, objective answers. Cleanliness of rooms and condition of paint are hard to measure objectively. Nonetheless, potential buyers take them into consideration to a much greater degree than an appraiser.



One fact you should know about the appraisal: They're good for a maximum of three to six months, measured from the date of the appraisal to the date the loan funds, which is likely to be thirty days or more after you apply. Usually three months is the limit if no loan was actually funded based upon that appraisal. If it's older than the lender's underwriting guidelines allow, every lender in the known universe is going to require a new one, unless your loan is one of the fortunate few that doesn't require an appraisal.



The most important fact every homeowner or homebuyer needs to know about an appraisal: The entity that orders the appraisal, controls the appraisal. If you pay for it, you're entitled to a copy. That doesn't mean you're going to be able to take it to another loan provider and use it. The appraiser will require both a release from the previous loan provider (who after all, is responsible for giving them business), and a retype fee of about $100, possibly more. Whether the loan provider will release it is problematical. They are not required to. Some won't, no matter how good the reason. Some want to be paid, first. Even the most liberal and ethical aren't going to release it if you've simply found a better deal. Remember, they've invested some serious resources in making this loan happen based upon your representation that you wanted it.



In another essay, I advise you to apply for a back up loan every time you buy a property or intend to refinance. Now I'm going to tell you the second smartest thing that you can do: Make certain you're the one who orders the appraisal and owns it. Now some loan providers use only their own "in house" appraisers and require the appraisal to be paid for up front, when you fill out the loan application. They do this to make certain they keep control of the appraisal, so no other loan provider can use it, obliging you to pay a second appraisal fee if you want to go somewhere else. Unless you can get them to agree in writing to release the appraisal (they won't), this is a giant red flag not to do business with that provider. The appraiser should be someone you have the option of choosing, and should be paid at point of service when the appraiser comes out to the home. (Don't choose an appraiser who's a family member, however. Lenders frown on this. Expect some pointed questions or having to get another appraisal if your name and the appraisers names are similar.)



Even other loan providers will try to slip in and assume ownership of an appraisal. If you want to control the appraisal, you must order it direct from the appraiser yourself, and if your loan provider provided the recommendation, the appraiser still might consider themselves bound if they get a significant amount of business there. On the other hand, as I also state in another essay, time is always a critical factor in every loan. The appraisal holds the whole process up if it's not done promptly, and a reasonable appraiser is going to put his priorities on getting the appraisals done from the people he gets business from on a consistent basis. So if you're going to order it yourself, order it immediately, or even on your own before you start the loan process if you know the parameters. This is difficult in the case of purchases, but very possible in the case of refinances. On the other hand, purchases are less time critical. Warning!: There are different kinds of appraisals, and different qualification levels of appraisers. There isn't space here to cover them all. If you order the wrong kind of appraisal or order it from the wrong kind of appraiser, it's useless. Just because 90% plus of all appraisals are the same kind from the same grade of appraiser or better doesn't mean yours is one of them. The best way to handle this situation is to give the loan provider no more than two business days to give you the parameters for the appraisal, and be preparing the ground ahead of time by telephoning appraisers. Somebody that will charge $450 and do it within two days is almost certainly a better value than someone who will charge $350 and take two weeks. Immediately upon receipt of parameters from your loan provider, order your appraisal. That exact second. Don't even put the phone down. As I said, time is critical. Some loan providers will not allow you to do this, insisting upon being the one to order the appraisal. This is a red flag. You probably want to take your business elsewhere. Handling the appraisal correctly is not trivial for a consumer, who after all is not usually a real estate professional, but if you handle it correctly, you put yourself in a position of much greater leverage.





Caveat Emptor

I am hoping to buy in the (city) area and am reviewing the possibilities. While I fear that the local market may be peaking, I intend to live in the home for at least ten years, so I am not trying to time the market.

My questions have to do with the down payment. I expect to shop for a property in the $450,000 range, and currently have $60,000 available for a down payment. I make a decent salary and receive an annual bonus of $35,000 - $40,000 each February. The bonus, while not guaranteed, is very dependable. After taxes and deductions, I should realize about $20,000 - $25,000 from it.

Do you think I would be wise to wait until February, by which time I will be able to make a down payment of $90,000 and perhaps avoid PMI and pay less interest over the life of the loan, or seek to buy now and lessen the taxes on the bonus? (I itemize, am single and am in the 28% bracket). Will the greater down payment help me to capture a better interest rate on the loan? (My credit scores are right around 800). Also, if I buy now, is it possible that I will be able to negotiate a mortgage in such a way that I can pay my realized bonus in February as a lump sum towards the remaining principal without incurring penalties? Ideally, i would like to use my bonus each year to pay down principal, as I can afford to balance my budget, including regular mortgage payments, without touching the bonus.

While on the subject of credit scores, I am reminded of another question - does an 800 score do me any good as contrasted with, a 740 or 750? Thank you again for your consideration. Your writings have been invaluable to my education.

I needed some more information, so got a subsequent email

I would expect the property taxes to run about $5,000 annually and association dues to be another $350 monthly. As I don't have a car, parking fees will be inapplicable. My closing costs should be somewhat reduced as I work for a bank (parent company) and they offer employees favorable mortgage rates with no points and no origination fees. Of course if I go elsewhere for the loan that would not apply, but I would only expect to do so if I received even more favorable terms.

As for an equivalent property, the market would price the rent at about $2,200 a month, although I am only paying $1,520 now (for a less desirable place than what I am shopping for).

First things first. You are easily A paper. Some lenders might have a small incentive (no more than 1/4 of a discount point) for folks with credit scores over 760, but most don't, and even if you go looking for one that does, it's no guarantee that their overall rate will be better than what you could get elsewhere. Remember, it's not important that they give you a quarter point incentive if their trade-offs were more than that above the competition. Look for a loan based upon the bottom line to you, not a little tweak that says you get treated a little better than the next guy.

Second, split your loan into two pieces to avoid PMI. One first loan for 80% of the value, and a second for the remainder, whatever that is. The second will be at a higher rate, but better that than paying PMI on the whole balance. It's likely to save you a lot of money this way. If you intend to pay it down, be very certain that there will be no prepayment penalty.

Now, let's look at now versus basically a year from now (Since February is ten months away). One thing I'm going to look at is whether your location may be above sustainable levels. My rule of thumb is that if a 20% down payment won't break even on rental cashflow, your area is likely to be overpriced. With current rates (6.25% for a thirty year fixed rate loan at par for the first, something like 9% for a 10% second), payment on $360,000 runs about $2215, plus taxes of $420 per month plus association dues of $350 plus an allowance of $50 per month for insurance. Total $3035 per month. As opposed to $2200 rent. An investor would be down $835 per month even if the place was never vacant and never needed repairs. Prices would need to drop $100,000 at least to cover that. I'm also going to assume you need $10,000 for closing costs out of your own pocket, reducing your down payment to $50,000. Now, I'm going to look 10 years out based upon this situation.

Year 1 2 3 4 5 6 7 8 9 10 11

Value $450,000.00 $374,500.00 $400,715.00 $428,765.05 $458,778.60 $490,893.11 $525,255.62 $562,023.52 $601,365.16 $643,460.72 $688,502.98

Monthly Rent $2,200.00 $2,288.00 $2,379.52 $2,474.70 $2,573.69 $2,676.64 $2,783.70 $2,895.05 $3,010.85 $3,131.29 $3,256.54

Equity 50,000.00 21,008.26 9,995.46 43,151.06 78,608.20 116,526.98 157,078.65 200,446.41 246,826.23 296,427.77 349,475.31

Net Benefit 31,500.00 -108,625.29 -91,384.89 -72,677.63 -52,395.49 -30,423.16 -6,637.55 19,092.60 46,907.31 76,955.83 109,397.24

Now, let's look at suppose prices have come down that same $100,000 in a year, but rents have gone up by inflation - roughly 4%. However, rates are a bit higher - let's say 7 percent. Furthermore, you have $90,000 less $10,000 for closing costs leaves $80,000 down payment. I'm assuming property taxes are based upon purchase price, as they are here in California, but if they don't go down when prices go down, that's going to make a difference of about $100 per month to start and more later on. Let's look 9 years out for an equivalent time frame.

Year 1 2 3 4 5 6 7 8 9 10

Value $350,000.00 $374,500.00 $400,715.00 $428,765.05 $458,778.60 $490,893.11 $525,255.62 $562,023.52 $601,365.16 $643,460.72

Monthly Rent $2,288.00 $2,379.52 $2,474.70 $2,573.69 $2,676.64 $2,783.70 $2,895.05 $3,010.85 $3,131.29 $3,256.54

Equity 80,000.00 107,242.69 136,398.64 167,602.25 200,997.33 236,737.81 274,988.43 315,925.50 359,737.71 406,627.01

Net Benefit 24,500.00 4,200.10 18,090.11 42,543.32 69,346.64 98,702.88 130,831.85 165,971.77 204,380.83 246,338.88

The picture looks much better by waiting a year for the market to get rational - assuming it does. If it doesn't, all you've done is taken that last year of benefits off the first chart, or worse, as perhaps the prices continue to rise for another year. Nor have I assumed that you paid extra on the loan. Quite frankly, once you've killed off that second trust deed, leverage is your friend, and you are better off investing the difference.

The question is "When is Wile E. Coyote going to look down?" Okay, not all that funny, but it has applicability to the situation. As long as everyone is in denial, and there is a market of folks willing to pay those prices, the market is going to stay afloat. What's caused our local sputter is the fact that everyone has "looked down", and they don't like what they see. There is no convincing reason why highly paid jobs have to be even more highly paid so that they can afford local housing here, whereas a large proportion of the jobs in certain cities like Washington DC or New York don't really have the option of leaving, as they are where they have to be. The government isn't leaving Washington DC unless it gets nuked, and the big guns of the financial industry aren't leaving New York unless every other big gun does so. You know better than I to where your city lies on that spectrum. My impression is that where you are is closer to the inelastic employment point. Nonetheless, if the rest of the country "looks down," so will those places that are relatively insulated.

If a 20 percent down payment doesn't pencil out as an investment property, as it doesn't in your case, the question is not "if?" the market is going to adjust, but "when?" and "how?" Here locally, you can almost hear the "pop!" If things are relatively inelastic, employer- and jobs-wise, a long slow deflation may be what occurs. You may even keep current prices while inflation makes things catch up. It's hard to say when I'm not as familiar with your city's economic engine as I am with my own, but here's what happens if prices stay stable for ten years:

Year 1 2 3 4 5 6 7 8 9 10 11

Value $450,000.00 $450,000.00 $450,000.00 $450,000.00 $450,000.00 $450,000.00 $450,000.00 $450,000.00 $450,000.00 $450,000.00 $450,000.00

Monthly Rent $2,288.00 $2,379.52 $2,474.70 $2,573.69 $2,676.64 $2,783.70 $2,895.05 $3,010.85 $3,131.29 $3,256.54 $3,386.80

Equity 50,000.00 53,930.19 58,150.38 62,682.08 67,548.41 72,774.22 78,386.23 84,413.13 90,885.78 97,837.36 105,303.52

Net Benefit -31,500.00 -39,318.42 -47,361.14 -55,634.47 -64,145.15 -72,900.45 -81,908.24 -91,177.08 -100,716.30 -110,536.19 -120,648.06

As you can see, you build up a fair amount of equity, but would have been better off renting and investing the difference.

Which of these scenarios is most likely? Here it's the one attached to the first two tables, except that we're a good portion of the way towards table two right now. Where you are, I'd make an educated guess that you're still looking at table one right now. There's money to be made even there if you buy and hold long enough, but you could be upside down for quite a while.

Thank You for asking, and please let me know if this doesn't answer all of your questions.

Caveat Emptor.

I got a search hit for that and, amazingly enough after 150+ articles, I've never dealt with this subject head on. So here goes.



One point, either discount or origination, is one percent of the final loan amount. After all of the loan amounts and fees and what have you are added, for a loan with one point, multiply the amount by 100 and divide by 99, and that will be your final loan amount. For a loan with two points, multiply by 100 and divide by 98. The general formula is multiply by 100 and divide by (100-n) where n is the total number of points.



Points come in two basic sorts, discount and origination. Origination is a fee your loan provider charges for getting the loan done. Some brokers quote in dollars, most quote in points because it sounds cheaper than an explicit dollar cost. Most brokers out there charge one point of origination. To contrast this, direct lenders do not have to disclose how much they are going to make on the secondary loan market. And many direct lenders still charge origination. Judging the loan by how much the provider makes (or tells you they make) is a good way to end up with a bad loan. My point is that it's the rate, type of loan, and net cost to you that are important, not how much the guy is getting paid for doing your loan. Remember two things here, and they will save you. First, loans are always done by a tradeoff between rate and cost. For the same type of loan, the more points you pay the lower your rate will be, and vice versa. Second, remember to ask about "What would it be without a prepayment penalty?" It's a good way to catch people who are trying to slide one over on you, and the lenders pay a lot more for loans with a penalty, and the lenders make a lot more on them when they sell them to Wall Street, so they often do them on what looks like a much thinner margin until you ask the question "What would it be without the prepayment penalty?" Remember it.



Discount points are an explicit charge in order to offer you a lower rate than you would otherwise have gotten. To use an example I ran across today, six point five percent with one point, seven percent without. On a four hundred thousand dollar loan, that's essentially four thousand dollars, either out of your pocket where you're not earning money on it, or added to your mortgage balance where you are making payments and paying interest.



Is it a good idea to pay discount points, or is it a better idea to pay the higher rate? That depends upon the loan type and how long you keep it. Let's say the loan is $396,000 without the point, $400,000 with, just to keep the math easy. Your monthly interest charge on the first loan is $2310, on the second it's $2166. On the other hand, you pay $361 principal on loan 2, only $324 on loan 1. Here's the bottom line, though: You've got to get that $4000 back before you sell or refinance. Just a straight line computation, that second loan saves you $181 the first month. $4000/$181 per month is about 22 months to break even (and it's a little faster than that, because loan 2 pays off more principal per month). On the other hand, even after you've theoretically "broken even" there is a period where if you sell or refinance, you will inexorably lose money because you're paying interest on a balance that's higher than it would have been.



But now let's run the actual numbers. If the above loan is a thirty year fixed and you keep it four years, you're well ahead. You've saved yourself $6944 in interest and your balance is only $2159 higher. $6944 - $2159 = $4785. Even if your next loan is at ten percent, you're only losing $215.90 per year. Especially when you consider that at a cost of money now versus later, you'll never make it up, because you can invest that $4785 you saved and it'll pay more interest than that.



On the other hand, let's say the rate was only fixed for two years. After that, it is a universal feature of hybrid ARMs that they all adjust to the same rate. You are theoretically ahead by $363, but because of your higher balance, even if the loan adjusts to five percent, you're losing $154 per year due to your higher balance, and there is nothing you can do about it. Play now, pay later.



There is no cut and dried answer about whether it's to your benefit to pay points. I tend not to do it, myself, because rates do vary a lot with time, and money sticks around in your balance. If I've got a zero or low cost loan and the rates drop half a percent, it's worthwhile to refinance for free. If I have a loan I paid a point for, I'm going to have to pay that same point again to see a benefit on refinancing, and as we've already discussed, if you don't keep the loan long enough, you've wasted your money. The median time between refinances is right about two years right now. I see no reason to pretend I'm any different from everyone else, but some folks do have a history of keeping loans a long time. You need to make your own choice to fit your own situation.



Caveat Emptor.

The question every good loan officer hates the most is "What is your lowest rate?"



First off, everybody doesn't get the same choices. As I've said before, somebody who can prove they make enough money, has a history of paying their debt, and offers the lender a situation where there's 30 percent equity (or more) gets a different set of choices than somebody who can't prove they make enough money, has a questionable history of paying debt, and wants to borrow 100 percent of the property value (or more).



Second, different loans get different rate-cost tradeoffs. The loan that most people seem to consider the most attractive loan, the thirty year fixed rate loan, is always the most expensive loan out there. It always has the highest set of cost/rate tradeoffs. Why? Because on top of the cost of the money, you are essentially purchasing an insurance policy that says your rate will not change for thirty years. Even when long and short term rates are inverted, as we may see soon, there is a premium charged for the thirty year fixed rate loan. It makes a certain amount of sense; insurance policies are never free, and the thirty year fixed rate loan is the most desired loan out there. Simple economics: Higher demand equals higher price. Goods perceived as more valuable carry a higher price tag. So if you're looking for a thirty year fixed rate loan, and all you say is "What is your lowest rate?" you are likely to get quoted a rate from a Negative Amortization loan, the least desirable loan out there, because it carries the lowest nominal rates. If this is your only datapoint from the varius loan providers you talk with, you are likely to do business with the one who quotes you the negative amortization loan, not the thirty year fixed rate loan. Matter of fact, the loan provider who tells you about the loan that you really wanted is least likely to get your business in this scenario, because you're focusing in on the red cape of rate and payment when you should be paying attention to other things.



Third, and most importantly, for every situation and every loan type, there is more than one rate available. Why is this, you ask? It seems obvious to you: Why not just choose the lowest rate, which has the lowest payment? It takes a little examination to see why.



The difference between the rates is in cost of the loan. There will be a rate called par. This is the rate at which the lender will give you the money straight across. They don't charge you any money (discount points) to get a lower rate. They don't pay any of the costs of the loan. Getting a loan done really does take a minimum of about $3400 in costs (actually, the quote is for California, which believe it or not is one of the cheaper states to get everything done in - every other state I've done business in costs more). Whether points and closing costs are paid out of your pocket or added to your mortgage balance, you are still paying them (When shopping for a mortgage, the phrase "nothing out of your pocket" from a prospective loan provider should immediately put you on guard).



For rates below par, you must pay discount points. This is an upfront incentive to a lender to give you a rate lower than they otherwise would. Every situation is different and should be analysed with numbers specific to that situation, but as a rule of thumb: Unless you're getting a thirty year fixed rate loan and you have a history of keeping loans at least ten years before sale or refinance, you should avoid paying points if you can. The lower payments you get, quite simply, are usually not worth the cost of adding points to your mortgage balance. People who don't qualify for A paper may not have this option, but more people qualify A paper than think they do.



For rates above par, the lender will actually pay part or all of your closing costs. It's rare that they will actually put money in your pocket, but it can happen. Note that this is different from a stealth "cash out" loan that adds the cash you get to your mortgage balance, charges you closing costs, and often puts a couple points on the whole amount of your new mortgage, and so where you've been told you're getting $2000 in your pocket, there may be $20,000 or more added to your mortgage balance. This is where the lender is actually paying part or all of the costs of the loan, so it is neither coming out of your pocket nor being added to your loan balance. This is called a "rebate". A rebate can be thought of as the opposite or negative of discount points, and discount points can be thought of as a negative rebate. There are never both discount points and a rebate on the same loan, although there can be origination points on loans where there is a rebate. I think that this is a material misrepresentation, but it is legal.



Now here is the critical fact that most consumers never figure out for themselves, and certainly never realize the implications of: The vast majority of people don't keep their mortgage loans very long. The median age for a mortgage is roughly two years; fewer than 5 percent of all loans are five years or older. If you're the exception, bully for you. Otherwise, take heed and remember this fact: Whatever costs you pay for a mortgage are sunk at the beginning. This money either comes out of your pocket, or goes onto your mortgage balance. If it goes onto your mortgage balance, it sticks around a very long time and you pay interest on it. When you sell or refinance, (or when your rate starts adjusting), the benefits stop. They are over. Done with. If you haven't recovered the costs you paid to get a lower rate by that point in time, you have made a losing investment. Period. End of story. No chance for recovery. Matter of fact, even if you are technically ahead at that point in time, you can go negative later.



Let us consider a $270,000 loan. Very small for California, but large in most other areas of the country. As I said earlier, real closing costs of doing this loan are somewhere in the neighborhood of $3400. Here are some real options that were available from one lender when I originally wrote this article:



You could do a thirty year fixed rate loan at par of 5.75 percent. Or you can get a one point rebate at 6.25, or you can pay one point and get 5.25 percent.



Assume you roll any costs into your mortgage like most folks do. Your starting loan balance will be $276,162 if you choose the 5.25% rate. If you choose the par rate of 5.75%, it will be $273,400. If you choose the one point rebate rate of 6.25%, your balance will be $270,666. These are real examples off the first rate sheet I happened to look at.



Let's compute the linear break evens: The 6.25% rate cost you $666 to get. You pay $1409.72 in interest the first month. The 5.75% rate cost you $3400, and you pay $1310.04 in interest. The 5.25% loan cost you $6162, and you pay $1208.21 interest the first month. Difference in cost divided by difference in interest.



6.25% versus 5.75% loan: $2734/$99.68 = 27.42 months.



5.75 versus 5.25 loan: $2762/101.83 = 27.12 months



5.25 loan versus 6.25: $5496/201.51 =27.27 months.



Actually, the break even is likely to come a month or two earlier. But let's compute what happens if you refinance into a 5% fixed rate loan for zero real cost right at breakeven time, 27 months.



The 6.25% loan leaves a balance of $263,241. The new monthly interest charge will be $1096.84.



The 5.75% loan leaves a balance of $265,193. The new monthly interest charge will be $1104.97. The extra money on your balance costs you $8.13 per month, almost $100 per year. Plus you still owe almost $2000 more.



The 5.25% loan leaves a balance of $267,104. The new monthly interest charges will be $1112.94. The extra

money on your balance costs you $16.10 per month, $193 per year, from here on out. Plus you still owe almost $4000 more.



These are actually favorable assumptions compared to the real world in that they treat the 5.25% loan option much more kindly than it deserves compared to the 6.25% loan.



Most people have done this multiple times. $10 or $15 per month doesn't sound like a lot, but do it a couple times and you have $100 per month, and owing tens thousands of dollars more than if you'd gotten a cheaper loan that carried a slightly higher payment in the first place. I believe in offering choices, but I also know which I recommend and choose for myself.



One point that needs to be made again is sometimes costs get built into the back end of a loan, via a pre-payment penalty. Most loan officers will not volunteer whether there is a pre-payment penalty, and many will lie even if you ask, just to get you to sign up, knowing that once you sign up you will likely consider yourself committed. This may not be legal, but it happens, and is another reason to apply for at least two loans, so that you've got a backup option just in case the first loan goes sour or the lender told fibs. Reading the Note carefully at signing of final documents is the only way to be sure that there is no prepayment penalty.



Caveat Emptor

On a fairly regular basis I get email asking what I think of this or that loan calculator on the web, this or that predictive model for real estate prices or loan rates, etcetera.



Loan calculators are pretty simple when you get right down to it. Numbers go in, other numbers come out. It's just math - except that you've got to be careful about the numbers going in. Just because your balance is $400,000 now does not mean it'll be $400,000 after the refinance. It's very possible to do a zero cost refinance that adds nothing to your loan, but most people don't do it. Furthermore, I know I've said this before, but the only calculator out there that I trust is one that I know the provenance of. I've caught more than one company that had programmed its calculator to low-ball the payment. There's no way to tell for certain except using your own calculator, and if you have your own financial calculator, why are you using the web? You can cross check, however, because it's rare that two calculators will be programmed to yield the same wrong answer. Also remember to add in closing costs and prepaid interest and escrow accounts, if you're going to have one, and always figure the cost of any points after everything else is added in there, because that's what the bank is going to do. Finally, don't take it for more than it's worth. Just because they tell you, "nothing out of your pocket," does not mean there are no closing costs. They exist. Somebody is paying them, somehow. Unless you know for a fact otherwise because you've discussed it and know where the money is coming from, I'm guessing that "somebody" is you, and they're getting rolled into the balance of the new loan. I've had people bring me paperwork from other companies showing new loan balances thirty thousand dollars higher than they were expecting, with correspondingly higher payments. (I've also told people to never shop for a loan based upon payment a few times, also)



For spreadsheets, what you can get is usually an analysis of one variable per spreadsheet. I've programmed a loan comparison spreadsheet, but it only compares two alternatives at a time and it's not really suitable for use with the public, because you have to understand the limitations and GIGO factor. Just like I've got spreadsheets that answer the "rent or buy" question, among others, but you have to understand the limitations on the results imposed by your model.



As a computer programmer, I make a pretty decent loan officer. In order to compare financial information via spreadsheets, you have to understand what points of comparison the calculations are meant to compare. If your data is out of whack, if your assumptions are away from reality, or if you're trying to apply the comparison outside its design limits, what you get is useless.



I have several spreadsheets I have programmed and use. All of them have limits that need to be understood in order to get useful information out of them.



The first is a rent versus buy spreadsheet, that I first talked about in Should I Buy A Home? Part 3: Consequences. In that article, I spent a good paragraph telling you what my assumptions were in cranking the numbers. I think they are good and reasonable assumptions for the markets I have seen in my area in my lifetime, but many people might not. I just had someone make a comment to the effect that "rent doesn't increase with inflation." Well, it hasn't been keeping pace with the cost of buying of late, but that's not the same thing as not increasing roughly with inflation. Furthermore, we've gone through a period these last few years when landlords were keeping rental rates low in the attempt to have someone else pay most of the mortgage of their investment property. Judging by the "loaf of bread" or hourly wage comparisons, or anything else except the price to buy, local rents have increased by a factor very close to general inflation over my adult lifetime. Whatever you think of my numbers, though, the fact remains that they are assumptions, and if they do not correspond to future numbers, the conclusions they reach have no bearing on the real world.



The second limitation upon this sheet is that it's assuming smooth increases. This is not what happens, as anyone over the age of ten ought to know. Over longer periods of time, the data may tend towards an aggregate average, but that says nothing about any given year. In reality, some years are plus thirty percent while other years are minus twenty. Even if my assumptions for averages are good, the spreadsheet that predicts the next thirty years is useful mainly to predict overall level of the market many years out. The numbers for any particular year are so much garbage, as far as the real world goes, where a 5% differential between estimate and actual is often enough to render something worse than useless. Even if my assumptions for average return are right on the money (and if I didn't think they were pretty close, I'd use others), any particular year could be at the top of a peak or the bottom of a market trough. If you know what state the market will be in in a particular year three decades out, why the heck aren't you richer than the ten richest billionaires in the world combined? Knowing what the market was going to do these past few years is a lot easier than knowing what it'll be like thirty years from now! I have what I think are good predictions based upon good models, but I don't have any god-level knowledge of where any part of the economy will be thirty years from now, and neither does anyone else. We see the future dimly, reflected through the present and the past.



Speaking of which, let's drag one of the standard disclaimers out and air the dirty laundry. "Past performance is not indicative of future results." Averages of past results may be the only way we have of predicting the future, but those results depend upon unknowable factors. Somebody could invent something tomorrow that utterly changes the face of housing thirty years out. You think the urban planners of the 1920s foresaw urban sprawl? I know for a fact that they didn't. What no model of the future can predict is unforeseen factors. I can't tell you what they will be or what effects they will have, but I can promise you there will be some. In 1894, Michaelson (who first measured the speed of light) said, "Our future discoveries must be looked for in the sixth decimal place." This just a few years after the formulation of Maxwell's equations, and within a year Rutherford had changed the atomic model forever, while the basis of quantum mechanics was being laid, and less than ten years later were Einstein and relativity. Michaelson was right in a technical sense that precise measurements were the key to unlocking future discoveries, but wrong in the sense he meant it, that all the major discoveries had already been made. My predictive model is more detailed than most, and I do my best to include all of the factors I see, but I have no way of including factors that I can't see, and one thing I can promise you is that there are some. It may work out that I guess right anyway, but that doesn't mean there weren't any unforeseen factors, just that I got lucky despite them. The further out the model goes, the more it is dependent upon subsequent events no one can predict. Someone could announce man-portable fusion power tomorrow, or "Star Trek" transporters, or any of dozens of new potential technologies that could alter the world, and that's just the technological possibilities. Politics and demographics will utterly change in the next thirty years (In 1977, more people were predicting the world conquest of communism than the collapse of the communist system. Mr. Carter's presidency was not the United States' shining hour).



Just because we know that the precise numbers are wrong, however, doesn't mean that those numbers have no value in predicting the future. The way the numbers will move relative to each other is much more important information. Population is increasing and will continue to increase. Demand in major urban areas and desirable areas will continue to rise faster than supply, and since such areas are where most of us live or want to live, the price of real estate will quite likely continue to increase faster than inflation. Particularly types of housing which are universally desired, such as detached single family residences sitting on a certain amount of land owned basically fee simple. PUDs and townhomes are less desirable for most folks, true condominiums less desirable yet, and below that are apartments. Offer most people the chance to move up on the ladder of desirability, and they'll take it. Since the only thing preventing most people from doing so is price, price is what's going to make it ever harder to make that transition to more desirable housing. Living space in a desirable location is a scarce good. Living space, desirable location or not, is a limited good. The only way to change this is to somehow manufacture more space or arrange to have fewer people to share it. I'm not aware of any plans to manufacture enough space to make a difference to the billions of people on earth, so I'm guessing that barring worldwide nuclear or biological warfare, population density is going to increase, demand for housing is going to increase, and supply is going to stay pretty much right where it is. Nonetheless, this is only a guess. My guess is that housing will be about four to five times as expensive as it is today thirty years out, If it's only twice, we'll all still live in million dollar houses. If it's eight times, we'll be in four million dollar houses. The wider the net, the more probability I have of being right - and the less useful the information is. Unless the price right now is something like two cents, nobody sane is going to invest money for that long without a better idea of what the payoff will be.



Whether I'm right or not is something nobody knows right now, or even how close. Actually, not being quite that much of an egotist, the question in my mind is more akin to "how far off will I be?" But the data is still useful, because it tells me that as long as my assumptions are anything like real, we're all looking at living in million dollar real estate - the only question is exactly when. It tells me what people will be need to be able to pay every month, at least in a general sense, and it tells me that more and more people are going to get priced out of real estate, or down into less desirable housing, and that real estate is therefore going to be a quite satisfactory vehicle for creating personal wealth.



On the other hand, no system of projecting the future is better than the limitations imposed upon it by limited foresight. If the population of the United States drops to 1789 levels all of a sudden - or 1607 levels - all bets are off. Of course if that happens, most of us won't be here to worry about it, and the ones that are will have bigger problems than the price of real estate. It's pointless to waste time worrying about the price of real estate in such possible circumstances, where the price of real estate will be the least of our worries.



Caveat Emptor

Beautiful Private Showplace



General: Urban East County, 3 bedroom 1.75 bath. 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: This is a beautiful property on a quiet street in a great school district close to everything.



Selling Points: Gardenlike front and side yards, with privacy hedge. Private gated drive into two car detached garage. Back yard has plenty of room for entertaining, or you could put in a pool. Thoroughly modern master bedroom and bath. Second and third bedrooms open on other bathroom. Kitchen is beautiful and modern, with lots of room. Tile roof, even!



Why I think it's a potential bargain: This sort of property doesn't go for this low of a price here. It's priced more like most fixers.



Obvious caveats: The second bathroom needs a little updating.



Why it hasn't sold already: Nobody else has found it?



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 $740,000. If you held it those ten years before selling, you would net about $350,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $2000 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $160,000 ahead of the renter, after the expenses of selling.



Fact you should be aware of: I didn't see anything.



Obvious way to enhance value or appeal of property: Other than a minor update for the second bath, I really can't see anything.



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 am looking to represent buyers, so 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!

The Best Loans Right NOW



6.375% 30 Year fixed rate loan, NO points, and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2495, APR 6.387! This is a thirty year fixed rate loan without points. The payment and interest rate will stay the same on this loan until it is paid off! 30 year fixed rate loans as low as 5.625%!



10 and 15 year Interest only payments available on 30 year fixed rate loans!



Zero closing costs loans also available!



Best 5/1 Loan trade-off: 6.00% 1 total point. Assuming $400,000 loan, payment of $2398, APR 6.084%. 5/1 ARM loans available as low as 5.125%! This is a real loan with a real payment that actually pays your loan down, and the rate is fixed for five years!



Interest only, No points and zero cost loans also available!



These are actual retail rates at actual costs available to real people with average credit scores! I always guarantee the loan type, rate, and total cost as soon as I have enough information from you to lock the loan (subject to underwriting approval of the loan). I pay any difference, not you. If your loan provider doesn't do this, you need a new loan provider!



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.



Yes, these rates are higher than last week. That's what happens when the stock market does well. It's likely to continue, so lock in now!



Interest only, stated income, bad credit and other options also available. If you need a mortgage, chances are I can do it faster and on better terms than you'll actually get from anyone else in the business.



100% financing a specialty.



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

The local dog target gave discounters several hundred thousand dollars of free puffery recently.



I'm not against discounters. I'm perfectly willing to do a discounters work for a discounter's price. Fifty percent for the pay for less than ten percent of the work and almost none of the liability is a real win as far as I'm concerned. The difference is that I'm not willing to pretend that you're getting the same value from me. In fact, the amount of value the buyer receives from their alleged "agent" is pretty much negligible.



Let's illustrate with a real example from last week. Some full service clients of mine had gotten interested in a property. They wanted a fixer property with potential and a view, and they asked me to check this one out. Yes, it had a view, but the view was of a high school stadium, making peaceful enjoyment of the property rather hit and miss, subject to the local sports schedule. It had some potential, true, but every surface in every room needed to be redone. It is going to take $100,000 to get that potential, and the property would only be worth maybe $40,000 more than the owners are asking. Leave out those pesky numbers and a less capable agent can make it seem like a great bargain. If all you're thinking of is that $5000 rebate check, which can be fraud for reasons similar to these, you may think you got a deal.



If they had been clients of a discounter, they would have been in escrow on the first property right now. Too bad about that $100,000 they'd have to spend to get $40,000 benefit. On the other hand, I found the same people a property not far away that needed about $40,000 worth of work to be worth $120,000 more than the asking price. What does a discounter do? Write the offer on the first property. Now you've got a property you need to put $100,000 into to make it usable, that's worth only $40,000 more than you paid. Money the discounter would have rebated: roughly $5000. If they didn't have a full service agent to compare with, it even looks like a great deal, because none of the value I provided these folks shows up on the HUD 1 form, or anywhere else as numbers on paper. The value is still there, as my clients know.



If you know enough about the state of the market, what problems look like and what opportunities look like, you may spend less with a discounter, or get a rebate, that doesn't cost you several times that difference. If you know everything a good agent does, there is no reason not to put that money in your pocket. But if you know everything a good agent does, why is the discounter making anything? Why aren't you doing your own transaction? Why aren't you in the business yourself and getting paid for your expertise?



A full service agent goes a long way past filling in the blanks on Winforms and faxing the offer. When I go out looking at 20 to 30 properties per week, I'm not just finding individual bargains. I'm also learning about the general state of the market, what things to look for in a given neighborhood, what common problems are with a given model of house. I know what's sold in the neighborhood recently, and I know what it looks like because I've been inside it, and I know how it compares to other stuff that's out there now. I have a pretty fair idea of what it's going to take to beautify properties, and I know what they'll be worth when the work is done, because I know what other stuff that already looks like that has sold for recently.



Real estate is a career. It may not absolutely require a college education, but many agents have one, and know many things you can't learn in college - because the professors don't know, either, unless they're active real estate agents. A good agent spends a lot of time and effort not only learning their local market, but keeping their knowledge base updated. This thing changes constantly, and it doesn't even change uniformly. How did La Jolla get to be La Jolla? I assure you it wasn't some random seagull anointing the neighborhood as having higher property values. Rancho Santa Fe doesn't even come close to the ocean, and it's the highest mean property value zip code in the nation. How did your neighborhood get to where it is? Is it likely to change, and how? What are the known and probable upcoming changes in the neighborhood? How is it likely to effect your prospective property? Wouldn't you like to know about that redevelopment zone - or the railroad tracks they intend to drive through the area?



Full service can be a very hard sale when all that you consider is the numbers on the HUD 1. There just isn't any space for "Agent kept you from making a $60,000 mistake," let alone, "Agent showed you an $80,000 opportunity." But people who know property know that there is a lot more to every transaction than the numbers on the HUD 1. If you're dubious, may I suggest this experiment when you're ready to buy: Find a couple full service agents willing to work with a non-exclusive buyer's agency agreements, and sign them. Then compare what happens as compared to the service of the discounter you use for properties you find yourself. There is no need to sign even a non-exclusive agreement with a discounter, by the way, as the sales contract will note the agency relationship for that transaction. Like I said in How to Effectively Shop for a Buyer's Agent, let the ineffective alternative select itself out.



I'm perfectly willing - happy, even - to do discount work for "discounter" pay. I only make half the money, but I can service a lot more than twice the clients for a much smaller level of risk and still be home in time for dinner. I'm even a better negotiator than dedicated discounters, because unlike them, I know what's really going on in the areas I serve. However, saying "full service at a discount price," does not make it so, and I refuse to pretend that it is. Furthermore, the people who approach me for discount work usually end up understanding that a real professional is worth a lot more than the extra money I make, and are happy to pay it. Most people have no problems understanding that the reason a good car commands a higher price than a bad car, let alone a skateboard, is because a good car provides more value. People will pay $100 per seat for decent - not great - musicians in concert when you couldn't pay them enough to attend a garage band practice session. Why should this principle holds any less true for expert help in what is likely to be the biggest transaction of your life?



Caveat Emptor

I read a lot of the info. you have on your web page ... thank you.

I don't live in San Diego so I'm not looking for a home.
What I am trying to decide is whether to sell or refinance.

I live in DELETED. My mortgage payments are now approx. $2,400. I cannot afford to refinance into a fixed rate mortgage or interest only. I wanted to reduce my payments and I was recently offered a neg-amortized loan.

While I do have plenty of equity in the home, I balk at the thought of using my home as a piggy-bank. It's just not my style. I feel like I made a terrible mistake. I had a very modest home ... fairly low payments & property taxes ... but I wanted more, so I sold it.

I bought a good-sized lot with the proverbial "fixer-upper." Mistake #1 I should have thought of it as the "MONEY PIT."

Anyway, five years later and I've just survived a remodel but I'm still struggling.

Do you have any sound advice/suggestions?

First off, despite your market being somewhere I am licensed, each area's market is significantly different. Unlike the loan market, each commuting area has enough of its own concerns that nobody can keep track of more than one - not really. If someone called me out of the blue and asked me to list a property even a few miles outside my normal area of San Diego County, I would not have a good idea what it should list for. I can do a comparative market analysis, but that's just cranking numbers, and there's a lot more to market knowledge than cranking numbers. I can point to a dozen properties I've looked at in the last week where the listing agent priced it wrong. Sometimes they're under, sometimes they're over. Whichever it is, it's not good for the owner. Some agents will tell you there's no harm in being high, which is a premeditated lie. Properties that sit on the market because they are priced too high will sell for less money than the owners could have gotten, and that's if they sell.

Some properties are money pits, while others are vampires, charming on the surface, while they embed their fangs permanently in your wallet. The best opportunities, however, are all fixers. The reasons a good buyer's agent is worth more than they will ever make are legion, no matter how much our local dog-target keeps pushing discounters. I just got a call from one pushing a property I previewed last week. Yes, it had a view, but the view was of a high school stadium, and every surface in every room needed to be redone. It's got potential, but it's going to take $100,000 to get that potential, and the property would only be worth maybe $40,000 more than they're asking. Leave out those pesky numbers and a less capable agent can make it seem like a great bargain. On the other hand, I found the same people a property not far away that needed about $40,000 worth of work to be worth $120,000 more than the asking price. Money the discounter would have rebated: roughly $5000. Difference in outcome: $80,000 in prospective equity and $60,000 of wasted work. Prospective differences in listing agents are every bit as large.

Now, let's consider the kinds of issues that might give you a better idea about what to do about your situation.

You say you've been through a remodel and have significant equity. That's good news in that you are not "upside down", but should be able to sell the home for more than you owe on it. That's better than a lot of folks right now.

However, the unavoidable fact is that it costs money to sell. A good listing agent is going to cost money - and a bad listing agent will cost you more, and this cost is no less real for the fact that most of it won't be on the HUD-1. A good listing agent is going to tell you to offer a good buyer's agent percentage, also. Furthermore, you're going to buy a home warranty, and a policy of title insurance. I warn my fixer clients that it's going to cost about eight percent of value to get the fixed up property sold at a good price - so they might as well include that estimate in the calculations of whether the property is worth buying in the first place. I'd rather work a little harder, and have a client that keeps coming back to me because they keep making a profit worth making. So figure eight percent of value in addition to the fact that this market is very soft for sellers, although I'm seeing indications my local market may be firming up. Your market may be softer or not so soft. The softer it is, the less you're going to need to be prepared to accept if you sell. Around here, if you've got a property that appraises for $500,000, you may only get $480,000 or less on the purchase contract - and you may have to give allowances on top of that. $480,000 less eight percent is $441,600, and if you have to give a $15,000 allowance for closing costs, that's $426,600. So you can have a good amount of equity on the face of things, and be upside-down in fact when it comes to the actual sale. Even if you have $100,000 in equity, it just turned into $25,000 to get you out from under a loan you can't afford. That's my local market. Yours may be different, of course.

On the other hand, given the fact that you cannot afford your payment, your alternatives do not include doing nothing. If you try to do nothing, you will have your credit ruined and lose the property as well as quite likely get a 1099 love note from the lender that says you owe taxes and possibly (depending upon whether or not your loan has recourse) a deficiency judgment. So doing nothing is not an option.

The other alternative is a negative amortization loan. I don't know what numbers you would get, so I'm going to assume something fairly middle of the road. A 1% payment on $400,000 would be $1287, saving you $1100 per month in cash flow. On the other hand, if your real rate is 7.75 (reasonably median), at the end of two years you owe $433,500, and that's no including the prepayment penalty. After three years, when most negative amortization penalties expire, you owe $452,000, assuming rates stay exactly where they are, which I do not expect them to. Even if you got the loan for zero cost, you spent $1450 per month of your equity. In order for you to come out even, you'd have to net almost $479,000. That means a little over $520,000 sales price in three years if you don't have to fork over that $15,000 allowance, or $537,000 if you do.

It's true that you don't have to make only the minimum payment every month. Nor do you want to. However, let's be honest with ourselves. For most people, most of the time, they will. Even if they had it to spend on the mortgage, the kids need shoes, they "need" a new car, or they "need" a vacation. My understanding is that less than 5 percent of the people who have negative amortization loans make bigger payments than minimum more than five percent of the time. So whereas you won't necessarily owe this much in three years, it seems a pretty good bet to me.

Now here's where people helping people in situations like yours get grey hairs. We're guessing at where the market is going to be in three years. Not only about what we think the general market will be like, but what we think this property will be worth. Some things are consistent. For instance, unless you do another remodel, it's unlikely your property will spontaneously acquire brand new cabinets and stainless steel appliances, and since you are stating that you can't afford your current payment, it's unlikely that you'll be able to purchase such. Your property will probably compare to the rest of the market about like it does today, or maybe a little worse. The carpet will get older, the paint on the walls will be a little older, the shingles on the roof will have used three more years of their useful life. You get the idea.

On the other hand, the market really doesn't have to gain much to offset this. Mostly it just has to firm up, and if it does so, then even a two and a half percent annualized rise in prices would cause you to break even. On the average, that's trivial. Less than half the overall average annualized rise. On the other hand, it's not something I or anyone else can guarantee. It's investment risk. The market could continue to slide for a while, or it could be completely flat. Once you buy an investment, any investment, there is no way to remove risk from the equation completely. One of the things that caused the problems a lot of the country has in the current market was agents who promised the people that their property would appreciate - and sometimes it doesn't. It's one thing for people to make the choice knowing the risks; it's quite another to sell them property by telling them that "real estate always appreciates," or even that "Real estate never loses value." Both are patently false.

As to what I expect my local market to do the next three years: I do expect it to firm up. I've started to see this happening already. Due to the number of bad loans, however, mostly people that were sold negative amortization loans, I don't expect to see any large increases for the next few years.

There is one more level of complexity to add, though. What are you going to do for a place to live if you sell? What do the alternatives look like? How are rents, and what are likely to do in your area? Are landlords going to have to increase them? Are people moving out of your area, causing them to drop? A good agent in your area will know. It's not happening to any appreciable degree here, but this isn't your area. To the extent it is happening here, people are more than replacing them.

These, then, are some of the things to consider. There's less risk in the "sell now" option, but you're accepting a significant hit by exercising it. If you hang on those three years, you might be just fine, or you might be hosed even more completely than you are now. Given that you know you can't afford the property, if you came to me I'd probably advise you to sell now. That's the safe option, however unsatisfying it is. Once you have sold, the hemorrhaging is over - you're not bleeding green every month. Sell to someone who can afford the property, and who can afford the risk that it will further decrease in value over the short term. The assumption would be that they would be getting a deal - but what if you hold on and the dice come up snake eyes? You are looking at a maximum length of time before you will have to cut your losses or have them cut for you. This is a recipe for a disaster even bigger than selling now.

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.



Now I'm going to leave the marketing and pricing 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. 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).