June 2007 Archives

One of the concepts I keep seeing without a decent treatment is the concept of leveraging an investment. Real Estate has this like no other investment. You go talk to a bank about leveraging eighty to ninety or even one hundred percent of your investment in the stock market, or the same percentage of a speculative venture, and see what happens. Be prepared for laughter, and they're not laughing with you. But real estate they will do it. Why? Because it's land. It's not going anywhere, and they're not making any more.



The fact is that real estate has the potential for leverage like no other. This is due to the interplay of two factors. One is the fact that you can rent the property out to pay for the expenses of owning it, and even if you use it yourself, you're able to save the money you would be paying in rent. Everyone's got to live somewhere, and every business needs a place to put it. The other, more important factor is leverage, the fact that you're able to use the bank's money for such a large portion of your investment. The bank will loan you anywhere from fifty to one hundred per cent of the value of the property. Yes, you've got to pay interest on it, but you're paying that through the rent - either the rent you'd save or the rent you're getting - and there are tax deductions that make such costs less than they might appear.



Now here are some computations based upon the situation local to me. Suppose you have a choice as to whether to buy a three bedroom single family residence for $450,000 (to pick the figure for a starter home) or rent it for $1900. Let's even allow for the fact that the home may be overpriced by $100,000. You have $22500 - a five percent down payment. More than most folks, and you would invest that and the difference in monthly housing cost, and earn ten percent tax deferred if you didn't buy the house. Let's crank the numbers and see what they say.







Year

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

29

30

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

$736,698.18

$788,267.06

$843,445.75

$902,486.95

$965,661.04

$1,033,257.31

$1,105,585.32

$1,182,976.30

$1,265,784.64

$1,354,389.56

$1,449,196.83

$1,550,640.61

$1,659,185.45

$1,775,328.43

$1,899,601.42

$2,032,573.52

$2,174,853.67

$2,327,093.43

$2,489,989.97

Monthly Rent

$1,900.00

$1,976.00

$2,055.04

$2,137.24

$2,222.73

$2,311.64

$2,404.11

$2,500.27

$2,600.28

$2,704.29

$2,812.46

$2,924.96

$3,041.96

$3,163.64

$3,290.19

$3,421.79

$3,558.66

$3,701.01

$3,849.05

$4,003.01

$4,163.13

$4,329.66

$4,502.85

$4,682.96

$4,870.28

$5,065.09

$5,267.69

$5,478.40

$5,697.54

$5,925.44

Equity

22,500.00

-48,406.32

-17,287.01

15,999.55

51,604.93

89,691.37

130,432.52

174,014.27

220,635.59

270,509.51

323,864.05

380,943.34

442,008.77

507,340.18

577,237.20

652,020.69

732,034.20

817,645.65

909,249.05

1,007,266.37

1,112,149.54

1,224,382.64

1,344,484.16

1,473,009.54

1,610,553.79

1,757,754.34

1,915,294.15

2,083,904.97

2,264,370.91

2,457,532.19

Net Benefit

-31,500.00

-110,236.00

-94,761.88

-77,990.23

-59,828.07

-40,176.54

-18,930.59

-4,021.36

28,797.71

55,524.07

84,333.56

115,367.22

148,774.35

184,712.85

223,349.64

264,861.00

309,432.96

357,261.61

408,553.54

463,526.08

522,407.72

585,438.30

652,869.38

724,964.38

802,381.90

885,736.68

975,442.55

1,071,939.93

1,175,697.38

1,287,213.19



The Net Benefit Column is net of taxes, net of the value of the investment account. The cost of selling the property is also built in. Now most people won't really do this, invest every penny they'd save. I have intentionally created a scenario that contrasts a real world real estate investment where you bought in at a temporary top, with a hopelessly idealized other investment.



There is a potential downside, and it could be big. This is a real risk, and anyone who tells you otherwise is not your friend. Look at the beginning of years numbered 2 through 5 in the equity column. You haven't gotten your initial investment back until sometime in the fourth year. Look at years 1 through 7 in the net benefits column. You're immediately down $31,500, due to me assuming it would cost you seven percent to turn around and sell the property. A year later, due to me assuming the bubble has popped, you're down by over one hundred ten thousand dollars, as opposed to where you'd be in you put it in the idealized ten percent per year investment. There is no such thing, but for the purposes of this essay I'm assuming there is. This is the illustration of why you need to look ahead when you're playing with real estate - a long way ahead. A loan payment that makes you feel comfortable for a couple of years isn't going to cut it. You need something viable for a longer term. If you'll look at projected equity at the beginning of years five and six, it goes between fifty odd thousand and eighty some thousand, assuming you've been making a principal and interest payment. You have plenty of equity to refinance there if you need to. If you need to do something in year three, however, you're hosed. If you've been negatively amortizing, you're hosed. You owe more than the property is worth. The payment adjusts, you can't afford it, you can't refinance, and you have to sell at a loss, as well as getting that 1099 love note from the lender that says "You Owe Taxes!"



But now look ten years out. At the beginning of year 11, you have $323,000 in equity, and if you sell at that point, you are $84,000 ahead of where you would have been if you invested that money in the idealized investment I've posited. That's four times your original investment, and I only assumed real estate went up seven percent per year, whereas the alternative investment went up by ten percent per year. How could that possibly be right?



The answer is leverage. That $450,000 was almost entirely the bank's money. The appreciation applied to this entire amount. But you only invested $22,500. The bank isn't on the hook for the value; their upside is only the repayment of the loan. If the property goes to a value of $481,500 and then $515,205 (normal seven percent appreciation in two years), then that extra money is yours. Think Daffy Duck shouting "Mine! Mine! All Mine!". Daffy's got to pay some money to get the property sold, as real estate is not liquid. The bank gets all of it's money. The bank always gets all of its money first. After that, however, then the extra belongs only to the owner, not the lender.



The lender gets none of the appreciation. This is all fine and well with them, by the way. They've been well paid whether the property increased in value or not. This money from increased value is all yours. This applies even, as in our example, if the property lost value for a while. Yes, if you had had to sell in year two, you'd have been up the creek. But you didn't; you kept your head and waited until the property increased again. Given that you didn't, the only numbers that are important are the numbers when you bought it, and when you sold it. The rest of the time is completely irrelevant to the equation, a fact that is true for any investment, by the way. Doesn't matter if the value is ten times what it was when you bought on paper, it only matters that when you actually sold, it was for a loss. Doesn't matter if the value goes to zero the day after you buy, and stays there for thirty years. If in the thirty-first year it rebounds to fifty or a hundred times the original purchase price and that's when you sell, then you really were a genius. Get it? Got it? Good.



So when the property appreciated back to $688,000 and change at the beginning of year eleven, and you only owe $364,000 and change, that's $323,000 in equity. You're almost fifty percent owner. Even after you pay seven percent to sell the property, you come away with $275,000, as opposed to a little over $191,000 that you'd have in the idealized but unleveraged investment.



Keep in mind this whole scenario is a hypothetical. Every Real Estate transaction is different. Every property is different, every market is different, and the timing makes a critical difference. That's why you can't just call your broker to sell it and get a check within seven days, like you can with stocks and bonds. That's why a decent agent is worth every penny, and a good one is worth more than you will ever pay us. But properly executed, a leveraged investment pays off like nothing else can, and real estate is the easiest way to make a highly leveraged investment that is stable until such time as it is favorable to sell.



Caveat Emptor.

What is Real Estate Worth?

|

One of the most common questions in real estate is "What is this property really worth?"



The easy answer is the same as the deepest, most profound one I can come up with, "Whatever you can get someone to pay for it." It's the answers in between that you've got to watch out for. The appraised value is simply a guesstimate based upon the sales of similar properties. But there is no such thing as an identical property. A Price Opinion is just a guesstimate based upon what an expert thinks might be an appropriate asking price. Even an accepted offer means nothing if the offerer backs out, changes their mind, or can't qualify.



Now it's no secret that some people can get folks to pay more for real estate than others, and others can bargain the price down better. But the bottom line is that if it's not worth what you paid, why did you buy it? If it's worth more than you sold it for, why did you sell it? There isn't a good answer to either one of these questions. It's worth what it sold for. Period. The only exceptions are when there's a distress sale, and even then, the answer reads, "Under the circumstances, that's what the property was worth," which is remarkably similar (like identical) to what the answer is in all other situations.



This goes for the other side of the coin, failed transactions, as well. Why didn't you sell to a good offer? Why didn't you offer more? Because it wasn't a good offer, or because it wasn't worth more, to that person.



If you walked up to the average person on the street and offered to sell them a parcel of land on which there's a home, anywhere in the US, for $5 or $10 or $100 or even $1000, most people would take you up on it sight unseen so long as you could deliver clear title. I can safely say that the average residential property in this country is worth at least $1000 to every legal adult in the country. Why then all of these elaborate rituals of listing contracts and MLS and inspections and offers and escrow and title insurance for the transfer of property?



The answer lies in the fact that sellers want to get the highest price possible. Ideally, they want to find the one buyer who will bid more than anyone else on that particular property, because the property is worth more to them than anyone else.



To find that one perfect buyer is actually fairly rare, in my experience. But you can certainly find buyers willing to pay more than $1000, in most cases. How much more? Well, that depends upon the property and the buyer, how widely and effectively your net is cast and how long you are willing and able to wait. As with all investments, it's a trade off and sometimes the money you'll get from a better buyer isn't worth the money you spend finding them. Knowing stuff like that is part of what I get paid for.



It does you no good to accept the offer of someone who can't qualify for the loan they need in order to purchase the property. It does no good to make such an offer. How do you tell, as a seller? Make it a part of your counteroffer that the deposit revert to you the day after contingencies expire. That's not friendly, and it may lose you some potential buyers, particularly in a buyer's market, but it's the only way to be sure. Prequalification letters are basically used paper, for all they really mean.



There is nothing wrong with saying, "My property is worth $X" as long as you understand that it's shorthand for "Similar properties in my area are selling for about $X". Because your property is never worth $X. Nor are any of mine, Donald Trump's, or anyone else's. It's not worth that unless you sold it for that, and if you sold it, it's not yours anymore, is it?



People get caught up in the damnedest ego blocks on comparatively few dollars. You put the property up for sale because you wanted something other than that property, right? You're out there offering money for the property because you think you can make more money with the property than with the money, right? Trying to squeeze too many dollars out of the other side of the transaction can and often does leave you with no transaction. There is a thin line between hard bargaining that gets you a good bargain, and overplaying your hand that gets you left out in the cold.



Don't get left out in the cold.



Caveat Emptor.

One of the most useless and overworked items in the real estate industry today is the pre-qualification for a loan. Sellers want buyers to be "pre-qualified", and buyers are seeking "pre-qualification" to convince buyers they are serious.



The level of work done for a pre-qualification varies. In some rare instances, the loan officer doing the work not only runs the credit, but verifies the income as consisting of the proper income documentation paperwork (w-2s and/or taxes, plus pay stubs and/or testimonial letter) for the loan, and determines how much of a payment you can qualify for based upon known income and known indebtedness, and actually includes the assumed property tax due to purchase price in the payment calculations, and gives you an answer in how much you can qualify for based upon current rates at the time. This is a fair amount of work, consuming hours of time. A loan officer at a direct lender who goes through this whole procedure might be done in two or three hours. A loan officer working for a broker can actually take a full day, or even two, making calls to various lenders and shopping the loan around after the primary calculations are done. On real transactions, I've gone over two days on multiple occasions, trying to find a better loan.



The pitfalls and caveats are many. If the loan officer doesn't run your credit, which costs money, they really have no idea what your credit is like. If they don't verify your income, they are making a giant assumption that what you told them is accurate for purposes of a real estate loan (you get to use gross pay, but there are a multitude of potential adjustments). The payment you qualify for when you actually go to buy a house and get a real loan is a so-called PITI payment, which stands for principal, interest, taxes and insurance. Insurance is always an educated guess, unless and until you have a quote from a prospective insurer on a particular property for an adequate amount of coverage. Taxes here in California will be initially based upon sales price, and unless you live within one of the high property tax areas, is pretty much a set rate for the whole state, but there are many special assessment districts, scattered all over the state. I've seen properties with as many as four of these, although many if not most properties have none. It's much harder in some other states to even come up with a meaningful rule of thumb figure. All of these factors throw the taxes figure off.



Principal and interest - the actual loan payment - is what's left over from your allowed payment. From this, you can compute a principal loan amount based upon known interest rates.



Here's where the games really start. The first question is "What type of loan are they basing it on?" The thirty year fixed rate loan always has the highest rate, which means that if they assume a thirty year fixed rate loan, they are going to be able to "pre-qualify" you for less than somebody else can. What's the lowest rate, and hence the highest prequalification amount? A month-to-month variable or even a negative amortization loan. Somebody assuming they are going to qualify you for a negative amortization loan is going to "pre-qualify" you for the largest loan - more than you can really afford. Which is more attractive to a client who doesn't know any better? That's right, the negative amortization loan. Which loan causes someone who is educated in mortgages want to drag the loan officer into the sunlight and stake them through the heart? That's right, the negative amortization loan. Amazing coincidence? Not really. From personal experience, many people do not want to become educated, even to the level of a competent layperson, and they will get taken for a ride as a consequence. What they want is to look at houses, pick out one they like, sign a couple sheets of paper, and move in. What these people are likely to get is a disaster. Many people in my industry make a very high class living ripping off people like this while setting them up with a gotcha that's going to bite, and bite hard, but not until after they've got their commissions and depart the scene. "How many houses are they going to buy from me, anyway?" is the typical thinking.



One more concern is the fact that while sub-prime loan rates are higher, and in most cases they will have a pre-payment penalty, where A paper loan rates are lower and in most cases do not have a pre-payment penalty. However, the highest payment A paper loans will allow is less than the highest payment sub-prime loans will allow. So the loan officer can typically qualify you for a bigger loan based upon a sub-prime loan. See my article on "Mortgage Markets and Providers" for more information.



Additionally, the rates on loans change every day. If the rates changes, so does the amount you qualify for with the same payment. It takes only a calculator to show that even an honest and complete "pre-qualification" done on a rate that's valid today may or may not be accurate by the time you actually find a home that you wish to purchase.



Another game loan officers play is with the rate versus cost and points tradeoff. It is counter-intuitive but true that it is actually easier to qualify someone for a lower rate. If you qualify for a given loan program at 5.5 percent, you will qualify for the same program at 5.25 percent, but you might not qualify at 5.75 percent. The reason is that the payment is (or should be) lower if the rate is lower, and payment is what qualification is based upon. The cost to you is that most people refinance or sell before they have recovered the additional costs of these lower rate loans. (See my essay on Mortgage Rate and Points for details and sample computations.) So they're going choose a loan that sticks you with multiple points - costs you're not likely to recover - all in the name of qualifying you for a larger dollar amount.



THERE IS NO WIDELY-ACCEPTED STANDARD FOR "PRE-QUALIFICATION." Let me say that again. There is no widely accepted standard for prequalification. One more time: There is no widely accepted standard for prequalification. Consequently, everywhere in the nation, but particularly in California and other high cost areas, the pressures on providers to "pre-qualify" you for inflated numbers is intense. If you don't qualify for enough to buy any home, they obviously don't have a transaction. If they pre-qualify you for less than someone else, most people are more likely to go to that somewhere else, and the loan officer doesn't have a transaction. The competition is qualifying them based upon month-to-month variable loans or even negative amortization, and so if they don't as well, they don't have a transaction. Few people qualify clients based upon how things really are, and the easy transactions where everything fits and the people qualify based upon traditional measures are mostly long gone. If the agent and loan officer doesn't have a transaction, they don't make any money. If they don't make any money, they don't stay in business, they can't make the payments on the Porsche, their house gets repossessed, their wife has to sell her jewelry to keep them off the streets, etcetera. It's not a pretty picture for them, and it often leads to them putting clients into situations they cannot really afford. Finally, of course, the size of commissions is based upon the size of the transaction, so if they "pre-qualify" you for more, they have the prospect of making more when you buy the bigger house that you cannot really afford.



This doesn't even go into the issues of a stated income loan. (See Levels of Mortgage Documentation). This is where you cannot prove income according to industry standards via taxes, w-2s, pay stubs, or perhaps bank statements for sub-prime loans, so you state your income and in return for a higher interest rate, the bank agrees not to verify the actual income level. Please note that it's still got to make sense for someone in your profession. For example, if you are a school teacher they are not going to believe you $250,000 per year. But people do make up numbers much larger than the real amount they make. It is not for nothing that stated income is often called a "liar's loan". That is fine and good, as long as you actually can make the payment. When you can't it becomes a real issue. Not necessarily for the loan officer, who's going to get their money and depart the scene, and as long as you make the first payment or two they're off the hook. No. The one who's going to have to deal with the mess is you, the client. Keep in mind that as soon as the loan is funded, that loan officer is out of the picture whether you went through a direct lender or not, and they know it. That real estate agent is also out of the picture as soon as you have your house, and they know it. You've got to live with the situation they created, and they kind of know it, but often it just isn't important to them, and certainly not as important as seeing that they get paid, and paid as much as practical. So watch out, and shop around. The person who "pre-qualifies" you for the lowest amount may be the one you should do business with, because they are using assumptions you can actually live with. Go over their numbers with a calculator in hand.



The stated income loan leads into our next issue, which is that few people will expend the necessary effort to do a "pre-qualification" correctly. It takes several hours to do an accurate "pre-qualification" correctly, but a Wildly Assumptive Guess takes just a few minutes. You may imagine which is done more often. This especially applies if the agent does not run credit or does not get income documentation. Due to the availability of the stated income loan in the current market, they really don't have a need to be accurate, and due to pressures to come up with high numbers, their assumptions are going to range from pretty optimistic to wildly optimistic. This is wonderful if you just want to be able to say you were a homeowner for a few months while the bank forecloses on you. It's not so great if you're trying to get into a survivable financial situation.



You may get the idea that when it comes right down to it, most "pre-qualifications" are convenient fiction, worth an approximately equal size of toilet paper, if not quite so soft on certain portions of your anatomy. You'd be correct. So "Why are they so ubiquitous?" becomes the obvious question.



The answer is sellers and seller's agents. Sellers are going to go through a significant amount of trouble and expense going through the motions of selling their homes. Furthermore, they can only have one proposed sale in process at a time and they may have a deadline. They understandably want some kind of reassurance that this buyer can actually qualify for the loan. For their part, seller's agents can be some of the laziest people I've ever met when you come right down to it. They've paid the money for the advertising that draws people or joining the big well-known National Brokerage With Television Advertising! Once they get the signature on a listing agreement, many think they're entitled to sit around with thumb you-know-where and wait for the commission to roll in. They don't want to go over the buyer's pre-qualification with the seller, and some of them have no idea as to how to do it. But they certainly don't want to carry out their part for more than one proposed transaction, hence their desire for this Magical thing called the "pre-qualification."



The correct way to respond to this concern, for a seller, is simple and yet many people think it's hard-nosed. Require a deposit. Require it be remitted to you on the last day of escrow as part of the initial contract, whether or not the loan funds. Now the standard form in California, as a default, makes the sale conditional upon the loan for seventeen days, but this can be changed by specific negotiation. True, you might scare away some buyers who aren't certain that they're qualified, and in buyer's markets this may scare them away entirely. But you won't enter into escrow with anyone who's unsure. You shouldn't rely on a "pre-qualification", which is basically just a piece of paper that's now been filled up with meaningless markings and so can't be used again.



Furthermore, many buyer's agents, knowing how useless a "pre-qualification" is, don't want to take the time to do them themselves and so tell their clients to go get one somewhere else, but that when the time comes they have someone who will do the actual loan. It didn't take very long for the word on this practice to get out, and so loan officers and agents with a very short time in the business learn not to do them unless they are going to get something out of it. Which basically means control of the transaction or an upfront payment. I certainly can't name anybody with more than a few months in the business who will do a "pre-qualification" unless a client either signs a Buyer's Agent Agreement or pays them a fee or does something that assures them they will get a transaction. And if your agent says go get a "pre-qualification" on your own, go and get another agent. If they or the loan agent they recommend can't be bothered, then obviously they are too busy to give you the necessary attention to get your transaction done properly and on time. It's very hard to fight the system that requires a "pre-qualification," no matter how useless it is, but it's part of the work they signed on for. They should do it themselves. If they try to get someone else do do their work, consider it a Red Flag not to do business with them, because they're already trying to skate by without doing work that they should be doing. Being a good agent or loan officer is work, and that's what we get paid for. Somebody who's trying to do less work now is likely to try and skate by without doing important work later.



Caveat Emptor






Every so often I get e-mail asking why real estate transactions are so complex. The answer is, "Because they're for a lot of money, and because there's a lot of money involved, con artists and other people will make a lot of money if they successfully con you out of small proportions of it. Therefore, real estate acts as a magnet for the less than scrupulous."



Nor is outright fraud the only issue. If Sellers can persuade potential buyers that their property is 2% more valuable, that's $10,000 on a half million dollar property. If buyers can persuade sellers to sell that half million dollar property for 2% less, that's the same $10,000. Offer ordinary Americans - wealthy by the standards of the vast majority of the world - a chance to make $10,000, and they'll do anything from eating live worms to months of primitive living and Macchiavellian scheming to be the last one voted off the island.



Greed is a very powerful motivator. Because of that, there are any number of scams and games out there. If you've been in either real estate or mortgage very long, chances are that you've had more than one tried on you or your clients. Perhaps one has even succeeded. Sometimes people get taken and don't realize it for years, if ever. Not too far from me, a couple months ago somebody got nearly $600,000 for a property that was really worth $480,000 to $490,000. The buyers are happy, too, according to the listing agent, never mind the fact that they paid $100,000 too much for the property. They'll eventually realize that their property isn't worth that much more than the neighbors', but they'll probably never make the connection back to "We paid too much". Unless the condition was completely misrepresented or something about what the seller says just isn't true, there's a good possibility of getting away with it. Even the sharp buyer's agents who spot the issue just want to keep their clients out of trouble. There's no advantage to me or my clients in publicizing other people's lies. Even on the listing side, the agent either thinks an offer is good or they don't, and the seller ends up accepting or sending the prospective buyer on their way. There's no advantage in warning others about one particular person trying to pull one particular scam.



With the amount of money to be made quickly, a lot of transactions have something fishy about them. I've seen figures and estimates varying all the way from two percent to nearly fifty percent of all real estate and mortgage transactions, depending upon where they set the threshold.



Against this backdrop, security measures have been instituted. Appraisal, inspection, disclosures, title insurance, escrow, notaries, etcetera, etcetera, etcetera. Every single one of them has reasons why they are advantageous and why they are required. Every time you do without one of the security measures that the industry has implemented which is applicable to your situation, you leave yourself open for things which vary from minor games to completely illegal. Yes, they cost money - a lot of money in the aggregate. However, when the alternative is leaving the door open to transactions that are one hundred percent fraud, they have gotten incredibly cheap. Every time you try to cut out the professional who is supposed to protect you or work on your behalf, you leave the door open for losing more than they might possibly cost.



Take out the security measures, and not only do you open the door wider, but the people who are mildly concerned that they might end up imprisoned now will have no real downside to the activity. If there's no real chance of being caught and punished, what rational incentive is there not to do it? Do it, and make an extra $50,000. Don't do it, and the only difference is that you won't make that extra $50k. What's the incentive not to? There just aren't a lot of saints out there. Look at the way people behave in traffic, for a lot less gain, and pretty much every day I see someone getting a ticket that's going to cost them more than getting away with the offense 100 times would save. For this reason, all sorts of folks hope that you can somehow be persuaded not to take advantage of all available protective measures. It means they stand a better chance of getting away with whatever they're trying to pull.



In fact, the level of complexity and detail assists in finding and convicting malefactors. The more information you have, the better you can pin down exactly who did what. By breaking up the charges and the payments to track exactly what went where and for what purpose, a paper trail is created detailing what happened. If the only record made is that A paid B $X for some land somewhere, that says nothing about whether B owned it in the first place, what B told A in order to sell it, what A thought the condition was, or even what exact land was sold. I can go on for quite a while, but the point is that every little finger in the pie should have a good reason why it's there. If you're not trying to pull anything, they're there to protect you. Even if you are trying to pull something, they're there to protect you from the other side of the transaction cheating better than you. Especially if you're honest in the first place, it's a better situation for everyone. Like employment and tort law, real estate law and practice has evolved the way it has as a protection against unscrupulous practices, and short-circuiting any part of it increases the odds that you will find yourself very unhappy indeed.



Caveat Emptor

The Best Loans Right NOW



6.5% 30 Year fixed rate loan, 1 total retail point, and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2528, APR 6.641! 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 5.75%!



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: 5.875% 2 total points. Assuming $400,000 loan, payment of $2366, APR 6.106%. 5/1 ARM loans available as low as 5.375%! 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.



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 short answer is "Because it costs less"



There is always a trade-off between rate and cost on a given loan type. If you want the thirty year fixed rate loan half a percent lower than everybody else is getting, you're going to pay for it in the form of discount points. The higher cost always goes with the lower rate. You might as well consider it a law of nature in the same league as gravity, because it is a law of economics. If you don't want to pay high costs, you end up with a higher rate. End of story. There are all kinds of games that can be played with loan quotes, but the fact of the matter is that of the tens of thousands of rate sheets I've seen from over two hundred different lenders from A paper all the way down to hard money, every single one of them conforms to this fundamental truth. A 6.00 percent loan will cost more from the same lender at the same time than a 6.50 percent loan of the same type. Some lenders have different trade-offs than others because they are aiming at different target markets. I could tell you about lenders that rarely have a rate below par on their sheet, and lenders that rarely have a rate above par, par being the point at which there are no discount points to get the rate, but no yield spread either. Some lender's par may be lower than others, or higher. The par on a completely different loan type, or loan program, will be different. Par varies with time, the qualifications of the borrower, the type of loan they desire, the type of documentation they are providing, and other concerns as well.



The cost of a loan is sunk. Once you have the loan, the money you spend to get it is gone, whether you paid it out of pocket or rolled it into your balance. If you sell or refinance before you have recovered it via lower interest costs, you don't get it back. Actually, if you roll it into your balance, the money isn't gone, because you still owe it and you're paying interest on it. If you sell, it will mean you get less money, and if you refinance again, your balance will still be higher. Paying it out of your pocket is no better, because you could be investing that money, likely at a higher rate of return than the rate on most loans.



Now here's a very old rate sheet I saved from a random lender. The rates are much higher now. All of the lock periods are thirty days. I'm going to presume a $400,000 total loan, as if you're doing a cash out refinance to a specific loan to value ratio, but the principles are the same no matter the loan size.







Rate

5.25

5.375

5.5

5.625

5.75

5.875

6

6.125

6.25

6.375

6.5

6.625

6.75

6.875

7

discount

3.898

3.221

2.6

2.01

1.452

0.963

0.615

0.252

-0.063

-0.381

-0.661

-1.039

-1.27

-1.511

-1.577

pts $

$15,592.00

$12,884.00

$10,400.00

$8,040.00

$5,808.00

$3,852.00

$2,460.00

$1,008.00

-$252.00

-$1,524.00

-$2,644.00

-$4,156.00

-$5,080.00

-$6,044.00

-$6,308.00

total cost

$19,092.00

$16,384.00

$13,900.00

$11,540.00

$9,308.00

$7,352.00

$5,960.00

$4,508.00

$3,248.00

$1,976.00

$856.00

$0.00

$0.00

$0.00

$0.00

net $

$380,908.00

$383,616.00

$386,100.00

$388,460.00

$390,692.00

$392,648.00

$394,040.00

$395,492.00

$396,752.00

$398,024.00

$399,144.00

$400,000.00

$400,000.00

$400,000.00

$400,000.00





Alternatively, If you owe $400,000 and roll the costs into the balance, it becomes the following. Actually, the costs are mostly higher because points are computed based upon final loan amount, while I was too lazy to recompute from the previous example. Also, the maximum conforming loan is $417,000 currently, so going over that would cause the rates to rise notably, but assuming you have a 7% interest rate now, this is how quickly you would recover the costs of the new loan:







Rate

5.25

5.375

5.5

5.625

5.75

5.875

6

6.125

6.25

6.375

6.5

6.625

6.75

6.875

7

total cost

$19,092.00

$16,384.00

$13,900.00

$11,540.00

$9,308.00

$7,352.00

$5,960.00

$4,508.00

$3,248.00

$1,976.00

$856.00

$0.00

$0.00

$0.00

$0.00

loan

$419,092.00*

$416,384.00

$413,900.00

$411,540.00

$409,308.00

$407,352.00

$405,960.00

$404,508.00

$403,248.00

$401,976.00

$400,856.00

$400,000.00

$400,000.00

$400,000.00

$400,000.00

int/month

$1,833.53

$1,865.05

$1,897.04

$1,929.09

$1,961.27

$1,994.33

$2,029.80

$2,064.68

$2,100.25

$2,135.50

$2,171.30

$2,208.33

$2,250.00

$2,291.67

$2,333.33

save/month

$374.81

$343.28

$311.29

$279.24

$247.07

$214.01

$178.53

$143.66

$108.08

$72.84

$37.03

$0.00

$0.00

$0.00

$0.00

breakeven

50.94

47.73

44.65

41.33

37.67

34.35

33.38

31.38

30.05

27.13

23.12

0.00

0.00

0.00

0.00



*over $417,000 kicks into non-conforming loan territory



People shop loans by payment. They shouldn't, but they do. Furthermore, a lot of people seem to get quite a stroke out of bragging that they have a low interest rate. But if you add $19,000 to your balance and only keep the loan long enough to recover $15,000 in interest, you've gotten a negative 20% return on your money - not including the time value of money. Furthermore, this money usually equates to the fact that you're going to have a higher balance and end up paying more money and higher interest on your next loan.



Now, it may be counter-intuitive, but it is easier to qualify for a loan with a lower rate, because the payments are lower, and therefore the Debt to income ratio is better. So any time somebody tells you that you didn't qualify for the same loan at a lower rate, you know it's nonsense. If you qualify for the program at all, you qualify most easily with a lower payment. This begs the question of whether you qualify for the program at all - your credit score could be too low, or it might not allow a loan to value ratio or debt to income ratio or any of many other situations you find yourself in, but if you qualify for the program, you will qualify at the lower rate. It may be smarter to want the higher rate, but that can be effectively eliminated by debt to income ratio.



So that's why low and zero cost loans are not popular. Most people focus in on either payment or interest rate, and when they discover that the low or zero cost loan means a higher interest rate, they're not interest. But if you don't keep the loan long enough to recover the additional costs, you're wasting money. Only a true zero cost loan can have you ahead immediately, but advertising or selling zero cost loans is like King Canute trying to command the tide to turn. Most people aren't interested.



There are other considerations. I've been telling people interest rates are going to rise for quite some time, and so rates gotten now are not going likely to be equalled for quite a while. This has now become quite apparent, for instance, if you've been pricing loans lately as opposed to when this rate sheet was valid a few months ago. If you're not intending to sell any time soon, it's likely to be a good idea to pay part of a point or even a full one, as you're likely to be keeping the loan longer, and the median time between refinancing is likely to rise. Nonetheless, there are limits on the size of any bet you want to make, and when you pay costs up front for a loan rate, you are betting that you're going to keep it long enough to more than recover those costs. For quite a few years now, the lenders have been winning the vast majority of those bets.



Caveat Emptor

Before you even make an offer, you should be aware that you're going to spend a significant amount of money well before the transaction is consummated. There are methods of avoiding it, but they're a good way to get yourself in serious trouble by short-circuiting safeguards built into the system.



This doesn't include the deposit. The deposit is not, strictly speaking, money you are spending unless you do something that causes its forfeiture. It's relatively rare for someone who has an on-the-ball agent and who isn't trying to play games to forfeit their deposit. In the normal course of things, it will end up being used for loan costs, transaction costs, and possibly for some down payment money. It's mostly money you're putting up as evidence of your ability to consummate the transaction. The larger your deposit, of course, the more you have potentially at risk, but also the more serious you are showing the seller you are about the transaction. If I'm putting up a $10,000 deposit on a $250,000 condo, that's 4 percent of the purchase price. A buyer who's that serious will likely be able to get an offer with a lower purchase price accepted than someone without much of a deposit. Once upon a time, the default was 2%, but that's comparatively rare these days, as most deposits are smaller.



The first thing you're really spending money on is the inspection. The lowest one I've ever seen was over $250, and they go up from there, with the average being about $350. The basic inspection is your best protection against undisclosed major or expensive faults in the property. I've heard of people using the seller's inspection or the previous buyer's inspection. This is a good way to save a few hundred while being out tens of thousands. The previous inspector could well have been instructed to ignore defects, and because you are not the one paying them, they have no responsibility to you. If you engage them and you pay them, you can sue them if they don't exercise all due diligence. It's okay to have your buyer's agent provide a recommendation or even select them - your agent is also responsible to you. But be careful if you're using a dual agent or going unrepresented. I would also never use an inspector recommended by the seller. They could have chosen their friend with malice aforethought. In any case, if you're not writing the check that pays them, they don't have responsibility to you. If they don't have any responsibility to you, what's their motivation to do a full inspection and report everything? Finally, you do want to pay them at time of inspection. Some inspectors will work through escrow, waiting until escrow closes to get paid, but they charge a lot more - and you're going to pay these higher fees whether or not the transaction actually closes. Better to just write the smaller check up front.



The second major thing you'll actually spend the money on is the appraisal. Like the inspector, an honest appraisal protects you. Around here, they start at about $350, and go up from there. Investment property appraisals are more expensive because there's extra work to be done, and so are higher dollar value properties. Never use someone else's appraisal or appraiser. I've written briefly on appraisal fraud before. The games that the unscrupulous can play are legion. Once again, it's okay to trust a buyer's agent or an independent loan officer you select to find an appraiser, but not a dual agent, and not a loan affiliate of the listing agent. The buyer's agent has an unalloyed responsibility to you, and the loan provider has one to the lender, who also doesn't want the appraisal to be for more than the property is really worth. Once again, if you're not paying the appraiser, they have no responsibility to you, so you want to be the one writing that check. Furthermore, many loan providers are willing to pay that appraiser, but you may take it for a law of nature that you're not going to save money that way - these loan providers will charge enough more to more than cover the cost of the appraisal, and they'll get it from you whether or not the transaction closes.



One of the things a good buyer's agent learns are suspect are seller's appraisals. That seller wants to get the highest price possible, and the appraiser they pay has a responsibility to them. Furthermore, in such circumstances, some appraisers don't have any compunctions as to how high they'll go. Last year, I visited an empty mosquito infested armpit of a property that hadn't been updated in sixty years. Okay, it did front one of our coastal lagoons, but even so my best estimate of the current value was about $640,000 - and somebody had managed to borrow about twice that according to public records. Stuff like that doesn't happen without appraiser complicity. So unless you want to take a risk of trusting someone like that, don't trust a seller's appraisal.



None of this includes specialist inspections that are real smart to get if your initial inspection finds something of concern. Of course, if the initial inspection finds something of concern, the smartest thing may be to walk away from the property. It depends upon too many factors to write about with any coherence, and there are no guaranteed answers. Pretty much every real estate transaction is an exercise in controlled risks for the buyer, which is one more reason you want to have a good agent on your side.



Around here, the seller most often pays for the termite clearance, because that termite inspector is making a general warranty to all concerned that the property is in the condition they say it's in, but that's subject to specific negotiation.



So before you make an offer, be aware that you are committing the costs of inspection and appraisal to this property should that offer be accepted. There are ways to avoid paying them, but it's not smart to do so, as it's likely to cost you a lot more than you could possibly save. Before you make that offer, ask yourself if you're willing to put up this money as insurance against all sorts of common issues that properties really do have. Yes, if something goes wrong with the transaction, it's money down the drain, but better several hundred dollars for the inspection and appraisal than half a million dollars or more for a property that isn't worth what you paid for it.



Caveat Emptor


I purchased a house in DELETED with two friends. Unbeknownst to us, one of them was in a legal domestic partnership relationship that she withheld from us (we knew about the relationship, just not about the legal part). We each had to sign these Domestic Partnership Addendums to our loan application. She did not indicate she had a domestic partnership relationship through that form. She and her partner split. The partner filed for dissolution in November and in her paperwork has named our property as joint property. Our "friend" has denied that her partner has any legal right to the property.

Apart from this mess, this house partner ...DELETED... has been a terror since we got the house. I have offered to buy her out three times since DELETED. THEN I found out she lied about her Domestic Partner situation.

Can I force her off the deed for fraud (since she clearly lied about the DP situation?) OR, can I force her to either get her partner to sign a Quitclaim Deed (or something like that) and, if she can't, then she has to remove herself from the Deed of Trust?

My feeling is that she intentionally committed fraud and therefore the Deed of Trust is either invalid or her part of it is. AND I dont feel like I should have to "buy" her out since she lied.

Please tell me you have an answer!!!

The best answer I can give is that this looks like a matter for an attorney. There's a lot of complexity to your situation, and my knowledge is limited. That said, I'll be glad to share my understanding of the issues.

You have run straight into an issue that bites folks all of the time. My understanding of the domestic partnership arrangement is that it is legally the equivalent of marriage with the exception of a couple of issues of which real estate title is not one. This makes your situation basically the same one as has been biting victims of gold-digging spouses for as long as their has been marriage and law and ownership.

You talk about the Trust Deed and Domestic Partner Addendums. However, those are between the lender and each of you individually, not between your group of partners. The main questions are, "In what manner do you hold title?" together with, "What sort of a business partnership do you have?"

For most people, the default title arrangement is "Joint Tenants with Rights of Survivorship." What this means is that you're all equal, undivided partners. If one of you gets married or domestically partnered, that new member becomes an equal partner. Nice for them. Not so nice for you.

This is a situation where "tenants in common" would likely serve the interests of business partners better. Tenants in common can hold other shares of ownership besides precisely equal. So if they put up only ten percent of the money, they can own ten percent, whereas if they put up ninety percent of the money, they can be ninety percent partners - or whatever arrangement you all agree to. If they get married or become domestically partnered, the spouse or partner only gets a portion of their share under the tenants in common arrangement.

In the case of a trust, it's whatever the trust agreement says. If you have a partnership agreement amongst yourselves, even better, because it can give explicit recourse for situations like this. Corporate ownership has its advantages as well. There are situations where each of these is appropriate. It all depends upon whats important to each of the partners and appropriate to the situation.

That said, whatever you've got is what you're stuck with. You can't go back to the beginning and change the situation now. You've found out first-hand about why the various forms of ownership came into being. If everyone was always a reasonable responsible adult, there would be no need for the alternative forms of ownership to have evolved. Even if you've got nothing written, though, dueling attorneys is a horrible way to settle the matter. It's likely to be a lot more efficient to sit down with a mediator and see if you can come to an agreement everyone can agree upon. When everyone's paying a couple hundred dollars per hour for an attorney, any advantage they might have gotten gets eroded quickly, and it's not very long before everyone emerges poorer for the experience.

At last resort, you do appear to be effectively the victim of fraud and should be able to use that as some leverage, although my understanding is that the law would mostly treat it as an additional side issue rather than the central fact of the matter. But when attorneys and the courts get involved, there aren't any easy answers, and the whole thing leaves your control when you submit it to the law. The plain fact of the matter is that it might be smart or fair to do a lot of things, yet it's unlikely you're going to be able to force anyone to do anything. Even if your partners from the nether regions are completely insane, you're likely to come out better overall if you can come to some sort of mutual agreement you can all live with, rather than paying attorneys and missing work for court. One more example of why, in real estate, an ounce of prevention is usually worth a lot more than a pound of cure.

Caveat Emptor

There are all sorts of reasons why escrow falls through, but they fall into three main categories. They can best be described as failures of qualification, failures of the property itself, and failures of execution.



Before I get into the main subject matter of the article, I need to define a contingency period. This is a period built into the beginning of the escrow process when one party or the other can walk away without consequences or penalty, usually for a specific reason. For instance, the default on the standard forms here in California is that all offers to purchase are contingent upon the loan for seventeen calendar days after acceptance. If the loan is turned down on the sixteenth day and the buyer notifies the seller that they want out immediately, the seller should allow the deposit to be returned by escrow. If it happened on the nineteenth day, the buyer should be aware that their deposit is likely forfeit. A contingency, just like anything else, is something negotiated as part of the purchase contract. If it's in the contract, you have one. If it's not, you don't, although some states may give buyers certain contingency rights as a matter of law.



Failure to qualify means that something goes astray with the buyer's quest to acquire necessary financing. They cannot qualify for the loan, they do not qualify within the escrow period under the contract, they allow their loan officer to spin all kinds of fairy tales about what the market is doing or likely to be doing when the plain fact of the matter is that the loan officer just can't do the loan on the terms they indicated when the poor unsuspecting consumer signed up. Maybe it existed at one time, or maybe they just hoped it would. In any case, it wasn't locked in and it certainly doesn't exist now, so rather than pay the difference out of their commission, the loan officer delays and hopes for the market or a miracle to save them. Or they told the consumer about a loan they thought they might be able to qualify them for, only to find out they don't, and they're stalling, hoping a better alternative will open up. Fact is, that if a loan officer can't get the loan done in thirty days, I'll bet money they can't do it on the terms stated in the initial documents. Jokers like this are a large part of the reason you should have a back up loan if you can find someone willing. Chances are much better that both loans will be ready to go with a lot fewer games played.



Sometimes it does happen that consumers don't qualify for the loans due to real problems that just don't come up until the file is in underwriting. Since this can cause you to lose your deposit, it's a good idea to ask your loan officer about any potential problems before you make an offer. You know your personal financial situation but you probably don't know what all of the potential disqualifying issues for a lender. The loan officer should know what the issues are that may cause lenders to have difficulty approving your loan, but they don't know your history unless you tell them. Many things that underwriting will catch do not necessarily show up on a loan application or credit report, so if you have an unpaid collection, monthly expenses that might not show up, a lien, a dispute in progress, any issues with your source of income, or anything else in your background that you have any questions about whether it could impact your loan, it's a good idea to ask right upfront, before you get into the process. Sometimes these issues mean that you flat out do not qualify, sometimes they mean that instead of 100 percent financing, you only qualify for 70 percent. Unless you have that extra 30 percent of the purchase price lying around somewhere, the transaction isn't going to fly, and the sooner you find out, the better. A loan officer who can't show you a loan commitment with conditions you can meet before the end of the contingency period is not your friend.



The second category of reasons escrow fails are failures of the property. Some defect is disclosed by the inspection process that the owner does not want to correct or is unable to correct, and the buyer decides that the property is not for them under the circumstances. Mold, termite damage, seepage, damage to the foundation, and all of the other usual suspects fall into this category. Title issues are here also, although they usually become unsolvable when they impact the loan. If the seller can't deliver clear title, the title company won't insure it, the lender won't lend the money, and any rational buyer should want to walk away. Why do you want to give someone money when they are likely not legally entitled to sell you the property?



For defects, both structural and title, providing it was discovered within the contingency period, it's up to the seller to convince the buyer they should still be interested. After the contingency period is over, things are more complicated as there is the possible forfeiture of the deposit to weigh. Good agents that you want to recommend to your friends get out and get the inspections done right away to avoid this issue. Agents that are looking to line their own pocket wait until the contingency period is over before doing so, as this gives the buyer more incentive to stay in the transaction. Let's say you've got a $5000 deposit on the line and seventeen days to remove contingencies, as is the default here in California. Would you rather your agent got an inspector out within a couple of days, or waited three weeks? Keep in mind that you're going to pay the inspector, but that's money you're going to spend regardless. The first possibility means that you find out about potential defects while you can still recover your deposit, while the second possibility means the seller can likely keep that deposit. I know which situation I'd rather be in.



Failures of execution are likely to be because someone messed up. The seller didn't do this. The buyer didn't do that. One agent or the other dropped the ball. The escrow officer didn't do their job. Loan officer failures would be here if loans weren't a whole category on their own. This category covers all the little details in the purchase contract, each of which has to be met before the escrow officer can close the transaction. These failures may or may not be actionable, in the sense of you being able to hold them responsible for their failure. Many times, the escrow officer is used as a whipping post for the failures of other parties, but some escrow officers do screw up big time. Sometimes it takes an outside expert to dissect things dispassionately in order to figure out what went wrong where and whose fault it was, but outside experts cost money, so most of the time everybody just fades into the sunset pointing fingers at each other, unless there's some pretty significant cash involved. The transaction is dead and it's not coming back. Unless there's a good possibility of recovering enough money to make it worthwhile, let it go.



Caveat Emptor.

Craftsman on Large Lot!



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



Why you should be interested: Clean well maintained smaller house with plenty of extra room on the lot. Alley access in the back.



Selling Points: Plenty of room to expand the home and would still have plenty of room on the lot.



Why I think it's a potential bargain: It's got dated fixtures, but they've been well maintained. Whether you don't need more than two bedrooms or if you want to add a master built to your own specifications, this is a great property.



Obvious caveats: Just that the furnishings are not new.



Why it hasn't sold already: Very few people know how to look past old.



If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $360,000, the property would be worth approximately $580,000. If you held it those ten years before selling, you would net about $270,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $1400 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $70,000 ahead of the renter, after the expenses of selling.



Fact you should be aware of: nothing aside from the fact that it's well maintained but old.



Obvious way to enhance value or appeal of property: Buff the floors, update kitchen and bathroom, add a master suite if you're so inclined.



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



I'm a buyer's Realtor®. I 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!

What Does Escrow Do?

|

This is a question that gets asked a lot.



Escrow is nothing more or less than a neutral third party that stands in the middle of a real estate transaction and makes certain all of the i's are dotted and t's are crossed. They make certain that all of the terms of the contract have been met, and then they make certain that everyone who is a party to the transaction gets what is coming to them via the contract.



Many times folks complain about the escrow company or escrow officer, when it's not their fault and the problem lies elsewhere. The escrow company is obligated to make certain all of the terms of the contract have been followed, not just most of them. I've talked before about how if the contract is not accepted exactly as proposed in the most recent modification, you don't have a deal. There cannot be any points of disagreement, or you don't have a purchase contract. Similarly for escrow. Usually problems that the client sees are not the escrow officer's doing, but rather someone else's. Quite often, the person complaining is the person who caused the problem. The escrow officer can't do anything without mutual agreement. If the loan officer doesn't get the loan in a timely fashion, it's not the escrow officer's fault. If the agent doesn't meet the inspector or appraiser so they can get their work done in a timely fashion, it's not the escrow officer's fault. If you can't qualify for the loan, if you have to come up with more money, if you don't get as much money as you thought, it's not the escrow officer's fault. But in many cases, the escrow officer makes a convenient whipping boy for the sins of others.



This is not to say that it's never the escrow officer's fault that something goes wrong, but if one party or the other is not in compliance with the terms of the agreement, the only thing the escrow officer can do is get an amended agreement or get them into compliance. Nonetheless, I have seen many transactions fall apart because the escrow officer was a bozo. The really good escrow officers are like chess masters - several moves ahead of the whole game, and when I find one, I want to use them all of the time. Unfortunately for buyer's agents, the seller is the one with real control over where the escrow transaction goes, and when the seller's agent decides they want to use some bozo, that's probably where it's going. I can do all kinds of things that should move them, but the bottom line is they're determined to use their broker's pet escrow (who is more likely to be staffed by bozos than any other escrow company, as they've got captive clients), I as the buyer's agent cannot force them to go elsewhere.



As the escrow process moves forward, the escrow officer collects documentation that the various requirements of the contract have been fulfilled. When they have all been fulfilled, the transaction is ready to close and record.



The loan is usually the last thing left hanging after everything else is done. There are a variety of reasons for this, most obvious of which is that the loan's conditions are likely to include everything else being done before the loan funds. Appraisal, grant deed, inspection, etcetera and ad nauseum. When the borrower meets underwriter's guidelines, they go and sign loan documents. Signing loan documents does not mean the loan will fund, and it is a major misapprehension to believe so. It is legitimate to move conditions from prior to docs to prior to funding if doing so serves some interest of the client, such as funding the loan before the rate lock expires. If they go to documents before the client's income and occupational status have been verified, that's an unethical lender looking to lock the client into their loan or none at all. Always demand a copy of outstanding conditions to fund the loan before you sign loan documents.



Once the loan documents are signed is when the real fun begins, because that's when the underwriter takes a step back and the funder steps to the forefront. The loan funder is an employee of the lender who fulfills much the same function as the escrow officer - make sure all of the conditions have been met before they release the money. The loan funder has responsibility only to the lender, though, not the borrower, not the seller, not anyone else. It's their job to ask such questions as when the homeowner's insurance got paid (and where is the proof?), has the final Verification of employment been done (assuming they aren't required to do it themselves), or work out a procedure whereby they get proof that all of this stuff is satisfied before the funds get released. If the loan officer has done their job correctly, the funder is working primarily with the escrow company. If I have to talk to the funder as a loan officer, that's usually a sign I should have worked a little harder earlier on, because my part should be done before the funder gets involved.



Once all of the conditions to fund the loan and close the transaction have been met, the escrow officer records the transaction. In point of fact, it's the title company who usually is set up to record the documents, something they will charge for. Until the transaction is recorded, the lender can pull the funds back. It's not the escrow officer's fault (in most cases) if they do this. It's because something about the borrower's situation changed, and now the lender is unhappy. Only rarely is it caused by a bozo of an escrow officer who doesn't understand what's going on, and tells the funder something that causes the lender to get nervous. Remember, they are loaning a lot of money, and the list of reasons why lenders justifiably get nervous is fairly long, especially as a certain percentage of all mortgage applications are fraudulent.



Once the loan is funded and the transaction recorded, the escrow officer has some final stuff to do. Send out the checks to everyone who's getting one, complete with an accounting of the money. Make certain all charges relating to the transaction are paid, for which they will usually keep a small "pad" for last minute expenses, so that the buyer and seller are likely to see a check a few days later after the escrow officer has made certain everything is paid to the penny. And so ends the transaction, and this article.



Caveat Emptor.


During the initial interview with prospects, I like to cover the division of the labor that goes into a purchase that makes the buyers happy.



I have to know what's important to the buyers, how important it is, and what the budget I have to work with is. My goal is to get my clients some combination of better property and a lower price that's at least ten percent better than they would have had otherwise. That's a realistic, achievable goal. But in order to deliver it, I have to know what's most important to them, what's not so important, and what's not important at all. That way I can ignore the property where the owner is so proud of some modification my client doesn't care about that they're not prepared to be reasonable.



Once I know what they want and what their budget is, I can tell them how realistic they are being. A good buyer's agent can hit a goal of making a ten percent difference with pretty much every property purchased. I can't guarantee it, but I'm pretty certain all of my clients would agree I made at least that much difference. In some situations recently, it's been thirty percent. But I can't find three bedroom houses in good shape on the top of Mt. Soledad for $250,000. It's not going to happen, and it's no service to anyone to pretend that it's likely to. If your budget and your desires are mismatched, it is my responsibility to inform you of that fact right at the beginning.



Once we have a meeting of the minds on what is possible and achievable, and what may be necessary to do it, the job that comes next is finding "possibles". I define a "possible" as any property which meets the client's essential requirements and might be obtainable within their budget. Budgets should be expressed to agents in terms of purchase price, not monthly payment, by the way. Expressing it in terms of payment leaves you open to being sold a property with a negative amortization loan. You get a higher priced property for a payment that's within the payment you told them, and by the time you figure out the gotcha!, they've already been paid, and now they're going to want you to do another transaction and get paid again!



Back to the "possibles." The primary responsibility for finding them is mine, but if the client wants to suggest possibles, that's fine with me. Once possibles are identified, I've got to do a little records research and go look at them. It doesn't take long - fifteen minutes inside each one is more than enough to tell me if this one makes the cut, as far as amenities and value and condition go. Because I'm looking constantly, I've got a pretty solid sense of where the market in my usual areas is. In most cases, I've been inside several that were initially built to the same floor plan that have already sold recently. I've got a laundry list of common problems I specifically look for and evaluate how bad they are if they are present. I've also got to see if I can find a reason why it's obtainable within the budget I've agreed to work with. The obvious case is that if the asking price is less than the client's budget, that's pretty good evidence. That's not the only possible evidence by any means, but it's a pretty solid indication. Where the cut is varies. The easier it is to find what my clients want within their budget, the pickier I can afford to be. The one thing I don't want to do is waste my client's time with below average properties there's no reason for them to be considering.



If a possible makes the cut for value, amenities, and especially condition, while being obtainable within my client's budget, it then becomes a "likely". This is when I bring it to my client's attention, we go take a look at it together, and I tell them what I see that's right and wrong with the property. Most of my clients aren't real estate experts. On the other hand, they know what they like and are willing to pay for better than I ever can. If the only way you'll ever get take action is if your agent tells you it's perfect and doesn't have any flaws, please get real. No matter how great it is, there's at least a dark lining to every property. If it's huge and beautiful, maintaining it is going to be expensive or you're going to be losing some of your return to deterioration. Fact of life. There is no such thing as the perfect property unless you've got an unlimited budget. Seeing as not even the richest man in the world has an unlimited budget, one hopes that you get the idea.



Agents should tell you about the pluses and minuses of every property they show you. They shouldn't be shy about making recommendations as to which one they like or has the best apparent value. With that said, however, it's not the agent's job to tell you which one you like. You're the one that needs to be happy at the end of things. No matter how much I like a property, if the client doesn't like it, that property profile goes into the wastebasket. Similarly, if the client likes one that I don't, it's my job to report the facts, not to talk them out of it. I can tell them why they shouldn't like it, but if I explain why they shouldn't like it and they still do, well, it's their money and their life. I'm the consultant, not the boss. I'm the hired expert who knows more about the market than they likely ever will, but they're the one that knows their own mind best. It's darned few who are silly enough to disregard my advice, but they must be able to do so. I'm permitted to try to talk them out of making an offer, but not to prompt an offer, and whatever the clients want to do, they have to be the final authority.



Once they've decided to make an offer, it's my job to figure out how to conduct negotiations such that the clients get the best possible price. To this end, I'm always looking for things that aren't money to offer. For instance, with sellers nervous about committing to move out before close of escrow, a short term leaseback can make an offer more attractive. It amazing the difference that can make to the price the seller may be willing to accept.



Finally, the due diligence period is mostly on my head. Getting the inspections and appraisal done promptly is important. It's great if the client is there for the inspection, but despite lawyers who advise agents not to be there, it really is a responsibility that can't be ducked. I can't see how it can not be negligence to be not be present at the inspection. Make certain the client knows and understands what is going on. If I have to call the inspector back to explain something, I have to call the inspector back. Make certain the client understands the title report. Etcetera.



A good agent provides lots of professional advice and input. More than some clients want, as a matter of fact. But real estate is enormously complex and if there were easy answers, everyone could do it. It's my responsibility to help you understand the issues, and also to make certain that you've got the best possible set of choices to choose between. The decisions themselves, however, must be yours.



Caveat Emptor

Cheap Four Bedroom Fixer!



General: Urban East County, 4 bedroom 1.75 bath. Asking price between $375,000 and $400,000. I think an offer of $370,000 net would get it sold.



Why you should be interested: When is the last time you saw a four bedroom house over 2000 square feet this cheap within 15 minutes of everything?



Selling Points: 4 bedroom 2000 square foot house on 7000 square foot lot. No HOA.



Why I think it's a potential bargain: I won't mince words: It's ugly right now. The average buyer won't look past the unappealing surface. But if you're willing to spend some money fixing it up, there's a smaller 3 bedroom place down the block on the market for nearly $200,000 more. It won't take nearly that much to fix.



Obvious caveats: It's got a cracked foundation, and most people think that's a bigger deal than it is in cases like this.



Why it hasn't sold already: Very few people know how to look past ugly.



If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $370,000, the property would be worth approximately $610,000. If you held it those ten years before selling, you would net about $280,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $1900 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $180,000 ahead of the renter, after the expenses of selling.



Fact you should be aware of: We'll want an engineering report during the contingency period, and those cost about $600 or so.



Obvious way to enhance value or appeal of property: Fix the foundation. New paint, new carpet, new appliances. Update the bathrooms.



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



I'm a buyer's Realtor®. I 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



6.5% 30 Year fixed rate loan, 1 total retail point, and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2528, APR 6.641! 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 5.75%!



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: 5.875% 2 total points. Assuming $400,000 loan, payment of $2366, APR 6.106%. 5/1 ARM loans available as low as 5.375%! 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.



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

Over the last few years, a lot of folks have gotten used to zero real scrutiny of transactions. With values increasing rapidly, it was hard to lose money on real estate, whether you were purchaser or lender. One of the most common abuses has been Straw Buyer Fraud. Well, with local prices having receded roughly 25% and no rapid increases on the horizon right at this instant, a lot of lenders are getting burned on loans, losing money, and going back after those who aided and abetted and made those transactions appear more solid than they were.



Against that backdrop I got this email, with the subject, "I am a straw buyer":



I thought I was helping out a friend and HONESTLY did not think and/or realize I was doing anything wrong.



The friend has been making the payments for 10 months and is due to buy the property back from me at the 1 year anniversary (DELETED).



If he can't buy the property back (which I don't think he can), I want to approach the Lender. I can't afford the payments of DELETED and I don't want the property which is worth DELETED.



What kind of trouble could I be in?



Also there is an agent, a broker and an attorney involved in this scenario as well.



Well, California is an escrow state, so this isn't anywhere I can get involved, and the rules are different in every single state. As I've said before, the best thing to do if you find you may have violated the law is consult a licensed attorney in your area, and if it relates to real estate, make it an attorney who's a real estate specialist.



There are some generally applicable principles, but keep in mind that I'm not an attorney, so if there's any conflict between this and what your attorney says, believe your attorney.



The situation is this: You signed a Note, and in most cases, a Trust Deed or the equivalent. The Note says you owe the money. The Trust Deed pledges the property as security for that money.



Now in many states, California among them, purchase money loans are not subject to recourse generally. Unfortunately, you have committed fraud, which is one of the exceptions and therefore subject to full recourse in every state I'm aware of. Furthermore, loan fraud itself is usually a matter that causes the federal government to get involved, as most lenders are federally chartered. So you have a criminal fraud case, most likely at the federal level, quite likely conspiracy added to that charge, and on the civil side, you are going to be at least one target of a civil suit if the lender loses any money. You can also expect to hold a share of liability for the lender's attorney fees. That's the bad news.



The good news is there's quite likely evidence that you were led down the primrose path by those alleged professionals who should have kept you from breaking the law. This won't get you released from your basic responsibility for what you did, but if the feds and the lender bother with you, you're not likely to be their primary focus, and on the civil side, you're not likely to be the deep pockets they are really interested in. While neither the feds nor the lender is going to want to let you off the hook, you shouldn't be their primary target if you can show that you were advised to do this. Ignorance of the law is no excuse, but when comparing the level and degree of culpability, I'd expect that a non-professional led afoul of the law by allegedly professional advice you should have been able to trust is a fraction the culpability of those professionals who willfully advised you to commit an illegal action.



Now before you breathe a sigh of relief, let's consider the following: What if those alleged professionals aren't there any more? What if they're already out of business, broke, and in jail? Now you're the only target left. Ouch. Now you know how the last of Custer's men felt.



Here's another not so comforting thought: What if that property isn't really worth what was paid for it? From what I understand, a large proportion of felons like to combine their scams. For instance, adding appraisal fraud usually doesn't add appreciably to the risk, while adding greatly to the reward. They pay an appraiser to come up with an inflated value, get someone to pay it, and voila! Extra profit! The games that can be played are legion. Usually, the sucker or mark is just so pleased to be getting "such a great property" that they don't really examine what's going on. Sometimes, they're so happy to be qualifying for anything at all that they won't examine the situation at all, for fear that they will won't qualify and it will all somehow melt away. It's been said before, but you're never so vulnerable as when you're trying to get away with something. If something seems to good to be true, it probably is, especially where hundreds of thousands of dollars are involved. Look the metaphorical gift horse in the mouth. If it's real, it will stand up to the examination. If it's not, you might just avoid paying three times what the property is worth, not to mention criminal prosecution.



Read those contracts. Really read them. Pay attention to paragraphs that say stuff like, "It is a felony to misrepresent information on this application." Trust me: With hundreds of thousands of dollars on the line, they mean it.



If anybody claims to be helping you break the law or circumvent safeguards, run away! If they're willing to break one law, or one of their ethical responsibilities, ask yourself what reason there is to believe they won't break others? To be precise, their duties to you? If you're trusting them for advice, it seems likely they know the system a lot better than you ever will. There is a reason for every single law and procedure in real estate. The vast majority of the time, it's to protect consumers. If an alleged professional is willing to admit to doing one thing illegal or unethical, what evidence do you have that you're not going to end up one of the victims?



If there are legal ways around legal requirements and procedures that have been put in place, it almost always involves full disclosure to all parties. There some stuff that's none of the business of some parties, but that's because they have no reason to be interested. For instance, the listing agent in a recent transaction asked me for some financial history on the buyers that they had no need to know - they were just trolling for data which might lead to future clients, i.e. trying to get my clients future business. For that sort of stuff, it's good to tell them something vulgar and report them to the state. But if you know or have been led to believe that the other side of the transaction is being deceived or intentionally kept in the dark, you should be hearing more warning sirens than a ten alarm fire during an air raid. Do all the agents know everything they need to? Does Escrow know? Does Title know? Does the other side of the buyer/seller transaction know? Most importantly, does the lender know? Are you sure? Did you tell them? If not, what evidence do you have that they know?



Nobody should ever rush you into signing anything. Take your time. If you're not certain you understand it, don't sign, no matter who's hopping with impatience. Even me, although I don't recall ever committing that particular sin. Taking your time and consulting disinterested parties may cost you some money, although your agent or loan officer is doing their job if they inform you of what consequences there may be. Not doing so can cost you a lot more money, plus your freedom for years and your credit rating for the rest of your life. Worst comes to absolute worst and you lose the transaction and your deposit, that's better than getting convicted of fraud and owing half a million dollars that the property isn't worth.



Caveat Emptor

Signing Off Loan Conditions

|

what is a underwriter final "sign off" on the conditions

First off, it needs to be mentioned that a good loan officer gathers information and puts a full package, with all of the information an underwriter should need, before submitting the package to the underwriter. That's how you get loans through quick and clean. Give the underwriters all of the information you know they're going to need right up front.

Some clients don't understand this. They want to hang back and see if the basic loan will be approved before they do "all of this work." This is a good way to have to work much harder on the loan. Give it all to them in one shot, and they only look at your file once. You get a nice clean approval. The issue is that every time that underwriter looks at your file, there is a chance they will find something else that they want documented, some little piece of the picture they are uncomfortable with. The underwriter can always add more conditions. The cleaner the package, however, the less likely it is that they will.

There are some matters it's okay and routine to bring in later. Appraisal is probably the most universal of these. Title commitment (aka Preliminary Report) is probably second most common. These are completely independent of borrower qualification, and when they come in later, will generally not cause the underwriter to re-examine the whole file. But you want to submit the borrower's package as complete as possible, right up front. If the borrowers pay stubs show up later, the underwriter will look at the file, and if the income they document is even one penny less than the initial survey of the file, they will underwrite the whole thing again. A good loan officer submits complete packages, so the file only gets looked at once.

But every loan officer gets asked for additional conditions from time to time. With the best will in the world, sometimes they are going to miss something that the underwriter is going to want to see in this particular instance.

Loan conditions fall into two kinds: "Prior to documents" and "prior to funding". "Prior to docs" conditions are related to "Do you qualify for the loan" type stuff. Income documentation, property taxes, existing insurance for refinances, verification of mortgage, rents, employment, deposits, all of that good sort of stuff. Also appraisal, title commitment, etcetera. If there's something missing in the loan package, it should be a "prior to docs" condition. These conditions should be taken care of between the loan officer and the underwriter. The underwriter tells the loan officer what needs to be produced in order to approve the loan, and the loan officer goes and gets it. If the loan officer can't produce it, there is no loan.

This is not to say that a good loan officer can't necessarily think of another way to get the loan approved. Indeed, that's a significant part of being a good loan officer, almost as big as knowing what loans won't be approved, and not submitting a loan that won't be approved. This is a big game with many loan providers, by the way. They get you to sign up with quotes they know you won't qualify for, but when the loan is turned down (or, more commonly, the conditional commitment asks for something that the situation can't qualify for), they then tell you about the loan they should have told you about in the first place. Pretty sneaky, huh?

Getting back to the underwriter's conditions, a good loan officer knows how to work with alternatives. But at the bottom line, the loan officer has to come up with something that the underwriter will approve. It is the underwriter who has final authority. They write the loan commitment, which is the only thing that commits the money. In fact, most loan commitments are conditional upon additional requirements. The only universal to getting these conditions signed off is that the underwriter has to agree they have been met. As the underwriter agrees that the conditions have been met, one by one, the loan gets closer to final approval.

When the last prior to docs condition is satisfied, the loan officer orders loan documents. This is also when many of the less ethical of them actually lock the loan quote in with the lender. An ironclad rule is that if it isn't locked with the lender, it's not real, but that doesn't stop many loan officers from letting the rate float in hopes of the rates going down so they make more money for the same loan. Of course, if the rates go up, guess who gets stuck with the increase? It's not likely to be the loan provider.

When the loan documents arrive, the borrowers sign them with a notary and that's when the rescission clock begins. There is no federal right of recission on investment property, and none on purchases, but on owner occupied refinancing, there is (Some states may expand on the federal minimums).

Now there will be "prior to funding" conditions to deal with. "Prior to funding" should be reserved almost exclusively for procedural matters, and should be taken care of primarily between the escrow officer and loan funder. There are always going to be procedural conditions here, but many lenders are now moving more and more conditions to "prior to funding" as opposed to "prior to docs". Why? Because once you sign documents, you're more heavily committed. Psychologically, once most people sign loan documents they think they're all done. This is not, in fact, the case. Legally, once the right of rescission, if any, expires, you are locked in with that lender unless/until they decide your loan cannot be funded. Once rescission expires, you no longer have the ability to call the whole thing off. You are stuck.

This is not to say that an occasional condition can't be moved to "prior to funding." Especially on subordinations. I've saved my clients a lot of money by getting subordination conditions moved to prior to funding so the rescission clock will expire in a timely fashion to fund the loan within the lock period.

This is all well and good if the lender told you about everything and actually deliver the loan they said they would, without snags. On the other hand, I have stories. One guy I used to work with had the capper, and the reason he got into the business was he was certain he could do better. He signed documents on a purchase, and a week later they called and told him he had to come up with $10,000 additional money within twenty-four hours, or lose the loan, the property, and the deposit, and be liable for all of the fees. His father had to overnight him cash, which he then took into the bank for a cashier's check.

He is only the most extreme example. The loan is not done until the documents are recorded with the county. Until that happens, the money does not have to come, and even if it does, the lender can pull it back. One procedural thing that happens with literally every loan is a last minute credit check and last minute call to the employer to be certain you still work there. If the borrower has been fired, quit, or has retired, no loan. If the borrower's credit score dropped below underwriting standards, no loan. If the borrower has taken out more credit, the lender will then send the file back to the underwriter to see if they still qualify for the loan with the increased payments. So like I tell folks, until those documents are recorded, don't change anything about your life.

The many less than ethical loan officers don't help matters any. I was selling a property a while back, and the buyer signed documents on Tuesday. If I had been doing the loan, the loan would have funded and the documents recorded the next day. Unfortunately, I wasn't doing the loan. This guy's loan officer had quoted him a loan he couldn't qualify for, and ten days after he signed documents, I got a call saying he could only qualify if I knocked $20,000 off the purchase price. I kept the deposit and went looking for another buyer. This guy learned an expensive lesson. When you sign loan documents, require your loan officer to produce a copy of all outstanding loan conditions. Don't sign until and unless you get it. This guy had signed, and was now locked in with a lender who couldn't fund the loan on conditions he could meet. I had even warned his agent (I accepted the offer because I was willing to sell at that price, so I wanted the transaction to go through), but hadn't been believed. So both of us ended up unhappy.

If they give you a copy of all outstanding loan conditions, you should know if you can meet them. If you can't meet them or aren't certain, don't sign. Don't hesitate to ask for explanations. Some of this stuff gets pretty technical, but a good explanation should be easily understandable in plain English. It may be complicated, but there just isn't anything that can't be explained in plain English. If the explanation you get is gobbledegook, you've probably been lied to all along, and I hope you have a good back up loan ready.

Caveat Emptor.

One of the things that most mortgage and real estate consumers get mixed up on is the distinction between low-balling and junk fees. Junk fees are when they add fees that really aren't necessary to what you're paying. Low-balling is when there's an essential cost (or the associated rate) that either gets underestimated or they somehow neglect to tell you about. This can also take the form of costs such as subescrow fees which happen because your representatives did not choose your service providers with your best interests in mind.



As I said in Mortgage Closing Costs: What is Real and What is Junk?, "The easy, general rule is that legitimate expenses all have easily understood explanations in plain English, they are all for specific services, and if they are performed by third parties, there are associated invoices or receipts that you can see." In my experience, the vast majority of what extra fees that appear on the HUD 1 despite not being on the earlier forms such as the federal Good Faith Estimate, California's Mortgage Loan Disclosure Statement, or a real estate agent's estimate of seller's proceeds, are not the result of junk fees being added for no good reason, but are the result of real fees that your agent or loan provider knew were going to need to get paid, should have known the amount, and chose not to tell you about them or chose to tell you they would be less than they are. In short, low-balling is a much worse problem in the industry than junk fees. I've had people tell me my closing costs seemed high, because despite the fact that I have negotiated for discounts from providers, other loan providers were quoting significantly lower costs. What's going on is not that my costs are high - in fact they're pretty darned low when you compare the fees my clients actually end up paying - but the fact that a large proportion of my competitors will pretend that a large percentage of those costs aren't going to happen. The penalties for this, in case you weren't aware, are pretty much non-existent.



The reason they do is is to make it appear for the moment as if their loan is more competitive than it is. What happens is that because it appears that their loan is cheaper for the same rate, people will sign up for their loan. They then invest the three to four weeks necessary to fund that loan working with that loan provider. By the time they discover the real costs and the rate of that other loan are going to be much higher than they were initially quoted, there's no time to go back and get another loan - and that's if the people notice, and industry statistics say that over half of the people do not realize even massive discrepancies between the initial quote and eventual loan delivered.



This is why most loan providers don't want to tell you what your loan is really going to cost. It isn't that the extra is junk or in any way unnecessary. It's that they want their loan to appear more competitive that it may really be. All of the incentives are lined up in favor of this behavior - they got you to sign up, didn't they? - and there is no penalty in law. Of those people who do notice discrepancies, eight to nine out of ten will give in and sign anyway.



This applies also to many agents' "estimate from proceeds of sale" form. Despite the fact that the default purchase contract and usual custom may have the seller paying for certain items, such as a home warranty plan and an owner's policy of title insurance, many agents will leave these costs off the estimate. Unless you're selling a fixer in utterly "as is" condition, you're going to end up paying for a home warranty plan. Unless the buyer's agent utterly hoses them, leaving that agent completely open to lawsuits, you're going to pay for an owner's policy of title insurance. Unwillingness to do so is a universal deal killer unless the buyers are getting a price more than good enough to make it worth their while to pay for it themselves. Even if they've deliberately chosen escrow and title providers such that you're going to pay subescrow costs, they'll likely leave those costs off their estimates. Why? To make it seem like you're getting a better deal from them than you actually are.



I've seen more than a few people who signed up with other agents or loan providers based upon ridiculous low-balls (and over-estimates of sale price). Without exception, these people end up paying every single one of those loan costs. It's not like the people who do the work are going say, "Oh well, it's not like we want to get paid for all this work we did." In the case of sales transactions, that's if it sells - and it's very unlikely to sell at all if it's overpriced. Nonetheless, this gives the person who gives the great line of patter - a supposedly "bigger better deal" - a large advantage in getting people to sign up with them. By the time the clients learn the truth, it's too late. Most people don't want to do the research up front to find out what's really going on. They wait until after they've already been hosed to do the research they needed to do in the first place.



Caveat Emptor


What can a seller do to get the deposit when the buyer backed out after the time limit and just won't sign off on the money? My real estate agent is not helping at all. The real estate office was representing both the seller and buyer and I believe they don't want to upset the buyer and that is why they aren't pushing her to do the right thing. Thanks for any help,.

They're not representing your interests in a fiduciary manner as demanded by the listing contract.

Real Estate is not sugar and spice and everything nice. Sometimes doing your job as an agent means that you have to do something unpleasant by taking your client's side. If your agent isn't willing to be a complete jerk on your behalf if they have to, they're not worth a talking to, much less signing a contract with.

This is another reason why Dual Agency is a bad idea from the consumer's point of view. Most of the reasons are from the buyer's side, but here's a concrete example why you do not want to permit your listing agent to also represent the buyer. Since about thirty percent of all purchase contracts fall out of escrow for some reason or another, ask yourself how you'd feel about your listing agent trying to preserve the buyer's deposit even though you, the seller, may be entitled to it. You gave them thirty or sixty days exclusive shot at that property, paid the mortgage and all the other bills for that time period, and could not sell it to anyone else while they were wasting all of that time and money of yours. This is a very common phenomenon when one agent tries to represent the interests of both sides. But your interests call for the buyer to forfeit the deposit, and if they want to continue to represent you, they need to act in your best interests. They haven't done that.

This isn't to say they have to start with scorched earth. A simple request to sign the cancellation and release of deposit is very reasonable - and precisely what they agreed to when they wanted to represent both sides, if the transaction fell apart. When there's no other agent, there isn't anyone else to do the job. They're it, because they tagged themselves by requesting dual agency.

Agents, however, are not lawyers, arbitrators, legal mediators, or judges. They have zero authority to force their other client to sign the cancellation and release of deposit. Some people won't do the reasonable and intelligent thing, whether it's because they're hoping to get away with it, or because they don't think it's the reasonable and intelligent thing, or for some other reason. But a failure to ask, and a failure to do their utmost in persuading the other side is a failure of their contracted fiduciary duty to you.

This means that you quite likely have a valid reason to cancel your listing. Consult with your attorney, but from the information presented, they have clearly failed to represent your best interests in accordance with that listing contract. As far as calls upon agent loyalty go, listing contracts conquer everything but the law, or at least they should. That's why I give each and every one of my buyer clients an explicit written release of any obligation if they should choose buy a property I'm listing. They can always find another buyer's agent to represent them, but the sellers are contractually committed to staying with me for the contracted period. I also tend not to show my few listings to my contracted buyer clients, for reasons I've gone into elsewhere.

One hopes you see why I make such a big deal about putting in the work to find a good agent. Here you are with months and multiple thousands of dollars gone, and you have absolutely nothing to show for it because your agent is a self-serving bozo. You don't need to fret about finding absolutely the best agent there is, but you do need to find one who knows what they're doing and will do what is necessary to represent your interests. I wrote a two part article How to Effectively Shop For A Listing Agent (Part I) and How to Effectively Shop For A Listing Agent (Part II) on this very subject. Chances are, there is more than one good agent in your area, but the good ones are usually outnumbered by the bozos, so just using your relative or friend is like playing Financial Russian Roulette with four of six chambers loaded. Nor is "top producer" any kind of sobriquet I'd want for my listing agent, because they're talking about overall volume of sales, and that's not likely to be present in the agent who can actually get top dollar for your property. All of the agency mechanics that favor mass production of sales work against them getting the best price possible for any particular property. To be fair, this works in the other direction as well, but it's not your problem. You want someone who's going to get the best possible price for your property, not someone who mass produces transactions. If they've chosen the other path, you don't need to feel guilty about passing them up in favor of the boutique agency that busts their backside to satisfy you. That high producing chain is making plenty of money off the suckers who don't know any better.

Caveat Emptor

When you have more than one loan on your property, there are some issues you should be aware of. Keep in mind the fact that some states still use the mortgage system, requiring court action to foreclose, as opposed to Deed of Trust, which does not. For practical purposes they are similar, yet I have never done significant work in a mortgage state so there may be small but significant differences.



Each loan is secured by a different Deed of Trust. Two loans, two Deeds of Trust. A Deed of Trust is a three way contract between the borrower (called the trustor), the lender (called the beneficiary), and a third party known as the Trustee, to whom title is nominally conveyed for purposes of selling the property if you default on the loan. The Trustee and the Beneficiary are often the same, and there while there is no legal impediment I'm aware of to the Trustor and Trustee being the same, I also cannot imagine a lender agreeing to it.



Trustees can be changed, and this is accomplished via a document known as "Substitution of Trustee," which is required to be recorded with the appropriate county in every state I've done business in.



Each Trust Deed operates independently of all others there may be against a given property. They take priority in order of date. When a Trust Deed is recorded against an property on which there already is an active Trust Deed, it automatically becomes a Second Trust Deed, if another happens it is a Third Trust Deed, and so on.



The reason they have the ordinal is because they are paid off in the order they happened. Suppose the property is sold, and the sale price is not sufficient to pay all of the debts. The trust deeds are not paid proportionally; The First Trust Deed is paid off in full before the holder of the Second Trust Deed gets a penny. Then the Second is paid before the third, and so on. This is why Second trust Deeds carry higher rates than First, because they are riskier loans for the lender. As I've said elsewhere, just because the property is sold doesn't mean you're clear. If there is not sufficient money from the sale to pay all debts, you can expect the lender to hit you with a form 1099, reporting that you have income from debt forgiveness, and you will be expected to pay taxes on it.



Now, if for whatever reason you pay off your First Trust Deed, the Second automatically goes into the first position, and any subsequent loan goes into second position. This is most common when people go to refinance the loan secured by their First Trust Deed. Even if you do not particularly want to pay off your Second Trust Deed, it may be the best thing to do. Because what happens if you just pay off the First Trust Deed (only) and get a new Trust Deed, is that the new Trust Deed will go into the second position. Unfortunately, in order to get the quoted rates for a primary loan, it is a requirement that the loan be in first position. If it's not in first position, they will not actually fund it. In short, no loan.



This is not necessarily an impasse. Many times, the holder of the second trust deed, because their loan was priced to be second in line anyway, may agree to Subordinate their loan to the new loan, which is a fancy way of saying stand in line behind the new trust deed holder.



They don't have to do this, and there is no way, other than paying off their loan in full, to force them to do so. Some companies never subordinate, while some others are never willing to stand second in line at all, and others are in both categories.



For those that will consider it, they are going to stipulate some conditions. First of all, the new loan is likely going to have to put the borrower into a position where it is easier, or at least no more difficult, to make payments and pay off the loan. So monthly payment usually cannot rise.



Second, they are going to want their trust deed to be in no worse of a position than it was when the loan was originally approved, as regards the value of the home being able to pay their loan off too if for some reason either loan is defaulted. They may even require than you agree to a higher rate, higher payments, or a different loan altogether - as I said, there is nothing you can do to force them to cooperate.



Assuming that they are willing to cooperate, they will require that the entire process on the prospective new loan be essentially complete - that is, ready to draw documents and fund when the Right of Rescission expires after three days, before they will even look at it. Some lenders take 48 hours to look at a subordination request, others take up to six weeks, and it can be even longer. For any given lender, it takes as long as it takes.



There is also going to be a fee involved. They have to pay their people to look at the loan situation and make certain it still falls within guidelines. They're the ones doing you the favor, they certainly are not going to do the favor for free. Whether the Subordination request is eventually approved or not, the subordination fee is likely to be non-refundable, a sunk cost that you are not going to get back even if it's not approved.



Even more important than that, however, subordination takes time. No loan quote is real unless locked, all locks are for a specified period of time, no lock is good past the original period of time unless you pay an extension fee, and if you need to lock for a longer period of time in order to subordinate, either the rate, the cost, or possibly both will be higher. Since this can add anywhere from two days under idea conditions to six weeks or more for a refinance that takes three weeks to get approved and get funded in the best of times, this means a longer lock period becomes advisable. Most often, the extra costs mean that it's more cost effective to just pay off both loans rather than subordinating the second to the new loan.



Since Home Equity Lines of Credit are always secured by a trust deed, they count as any other second mortgage would. You'd be amazed how often people do not disclose Home Equity Lines of Credit even when directly asked about them. They are only hurting themselves, but they often get angry to no good purpose when, if they had been upfront about them, the loan officer could have designed around any difficulties. Furthermore, people are often resistant to the idea of paying off and closing Home Equity Lines, despite the fact that they are easy to get. I've had people stonewall, utterly in denial that this is a Deed of Trust opon their residence until I have the title company fax me a copy of the Trust Deed, and reference it with the Preliminary Report, and ask to see the Reconveyance (which is a fancy way of saying the piece of paper proving that the trust deed has been paid off). If it's a legitimate lien, we have to deal with it. Actually, we have to deal with it if it's not a legitimate lien as well, just in a different manner. On the other hand, about eighteen months ago I had some seasonal resident clients whose ex-caretaker had managed to take out a loan against the property. It does happen, and it's a mess, but most times it's just the people themselves who weren't told - and didn't figure out - that this financing agreement they signed for the pool or air conditioner or roof was a second trust deed on their house.



To summarize then, second loan means second trust deed, if you refinance they must be paid off or subordinated, and subordination takes time such that it may be better to pay it off than go through the rigamarole of subordination.



Caveat Emptor.

Lender Owned - Nice Inside!



General: San Diego City, 3 bedroom 2 full bath bath. Asking price between $425,000 and $450,000. I think an offer of $400,000 net would get it sold.



Why you should be interested: I don't think I've ever seen a lender owned property that's in this good shape.



Selling Points: Bathrooms and Kitchen are nicely modernized.



Why I think it's a potential bargain: You don't find lender owned properties already modernized like this!



Obvious caveats: The yard is a mess. The back yard, in particular, is ugly and needs work. There are a couple of small holes in drywall inside as well.



Why it hasn't sold already: The landscaping issues just jump out at you. Before they even open the front door, the average person has decided they aren't interested.



If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $400,000, the property would be worth approximately $650,000. If you held it those ten years before selling, you would net about $300,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $2100 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $200,000 ahead of the renter, after the expenses of selling.



Fact you should be aware of: Flat roof.



Obvious way to enhance value or appeal of property: Clean up the yard, fix the few holes in the drywall.



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



I'm a buyer's Realtor®. I 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 Three Day Right of Rescission

|

One reason to check your referral logs every day: Sometimes you can find great material for an article. I got one about the three day right of rescission.



This is a feature (or bug, depending upon your situation) with every refinance on a home that is a primary residence. The reason it exists is that until you see the final documents at signing, there is literally no way to prove that what your prospective loan provider quoted you on the Mortgage Loan Disclosure Statement is actually what they intend to deliver. There's a lot of paperwork I can put under your nose to make it look like that's what I intend to deliver, but until you have the final loan documents sitting in front of you, none of it means anything. Just because they give you those wonderful forms like a MLDS or TILA or anything else does not mean that is what they intend to deliver. The only document that is required to be an accurate accounting of the loan and all the money that goes into and comes out is the HUD-1, and that comes at the end of the process, and you get it at the same time as you sign the note.



I have said it before, but there are three documents you need to concentrate on at loan closing. Everything else is in support of those. They are the Trust Deed or Mortgage, the Note, and the aforementioned HUD-1. An unscrupulous lender certainly can slip stuff past you on other forms, but most won't bother. These three forms will tell you about 99.9 percent of the shady dealings. Some lenders and brokers will actually train their loan officers in how to distract you from the numbers on these three documents.



Once you have signed all of the requisite paperwork to finalize your loan (the stuff you sign in front of a notary at the theoretical end of the process), there is potentially a waiting period that begins. Purchases have no federal right of rescission, nor do refinances of rental or investment property, but if it's your primary residence and you are refinancing, you have three business days to call it off. Note that some states may broaden the right of rescission, and some may even lengthen it, but they can't lessen what the federal government gives you.



As an aside, just because you have signed "final" documents does not necessarily mean your loan will fund. There are both "prior to docs" conditions as well as "prior to funding" conditions. The former means they must be satisfied before your final loan documents are generated, the latter means they must be satisfied as a condition of funding the loan. I want to emphasize that there will always be "prior to funding" conditions, but they should be routine things that make sense to do at that time, in that they cannot realistically be done any sooner. Many lenders, however, are moving "prior to docs" conditions to "prior to funding." This has always been prevalent for so-called "hard money" loans, but recently subprime lenders in particular have been emulating their example. The reasoning for doing this is simple. Once you've signed documents, you are bound to them unless you exercise right of rescission. Once right of rescission expires, you are bound to them period, until they either fund the loan or give up on the possibility of funding it. I strongly advise you to ask for a copy of outstanding conditions on your loan commitment.



Assuming that there is a right of rescission applicable, once you have signed final documents, the clock starts ticking. The day you sign documents doesn't count. Sundays and Holidays don't count. It is possible that Saturdays don't count, depending upon the law in your state. Here in California, Saturdays count unless they are holidays. It is three business days. So let's say that you sign final documents with a notary on a Monday of a normal five day week. Tuesday, Wednesday, the Thursday all go by while you have still got your right of rescission. Thursday midnight the right of rescission expires, and the loan can fund on Friday. Note that no lender can or will fund a loan during your right of rescission period, and every so often an otherwise excellent loan officer will have you sign loan documents before some other conditions are finished so that the right of rescission will expire in timely fashion to fund your loan before your rate lock expires. Remember that if the rate is not locked, the rate is not real, but all locks have expirations.



Applicable rights of rescission cannot be waived, cannot be shortened, and cannot be circumvented. Ever. There literally is no provision to do so in the law. This is both intentional and, in my opinion, correct. Kind of defeats the purpose of having it, which is to give you a couple days to consult with professionals before it's final, if it can be waived, because you can bet millions to milliamps that the sharks you are trying to protect folks from would have the folks sign such a document if it existed.



Now, just because the right of rescission has expired and the loan can be funded does not mean that it will be funded, much less on that day. For starters, good escrow officers will not request funding upon a Friday because the client will end up paying interest on both loans over the weekend for no good purpose. Once they request funding, the lender has up to two business days to provide it, and then the escrow officer has two business days to get everybody their money.



Also, remember those "prior to funding" conditions I spoke about a couple of paragraphs ago? If there's something substantive, it usually should have been taken care of prior to signing docs, leaving procedural stuff for prior to funding. But sometimes it can be in your interest to move them, if it means your loan is more likely to fund within the lock period, so you don't have to pay for lock extensions. On the other hand, there has been a movement towards making as many conditions prior to funding as possible, simply because once you have signed final documents you are more tightly bound to that lender.



In summary, if a right of rescission is applicable, start counting with the next business day after you sign final loan documents. After three business days, the right of rescission has expired and the loan can fund. Assuming a normal five day week, and that Saturday counts, as it does in every state I've worked in:



If you sign: Recission expires:

Monday — Thursday midnight

Tuesday — Friday midnight

Wednesday — Saturday midnight

Thursday — Monday midnight

Friday — Tuesday midnight

Saturday — Wednesday midnight

Sunday — Wednesday midnight


One thing that is very common in the mortgage industry is masking loan costs by rolling them into your loan balance. People are less sensitive to being asked to roll this money into their loan balance than they are about writing a check out of their bank account. In the latter case, everybody understands that this is money you busted your backside to earn and save. In the former case, a lot of folks don't understand that the money is every bit as real.



Indeed, one of the standard ways to deflect questions about cost that seems to get taught to every loan officer by every loan provider is the phrase, "Nothing out of your pocket." Sounds like they mean there's no cost. That's not what it means. What it means is that they don't want to talk about what the loan is really going to cost, as they're going to have to do if you're writing a check. Therefore, they want to roll it into your balance on the refinance. Most people in most situations have had their property value increase since the last time they got a loan, which likely means there's plenty of equity to cover it.



For purchases, you can't really do this because your value is never more than the purchase price. There are only three places for loan costs to come from: Your pocket, your down payment, if you have one, which reduces to your pocket, and Seller Paid Closing Costs. Seller paid closing costs are an agent and loan officer favorite, because it makes it look like you're not paying them, even though you are. If nothing else, a smart seller would rather take $10,000 less in purchase proceeds than pay $10,000 of buyer's closing costs, on which they are going to pay commissions and taxes to boot.



This trick of making it appear like you're not paying closing costs is one of the best ways to get stuck with an awful loan, but most folks won't do the research until after they've already gotten burned. You are paying those costs in one fashion or another, I personally guarantee it. There is more than one way to pay them, but if you don't know how you are paying them, you are probably not paying them the way you want to, and you're almost certainly paying too much, to boot.



There is ALWAYS a trade-off between rate and cost in real estate loans. It can be very intelligent to pay some or all of your closing costs by accepting a higher rate, especially if you don't plan on keeping the loan very long. If you know you're going to sell or refinance within a few years, or think it likely that you will, it's likely to save you money if you accept a higher rate that has lower costs. On the other hand, if you're 100 percent certain that you're going to keep this particular thirty year fixed rate loan the rest of your life, sinking a couple of points into reducing the rate can be an excellent investment. However, be aware that if you later decide to refinance or sell after all, you're not going to get your previously sunk costs back.



People get talked into rolling multiple points into their loan because it reduces their rate, and therefore their payment, aka the check they're writing every month. Let's consider two rates and the associated costs I quoted earlier today, on a maximum conforming loan, thirty year fixed "A paper" (those rates are gone now, whether tomorrow's are higher or lower). 6.5 percent was 1.5 points, or $6255 in real money, plus about $3400 in total closing costs when you consider title and escrow and appraisal. You'll find a lot of loan providers will go a long way to avoid quoting you the actual cost of points in dollars. But at 7.00 percent, I could give them back about 15 basis points, or $625, towards reducing their closing costs of about $3400. So assuming a $417,000 loan, this person would really get:







rate

6.5

7.0

useful $

407,345

414,225

cost dif

+$6880

-$6880

int/mo

$2258.75

$2432.50

int dif

-$173.75

+173.75

breakeven

39.6 mos

39.6 mos







However, that's dodging the real purpose of this essay. Suppose a loan officer was to pretend that these costs didn't exist when quoting you their loan rate. Their loan would appear to be cheaper, so that you would be very likely to sign up with them, but when the facts became apparent later on - that those costs exist in reality, whether your loan provider tells you about them up front or not - you're likely to continue with their loan anyway, because you don't have time to get another loan for one reason or another, or you just decide to stick with what you've started.



Furthermore, by pretending you don't have to pay loan costs, that makes it easier to get you to accept outrageous ones. Suppose your choices were to pay that $9700 in points and closing costs to get that 6.5% rate in cash, or you could pay $15,000 by rolling it into your loan balance. It is a sad fact that most people don't understand that this is about a point and a half more in costs that are every bit as real as dollars coming out of their checking account. However, most people are a lot more careful with dollars in their checking account because they understand that those dollars are real money. They had to earn it, dollar by dollar - in the form of so many minutes out of your life per dollar if you earn an hourly wage. Then they had to not spend it right away, as soon as they got their pay! Most folks figure they have something to be proud of if they save ten percent of their pay, but if you make $5000 per month, it takes over a year and a half to save $9700 if you save 10% of your gross pay. They understand that $9700 in terms of the nineteen months of their life it took them to save it. If they're just rolling it into the balance of their mortgage where it's being paid for by the fact that the home increased in value, it may be more than half again as much money, but a lot of folks somehow think it's not as real, and they'll accept rolling it into their balance much more readily than writing a check. It doesn't matter if you're writing a check or putting the money into your balance - a dollar is a dollar. By accepting the higher cost loan, not only are you wasting over $5000 of your money, but you're paying interest on it in the meantime.



If it's an expensive loan, it's an expensive loan, whether you're rolling it into your balance or out of your checking account. If you're paying too much money by rolling it into your balance, you're still paying too much money, and it's at least as bad as if you wrote a check or even counted out the cash. Doesn't matter whether you're writing a check or rolling it into your mortgage balance. So before you sign that loan paperwork, ask yourself if you'd be as happy with that loan if you had to write a check for every single dollar, or even count it out $20 at a time like an ATM machine. Chances are you'll be a lot more careful with your hard earned money.



Caveat Emptor

Builder Upgrades

| | Comments (0)

What I still am unclear on is the pool and how (in my opinion) it's crazy to finance $40,000 into a mortgage when you *plan* on refinancing in a few years. By *plan* I mean you take out a mortgage that you know isn't what you want but you took it because the builder forced you into it with "incentives" or they just plain wouldn't build a house for you if you don't use their lender and the builders lender is looking out for the builder, not you. I guess you can't *know* that the pool won't add value . . . especially in a new area where there are no comps . . . but am I crazy here?

Another situation I don't get is with all the "upgrades" they try to get you to buy with a new house. Blinds, paint, water softener, ro water filter, counter tops, cabinet upgrades. I wonder if you would be better off just getting the cheapest options and then upgrading later when you can afford to pay cash. I can guess that's the case but people figure life is too short to live in a a despicable house that has a kitchen with laminate counter tops instead of granite!! (I have laminate and somehow my wife and I manage.)

And that leads me to the pricing on new homes and how the builder sets the price and somehow the lender will lend you money on a house that may or may not be worth what you end up paying (granite counter tops may add value to the house but probably not $10,000). The more I learn the more I realize how much I still have to learn.


Builder upgrades are an almost entirely different set of rules and calculations than after-market upgrades. There are reasons for this that mostly reduce to "The lender can do a lot of things if they really want to, but most lenders don't have a reason to want to." For all of this, keep in mind that my normal stomping grounds just don't have a whole lot of new developments any more, so I don't deal with developer issues a lot, and it's very possible for the rules to change while I'm not doing any developer deals. I'm working with one set of clients right now who might end up buying in a new development, but it's been over a year since my last set of clients who bought just one (although if there's any developers reading this, I do have one investment firm client who wants to buy out the last of any new development that isn't moving quick enough).

The normal after-market upgrade, if you want a normal mortgage loan for it, has to be justified in terms of the property's current numbers. In other words, if you want to take $50,000 cash out to put in a pool, you must already have $50,000 equity available to you. You have to qualify for that loan debt to income ratio and loan to value ratio exactly as if you were going to take that money and buy lottery tickets with it. In other words, without the value of the proposed pool or other improvement added to your property, but solely based upon the situation as it sits now.

With builder upgrades, however, there's a little more latitude built in - especially where the builder controls the lender outright. Sure, the property is really only worth maybe five thousand more with that fifty thousand dollar pool installed, but because the basic number equates to money in their pocket directly, as well as money that they're going to earn interest on, they have a motivation to be more forgiving than in the case of the lender who is not getting $50,000 placed into their left hand while they loan it out - at interest - with their right. In many cases, even if they don't control the lender directly because they're not that big yet, they've made an agreement to indemnify the lender for any losses they take as a result of lending that money. The builder is secure in the knowledge that they'll make a lot more from the increased number of upgrades than they'll lose from the small proportion of defaulters. However, this should explain to consumers why sometimes builder's preferred lenders can do things nobody else can - because they're getting paid to do it. Furthermore, because they can do something nobody else will, they can charge a premium, either in rate, points, or both, over general market rates. Because the consumer wants the home with these upgrades, and because this is the only way anyone will lend on it, there's money to be made! Usually, there's plenty of money to go around - the consumers are, in aggregate, paying for it. Surcharges and premiums on the secondary mortgage market can go anywhere from two and a half percent up to six percent, perhaps more. On a hundred $500,000 homes, four and a half percent is over two million dollars additional clear profit. Even if three of those homes default, losing roughly fifty thousand in each case, they've still cleared more than two million extra profit for having done this.

(This is not to say that many after-market contractors don't have their own finance department cranking out trust deed financing even if the equity may not be there to pay it right now. But this way they get the job, which means they make the money for that job, and most of these contractor loans carry rates well above regular current market, so they can make more on the job as well as on the loan. How remarkably analogous!)

As for whether it's smarter to upgrade with the builder or wait and pay cash, there's an argument for each side. On one hand, the argument for waiting is that you are a lot less likely to owe more than the property is worth if you need to sell. Furthermore, you're not paying interest on depreciating fixtures, a classic double whammy anyone who's even bought a car on credit can relate to. Because you're not asking for anything special or difficult in the way of financing, you can at least theoretically go anywhere for your financing. Builders in California cannot legally require you to use their lender, which is not to say it doesn't happen - sometimes very blatantly in violation of the law - but that's the theory, anyway, that you should be able to shop the market. Finally, the cost of most upgrades is rarely recovered in increased sales price when the current owner sells. Spending a dollar, and paying interest on it, to make back twenty cents in eventual increased sales price strikes me as shooting yourself in the foot. It is to be admitted, however, if it was worth a dollar to you to have the upgrade, the twenty cents is icing on the cake.

Against this, however, is the cold hard reality of labor costs. If you build granite counter-tops in the first place, the only increase in costs is the comparatively small increase for more expensive materials. If you wait until after it's done, you've got to tear all the old work you've already paid for out, then pay the labor costs to put the new counter-tops in, as well as new materials, the cost of haul away, etcetera - not to mention the restaurant meals you'll be eating while it gets done. At anywhere from $15 per hour up, plus benefits plus markup, that labor isn't cheap, and it's usually at least a couple of workers for several days.

Builders know all of this, and that it's very attractive to roll the upgrades into the cost like this. When they build a property "on spec" (meaning it hasn't sold before the framing is done at the very latest), they typically build in all of the upgrades they can, and if you went to them to take a completed property off their hands, but wanted something not upgraded, it's likely they will be unable to accommodate you (This is a negotiating opportunity on the rare occasions it happens!). They don't tend to build very many "on spec" around here, or anywhere else if they can avoid it without worse consequences, but that's what they do when they do it.

There's also one more argument in favor of builder upgrades: You won't get your extra money out of them, but in slow markets like right now, it's more likely the property will sell if you do need to sell it. There are always suckers out there who will zero in on the upgraded property because "it's soooo beautiful!" even though there are better bargains nearby. Real estate fixers and flippers worldwide make their fortunes on the backs of these people, but they're legal adults deciding this stuff is worth their hard-earned money. Who am I to say it isn't?

Builders set their prices on the same motto as Poul Anderson's Polesotechnic League: "All the traffic will bear!" Profit isn't evil, it's what motivates developers to build places for people to live. But there's nothing that says you have to cater to it by forking over excessive numbers of your hard earned dollars, either.

Caveat Emptor

HUGE Profit Potential!



General: Urban East County, 3 bedroom 1.75 bath. Asking price between $425,000 and $450,000. I actually had it in escrow for $415,000.



Why you should be interested: This is a solid home in a great area that needs some fixing up. A close match a few doors down sold for $575,000 a couple months ago.



Selling Points: Great lines of sight and a good view. It looks down the length of the street, as well as across to the opposing hill.



Why I think it's a potential bargain: This sort of property doesn't go for this low of a price here.



Obvious caveats: Only a one car garage.



Why it hasn't sold already: It did! But the guy wouldn't let me do the loan, and the guy he picked hosed him! With this much profit potential, I would have signed anyway!



If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $415,000, the property would be worth approximately $675,000. If you held it those ten years before selling, you would net about $320,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $2100 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $200,000 ahead of the renter, after the expenses of selling.



Fact you should be aware of: Just that it's old as it sits.



Obvious way to enhance value or appeal of property: Polish the floors, landscape the yard, update the kitchen and baths.



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!

Market Resilience

| | Comments (0)

Most Resilient U.S. Real Estate Markets





Market corrections follow three basic recovery patterns. A V-shaped recovery where a market experiences a sharp, fast decline but comes out strong once it hits bottom; a U-shaped recovery, where prices decline gradually and recover slowly; and an L-shaped curve, a hard, fast fall with paltry price bounceback following the market trough.



The differences between a V-shaped market and a U-shaped one has to do with barriers to growth. High vacancy rates and high investor share can hurt a market, but if the local economy remains strong and housing stock affordable it's only a matter of how long it takes to absorb the excess inventory.



San Diego is portrayed as a V shaped market, albeit one whose recovery is dependent upon external factors. However, the fact that there just isn't anywhere new to build is going to be a major factor, as is the desirability of living in San Diego.



Those who wait for confirmation of market bottom are likely to completely miss out on the best bargains. It wasn't until prices had been decreasing for almost a year that official statistics admitted it. October 2005 is generally seen as having been the top, but the statistics confirming this didn't emerge until July or August of 2006.



This isn't any double-talk. I ran an article just a few days ago telling people that it's a rotten time to sell. Inventory is high, and there aren't a lot of buyers who have come off the sidelines yet. But this precise combination of factors is what makes right now one of the best times possible to buy. But it's not going to last forever. The seller to buyer ratio is nearly twenty percent lower than it was last year at this time (32 versus 39). It's getting harder to find the very best bargains. Stuff that's beautiful is selling, but properties that aren't reach out and grab you beautiful are sitting on the market. Great if you can afford to fix it. Not so hot if you can't. On the other hand, if you're willing to be the one to deal with a few minor cosmetic issues, this is a great time to end up with a great bargain. Particularly if you've got a few thousand in your pocket to redecorate once you've bought, now is a great time to be finding those properties where $10,000 in easy stuff like carpets and paint can add $100,000 in value. Whether you then want to live in it for ever and ever or simply take your profits and run, that's not at all a bad situation to be in.



San Diego is a resilient market, and I'm seeing a huge number of people who want to buy but are "waiting for the market to hit bottom." When you've got a situation like that, as soon as those people see some indication that things have turned, they're likely to come swarming, thereby boosting demand and depleting inventory (i.e. supply) over a very short period of time. I haven't been among those thinking San Diego is likely to see any kind of a double digit gain any time soon, but the longer it takes to start getting people off the sidelines, the more demand will build, and the stronger the turn will be. I still don't think we're likely to see double digit gains in the next couple of years, but I'm starting to see evidence that I could be wrong about that. I predicted losing thirty percent of peak value, and we're at about 25% off peak right now. The number of bad loans could make the housing bear run a little bit further, but there's also a large amount of pent up demand, in the form of people who are eager, willing, and able to buy a home, but are only "waiting for the right time". Based upon purely anecdotal evidence, I think we're at the point where the latter significantly outnumber the former. If you're one of those on the sidelines waiting for the right time, I'd be very careful not to be late onto the field.



Caveat Emptor

The Best Loans Right NOW



6.5% 30 Year fixed rate loan, 1 total retail point, and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2528, APR 6.641! 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 5.875%!



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: 6.125% 1 total point. Assuming $400,000 loan, payment of $2430, APR 6.263%. 5/1 ARM loans available as low as 5.625%! 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

One of my clients would like me to link to her site so for those of you who might like to see work in progress, here's her most recent post, showing the condo torn apart.



2 bedroom 2 (full) bath condo in El Cajon, 900 square feet. We got it for $197,000. The previous model match had sold for $273,000 in February, and I think the market really sits somewhere in the $250-260 range as of closing.

Mortgage Loan Rate Locks

|

One of the most true sayings in the mortgage business is, "If you can't lock it right now, it's not real."



But many mortgage providers will play a game of wait and hope. They tell you they have a certain loan when they in fact do not, hoping the rates go down to where they do. Or they'll tell you about a rate they actually have, but wait to lock it hoping the rates will go down so they can make more money because when the rates go down, the rebate for a given rate goes up.



Sometimes the rates do go down, and they can deliver. But sometimes the rates go up, too. When this happens, the mortgage provider playing the "wait and hope" game has three choices. They can make less money, charge more for the loan, or punt by playing for time. I shouldn't have to draw adults a picture as their relative likelihoods.



Many times one side effect is a delayed loan. This is probably the number one reason for delayed loans, and one of the strongest reasons I keep telling you that if a provider can't do it in thirty days, they probably can't do it on the terms indicated. Many times they bet on rates going down, when rates actually go up, so they end up with a loan that they can't make any money by doing, so they delay it day by day, week by week hoping the market will move. Note, please, that they usually have zero intention of finishing your loan if the market doesn't move downwards enough. Whether it's National Megabank with a million offices, or Joe Anonymous working out of their home, their motivation is to do what it takes so they make money, and they will keep sweet talking you as long as they possibly can. They're certainly not going to work for free, and many of them will not do it at all rather than compromise their usual loan margin. If you allow them to play this game, when you finally give up in disgust, they still have several weeks after you apply with someone else where they're the only ones that can possibly have the loan done, and if the market moves down during those weeks, they're covered. If you could have gotten a better loan during that period, you likely would. But because you were quoted a price that didn't exist and believed it, they've got what looks to a consumer to be a competitive advantage. And if they call after you've cancelled their loan and say that they can close the loan now when the new provider you just contracted with isn't ready yet, most people will go ahead and sign the papers because This Loan Is Ready now.



There are honest mortgage providers who lock every loan at the time you tell them you want it. But there is no way for a consumer to verify that any given loan provider is among them. All of the paper I can put in front of you as regards a loan rate lock can be easily faked. Which brings us back to one of the standard refrains of the site: Apply for a back up loan.



There is another issue with regard to rate locks. They are all for a certain set period in calendar (not working!) days, usually measured from the time you say you want it to the time the loan actually funds (not until you sign documents). Assuming your loan is actually locked when you say you want it, this means that there is a DEADLINE.



This means that once you tell someone you want the loan, give the loan provider every scrap of documentation they ask for right away, not a week later. The loan provider is not going to pay for the delay, you are. Many banks will not even look at an incomplete loan package, so it is crucial to have the paperwork organized quickly. If that loan goes beyond the initial lock period, you can pretty much count on paying an extension. Some banks charge one tenth of a point for up to five days, some a quarter of a point for up to fifteen days of extension, some even more, but it's always charged in full from the first day of an extension. Sometimes the lender will give an extension for free if it was obviously their fault, but not very often. More likely, whether it was your fault, their fault or nobody's fault, the extension will be charged. Lenders have no sympathy for going over the lock period, and neither do most brokers. The lenders have set a large sum of money aside for your use, and they aren't earning interest on it. They want some kind of compensation, and when you think about it, this is not unreasonable.



Common rate locks are done for 15, 30, or 45 days, but they are available in 15 day increments for almost any length of time out to about nine months. However, there is a cost. The longer the lock period, the costlier the loan. Par becomes higher with a longer lock period. You pay more in points, or get less in rebate for the same type of loan at the same rate. The reason for this is simple. The bank is setting all of this money aside for your use, and not getting any interest in compensation. They are doing you the favor, and they will charge you extension fees if you go past the lock period. I'm looking at a rate sheet right now that was valid a couple of days ago from a medium size lender. For a thirty year fixed rate loan, the discount points go up one eighth of a point between the fifteen and the thirty day lock, and another quarter of a point for a forty-five day lock.



The problem with 15-day locks is that they are useless as an "upfront" lock. Especially with refinancing, where you lose a week by law between signing documents and funding the loan, there just is no way to reliably get it done within this time frame. Even purchases are chancy with the best of cooperation from everybody involved. 15-day locks are primarily a tool of those providers who play the "wait and hope" game mentioned above, and they lock just before printing final loan documents. The fact that they are planning a shorter lock period allows them the illusion of quoting something lower, but even if they tell you what the rates are today, they are quoting you a rate that may or may not exist when the loan is actually ready.



A 30-day lock is most common lock period for those who lock the loan immediately. If both you and the provider are organized, it's enough to reliably do all the paperwork and miscellaneous other projects, get final approval, and get the loan funded. It sounds like a lot of time, but it isn't. On refinances, you lose a week due to legal and system requirements. Let's say you sign the final paperwork on a Monday. By federal law, you have three days to change your mind, and they're not going to fund the loan before that period expires. Monday doesn't count, so Tuesday, Wednesday, and Thursday go by before anything can be done. Good escrow officers don't usually request funds on Friday, because when they request funding is when the new loan starts accruing interest. Monday they fund the loan, and the bank has up to two days to provide the funds, then the escrow officer has up to two days to pay off the old loan before the documents record and the transaction is essentially complete. This takes us to potentially to Thursday or Friday of the following week.



On purchases, there is no three day Right of Rescission, but if the escrow officer begins funding a loan on Tuesday you are still talking about potentially hanging over until Monday of the next week. Funding doesn't necessarily take this long, but it does happen.



45 day and longer locks are primarily useful for purchases where there is something external holding the loan back. Only rarely do the market conditions become such that longer locks than 30 day become necessary on refinances. Otherwise, they are most often used only when the actual purchase contract says that the purchase can't close until 45 or 60 days from now. There is a tradeoff here, and I may occasionally counsel people to wait if the construction on the house isn't scheduled to be complete for ninety days or longer. This makes for a risk that rates may move in the meantime, but rates generally don't go up in huge jumps, but rather incrementally higher from day to day, and past ninety days you may be risking less by waiting than by locking. There's no reason to pay more for a lock than you have to.



Usually, though, I want to lock it now. As a broker, I can always take it to a different lender if I get a better deal, or if we made the wrong choice and locked when we should have waited. I've seen too many folks burned by lenders or brokers waiting to lock, and all of the rates go up and stay high. If it's not locked, it's not real. Even a legitimate and complete quote is fairy gold until it is actually locked. A bank can withdraw its loan pricing at any time. Sometimes this happens right when I'm in the middle of the locking process, and when this happens, the client gets the new pricing. Period. End of story (some banks will give you 30 minutes to complete locks already in process, but this is subject to limitations). Some lenders and loan providers attempt to hide this (and they call it "Consumer transparency." You may hoot in derision if you so desire. A better name would be something like their "Consumer Ignorance is Bliss" policy. "Don't you go worrying your poor little head about that, ma'am!"). Until the lock process is complete, you don't have a right to those rates.



Caveat Emptor


Precis: Still an excellent good time to buy and a poor time to sell. Matter of fact, don't put the property on the market if you've got a reasonable alternative. If you're looking to buy, though, you're not likely to find a better time soon.



The hard fact is that there's a lot of inventory, and most owners have priced their property over the market. There's an awful lot of agents out there that "buy" listings by telling owners they can get more than the property is worth. There are comparatively few buyers out there, and there are 32.6 sellers for every one of them. I hope those readers who aren't hetero bear with us, but imagine you're at a dance where one sex outnumbers the other thirty to one. Those few members of the outnumbered sex can be incredibly picky, while the multitudes of the outnumbering sex are going to have to do a lot to compete with their thirty plus rivals.



Real estate isn't a dance of course. For one thing, in the real world boys can dance with boys and girls can dance with girls, at least if they're so inclined. But in real estate, two sellers can't really dance - it doesn't do them any good. In the real world, you have the ability to leave this dance and go find another one. In real estate, you can't do that. The property is where it is. You can leave the dance and go home, but there's only one dance to go to.



For sellers, you can either do what is necessary to out-compete the other sellers for the buyer's attention, or you can decide it's not that important to sell. If you take the latter option, get your property off the market. If you want to sell, look at what properties like yours are actually selling for. For most, it's thousands to tens of thousands less than asking price. Properties that are correctly priced are selling, while properties that are overpriced aren't. If you need to sell, it doesn't do any good to price it too high. If you don't need to sell, and I mean need to sell, then why is your property on the market? If you do need to sell, you might as well list it for what it's going to sell for and get it done, because until you're ready to accept an appropriate offer, it's going to sit unsold, which costs you money. You can have $X now, or you can have $X three months from now, after you've spent another $10,000 on taxes and mortgage. Your choice. $X plus thirty thousand is not on the list of options.



For buyers, the pickings are still very rich, if not quite as good as they were earlier in the year. Where earlier in the year you could take all the time you wanted to think it over, no matter how good the bargain was, I've had three properties go "Pending" on interested buyers in the last month. People are out there, looking for bargains. Properties that are priced appropriately are selling.



One thing that distresses me is what a large proportion of Vampire properties are out there, and what some of them are selling for. There was a Vampire some clients of mind got interested in because it had a large lot, four bedrooms and a pool. However, it also had foundation, structure, and settling issues. I talked my clients out of it, but somebody else paid essentially full price despite the fact that the foundation is cracked through and the structure is settling unevenly. Spotting Vampires is one of the areas where a good buyer's agent earns every penny they make - in this instance, my clients aren't going to have to find thirty or forty thousand to fix the foundation and another twenty plus for the structure. It seems like the proportion of Vampire is increasing, also. People are trying to unload their problem properties rather than fixing them correctly - and other people are buying them. It's one thing if it's disclosed and everybody is negotiating on the same page. It's something else again if the sellers are trying to pretend those problems don't exist, or even worse, trying to hide them. If you try and hide it, I guarantee it will come back to haunt you - it's not like those buyers are going to say, "Oh, well, we're just out fifty thousand dollars!" Not that winning the lawsuit is going to be any comfort to those buyers in the meantime, but the sellers can pretty much count on having to make it good.



I've saved the most important recent development for last. Rates on loans, particularly thirty year fixed rate loans, are up. A month ago, I could get 5.875% on a thirty year fixed for one point retail. The equivalent rate today is 6.50 percent. So if someone qualified for a payment of $2500 then, they could afford a loan for $422,500, while at today's rates the equivalent loan is only $395,500 - more than a six percent drop. Now I'm neglecting other factors in the equation, but the point is this: Unless rates go back down, they're exerting downwards pressure on prices. With the trade deficit, budget deficit, and microscopic US Savings rate, I don't expect rates to fall, nor does the federal reserve. In the longer term, prices will continue to rise, but in the short term, together with the huge glut of inventory on the market and the high ratio of sellers to buyers, we may see further price drops until this inventory clears. If you don't need to sell right now, no biggie. But if you do, it's even more reason to price the property correctly and get it sold now, because the odds are that the prices will be at least a little lower in the next few months.



Some people are going to read that and think, "We'll wait to buy until prices have bottomed out!" This is an excellent way to miss the buying opportunity we have now. How will you know that prices have bottomed out? The answer is, "When prices start rising again," but if you wait until then, there's a reason why prices will be rising again. The excess inventory will have cleared, there will be a lower ratio of sellers to buyers, and in general, things will be much better for sellers than they are now, while not being as good for buyers. There is also a tremendous pent up demand out there, people who want to buy houses but figure they'll be better waiting. When those folks finally decide to come off the sidelines, as they will when government starts reporting housing prices increasing again, watch out for another year like 2003 where prices go crazy because everybody wants to buy and nobody wants to sell. But in order to cash in on it, you have to have bought previously.



Caveat Emptor


What's negotiable on a purchase?


The short answer is everything.

There may be standards and traditions in your area, the same as there are in mine. That doesn't mean they are not subject to amendment by specific negotiation. Once you get outside legal requirements, anything is subject to negotiation. As long as both (or all) parties concerned agree to it, that's the way it's going to be.

This is not to say that some things aren't better left alone. For example, if I was buying a property and the seller didn't want to pay for the policy of title insurance, as is traditional, I'd certainly think long and hard before continuing with the transaction. Furthermore, such behavior would certainly cause the price I'd be willing to pay to drop dramatically. If I'm helping clients, the same applies even more strongly. I'm going to tell them that this may mean the seller may not be able to deliver clear title.

This is also not to say that there may not be consequences as the result. For example, if I or my client is selling the property, and someone asks for a $10,000 credit towards closing costs, the lowest offer I'd accept would be at least $10,000 higher, probably $11,000, maybe more. Why? Because commissions and transaction costs are based upon the official sales price, not the sales price less that rebate to the buyer. The bottom line is that it costs at least $10,000 to rebate $10,000 thusly. A $400,000 offer that requires $10,000 in rebates isn't a $400,000 offer. It's a $390,000 offer at best.

In order for it to be a valid contract, the two parties have to agree in every particular. If there is not complete, total, 100 percent written agreement as to what is going to happen, there is no contract. Two parties haggling over whether one light bulb gets replaced do not have a valid contract any more than two parties haggling over whether the price will be $200,000 or $500,000.

Nonetheless, except for those very few things mandated in law, it's all negotiable. Specific negotiation can change anything that's not legally mandated, and most things with defaults specified in law. If you've got a gold bathroom faucet that you want to keep, a normal sales contract says that it stays by implication (it's a furnishing attached to the property and required for the property to function normally). But you can change this by specifying that you have the right to remove it in the contract. Now if they buyer is only buying the home because of that gold faucet, they can walk away or counter offer that it stays. Let's say you eventually agree that it will be replaced by another gold faucet. That's specific negotiation. The replacement will be required to be installed, equal in functionality and free of defects - unless you change this by more specific negotiation.

I've seen negotiation for personal property to remain, furnishings to leave, the disposition of existing tenants, allowing leasebacks to the prior owners, and just about everything else under the sun. If there's something about the standard contract you don't like, or something specific to this situation or this property, specific negotiation is how you deal with the issue. Furthermore, even if you don't want to change anything, the other side might. Indeed, probably more properties have further negotiations due to problems or issues raised by inspections than don't. Something is revealed to be not quite right, and the seller either has to make it right or negotiate with the buyer for acceptance in the current state.

This is not to say that as long as the transaction records the seller is golden, by the way. If the buyer can show reasonable evidence that the seller knew of the issue but failed to disclose it, that's a bone for the lawyers to fight over when it's discovered. Some sellers fight a losing battle over issues like this for years - and it ends up costing them far more money in the longer term. The buyer finds out something you should have told them after the transaction, that's a bad situation for a seller to be in. Better to disclose right away and be done with it. When the seller can prove the buyer knew the full extent of the issue and bought anyway, that's much better protection.

So make sure that if there's some issue you want resolved, the purchase contract resolves it completely and unambiguously. That contract is how the transaction is going to happen. If it's not there, you're at the mercy of the other party. They might see it your way. Then again, they might not.

Caveat Emptor

I got a search for "which states allow prepayment penalties". I'm not aware of any that don't. If you are, I'd like to know. Any such states should immediately be renamed "Denial".



I really hate prepayment penalties, for a large number of reasons. Nonetheless, to make them illegal would not be in the best interests of consumers.



Let's examine why. Let's consider a hypothetical couple, the Smiths, who don't have much of a down payment, and have difficulty qualifying for the loan. They want to become owners rather than renters, and it is in their best interests to do so.



The cold hard fact of the matter is that nobody does loans for free. Real Estate loans are complex creatures, and they don't just magically appear out of some hyperspatial vortex upon demand. I may cut my usual margin by half if I'm the buyer's agent as well, but that's because I've found I'm going to do a large portion of the work anyway, have to ride herd on the loan officer, and stress out because it's a major part of the transaction that can really hurt my clients that is not only not under my control, but I cannot monitor with any degree of confidence I'm being told the truth. I keep telling folks that the MLDS , by itself, doesn't mean anything. It is not a contract, it is not a loan commitment, it is not a Note or Deed of Trust, and it definitely isn't a funded loan. It is supposed to be a best guess estimate of your loan conditions, but with all the limitations and wiggle room built into them, the regulators might as well not have bothered. By itself, it is worthless. None of the paper you get before you sign final loan documents means anything unless the loan officer wants it to. Unless the loan officer guarantees it in writing that says that someone other than you will eat any difference in costs, what you have is a used piece of paper with some unimportant markings on it. If I, as a better more experienced loan officer than the vast majority of loan officers out there, cannot monitor what another loan officer is doing with any degree of confidence, do you want to bet that you can?



So we have some folks who can just barely stretch to do the loan. In order to buy them a little space on their payments, so that any bill that comes in isn't an absolute disaster they cannot afford, and also so I can get paid without it coming out of the money these people don't have, I talk to them about the situation and we all agree to put a two year pre-payment penalty on the loan. This buys them a lower rate with lower payments, without adding anything to their loan balance. They don't owe any more money, they get a lower rate, I get paid, and they didn't have to come up with money they don't have. Everybody wins, whereas without the prepayment penalty they would be paying $200 per month more, and perhaps they couldn't qualify. No loan, no property, no start to the benefits of ownership. They certainly wouldn't have that $200 per month cushion that's likely to save their bacon from their first emergency. Leaving aside for a moment the issue that most folks want to buy more house than they can afford, that really stinks from the point of view of the people that those who would outlaw prepayment penalties altogether say they are trying to help, those who are trying to buy a home and just barely qualify.



Many folks have a long mortgage history, and they are comfortable in the knowledge that they will not refinance or sell within X number of years. They're willing to accept a pre-payment penalty in order to get the lower rate. They want that $200 per month in their pocket, not the bank's, and they are willing to accept the risk that they may need to sell or refinance in return. After all, if they don't sell or refinance within the term of the penalty, it cost them nothing. Zip. Zero. Nada. For all intents and purposes, free money. I may advise against it, but it is their decision to make or not make that bet, not mine, not the bank's, not the legislature's, and definitely not some clueless bureaucrat's, let alone that of some activist who only understands that lenders make money from them, and not the benefits that real consumers can receive if they go into it with their eyes open.



Pre-payment penalties get abused. Badly abused. I know of places that think nothing of putting a three year pre-payment penalty on a loan with a two year fixed period. There is no way on this earth anyone can tell those folks truthfully what their payments will be like in the third year. I may be able to tell them what the lowest possible payment could be, but not the highest. I've seen five year prepayment penalties on two and three year fixed rate loans, and that situation is even worse. I've heard of ten year prepayment penalties on a three year fixed rate loan. I've seen even A paper lenders slide in long prepayment penalties on unsuspecting borrowers that mean they get an extra six or eight points of profit when they sell the loan. So there are some real issues there.



With this in mind, there are some reforms I could really get behind. The first is making it illegal for a prepayment penalty to exceed the length of time that the actual interest rate is fixed. Regardless of what the contract says, once the real interest rate starts to adjust, no prepayment penalty can be charged (This means no prepayment penalties on Option ARMS, among other things). The second is putting a prepayment penalty disclosure clause in large prominent type on every one of the standard forms, and making it mandatory that the loan provider indemnify the borrower if the final loan delivered does not conform to the initial pre-payment disclosure. In other words, if I tell you there's no pre-payment penalty and there is one, I have to pay it for you. If I tell you there's a two year penalty, and it's a three year penalty, I have to pay it if you sell or refinance in the third year (in the first two years, it's your own lookout because you agreed to that from the beginning).



But to completely abolish the pre-payment payment penalty is not in the best interest of the consumers of any state. Show me a state that has abolished them completely, and I'll show you a state that has hurt its residents to no good purpose. Sometimes there is a good solution to a problem, as I believe I have demonstrated here. It's just not the first one that springs to mind.



Caveat Emptor.

Have a "looking for cheap" attitude, especially on services meant to protect you.



It's great to have a "looking for value" attitude. If I cost more than someone else, it is in your best interest to ask why, and ask me to justify what I make in terms of value provided to you. I don't resent people that are looking for value. If I can't show them something they agree is more valuable to them, then I can't blame them for going with the person who offers the same exact thing cheaper, and truthfully, I'm probably not the agent they should use. There's plenty of room for all levels of service in the industry.



But to have the attitude that "cheaper is better" presupposes that there is only one possible level of service, and therefore, anyone who provides it any cheaper must therefore be a better value. This is preposterous. I just finished a transaction where my brokerage made about $7000 grand total for the purchase of a condominium and the associated loan. Somebody else might have rebated close to half of the buyer's agency commission - but somebody else didn't get my client a condo for $75,000 less than a model match in the same complex that sold six weeks previous - over a 25% difference in price. Furthermore, that's the grand total. That's not what I get to put in my personal bank account. That's got to pay office rent and electricity and all the costs of staying in business. Once I get my share, I've got to pay taxes and mileage and licensing and continuing education and all the costs I have as an individual of staying in business.



You may get the idea that what's left over isn't as much as most people assume it is. Now you know why discounters cannot afford to provide the same level of service a full service agent can. There are full service agents out there providing discounter service for full pay, but there are no agents providing full service benefits for discounter pay. Even if they were doing twenty transactions per month per agent, they simply aren't making enough to stay in business by doing it that way.



Now, because you're working with an agent who doesn't have the time to do the same due diligence (and may not have the expertise), you're either going to deal with it yourself or hope that the other side of the transaction isn't intending to do anything unethical. Even if they're not intending to do anything, that doesn't mean that nothing will have happened on its own. Sometimes, it really is nobody's fault. I'm working on one now where the septic tank failed the inspection and the inspector said it needs to be replaced. The seller is out roughly $20,000 in order to be able to sell the property. It was fine a few months ago, but isn't now. Nobody's going to buy the property if they can't flush their toilets, so this needs to get taken care of. If I hadn't done my full due diligence, my clients would have had a nasty surprise.



It's not just agents. Appraisers and inspectors are two allied professions where spending just not quite enough can mean they missed what you were paying them to find. Or the appraiser charges you $50 less, but takes three weeks to get it done, during which time you're out four tenths of a point in lock extension fees. On a smallish $200,000 loan, that's $800.



This also applies to loans. It's trivial - and legal - to low ball people who want to know what sort of loan you're likely to get. Are they willing to guarantee their quote? Or are they just getting into the spirit of a game of what amounts to liar's poker where the only way to call the bluff is wait until the end of the process, thirty days out? In such a situation, there's no real reason not to say you've got, "Ten nines," but nobody really has ten nines - I just looked and serial numbers are only eight digits long. But if there's no proof until thirty days out, what happens when they deliver a loan that's pair of ones? I'll tell you: Most people are still going to sign those loan documents. I've gone over how much lenders can legally low-ball quotes in the past. If they can't deliver their quote, they can't deliver it, and it gets you no benefit. I get people hitting the site every day asking questions that indicate to me that their lender presented them with an entirely different loan than they initially told them about to get them to sign up. Consequences to the lender: Zero. Consequence to the borrower: Now you have a choice between signing the documents for this loan, or doing without. Chances are that you're going to sign their papers anyway, which means that lender will be rewarded for lying to get you signed up, and the attitude of "looking for cheap" is what did it to you. I've dealt with any number of people who metaphorically plugged their ears and refused to listen to the downsides of the negative amortization loan. It doesn't change the fact that there are downsides, or how bad they are. It just means you don't know about them. But they sure do have that low payment (for a little while, at least!)



In real estate, breaking the law is only the second best way to create problems for yourself. Since in the current environment, you can count on law breaking being discovered, that should tell you how bad looking for cheap is.



Caveat Emptor

Joint Loans

|

First off, let me say that your site has been very informative and helpful. I stumbled across your blog looking for information on ARM vs. 30 year fixed loans and ended up reading every article.

One issue I have never really seen addressed is joint loans. When a couple, married in this case, gets a loan, which FICO score do they use?

Right now, my wife is a nursing student, when she graduates in August we want to buy a new home that is significantly more expensive than our current home. Our combined salaries at that point should be somewhere around 120K. I have been told by a mortgage professional in our first phone conversation that being a student counts for "years in
line of work", but we would have to wait until she receives her first paycheck from her new job before we could count her income. We just accepted an offer on our current home last week, and will have enough cash to put down 10% in the price range we are looking at (200-300 K). If we want to buy before she is employed, but has an offer so we know
her salary, what are our options? It seems to me that we would be in a situation where we are doing a Stated Income type loan.


The answer to this is that whoever make more money is the primary borrower. This works with a couple as well as other arrangements. It's a very simple answer, but you'd be amazed how often I have to repeat it for trainee loan officers. Of course we all want to use whichever score is better, but it's the person who makes more money whom the lender will consider to be the primary borrower.

Now as far as A paper goes, it's kind of academic. If you want to use both incomes for the loan, you both have to qualify. This can be an issue when one spouse forgets to pay bills and the other is as a-retentive as I am about it. Over time, spouses credit reports tend to track one another more and more closely, as they switch from single credit accounts to joint accounts. If it's a joint account, doesn't matter who forgot to pay the bill - you both take the hit. On the other hand, even long-married spouses don't tend to have exactly the same score, and in many cases they have intentionally segregated the credit accounts for precisely this reason, that one spouse is better about paying bills. So one spouse has a 760, and the other spouse has a 560. Ouch.

It is to be noted that the superior solution is to have the responsible spouse pay all of the bills, which results in two high credit scores. Why is this important? If one of you has a 760, they may qualify A paper. If the other has a 560, you have a choice: go subprime, or have the high scoring spouse be the only person on the loan. In other words, when you're talking about A paper, you both have to meet the credit score minimums, or you don't qualify as a couple.

This has implications. Suppose you have a 760 score spouse who makes $3000 per month, and a 560 score spouse who makes $5000 per month, you have a choice: Qualify based upon $3000 per month, go stated income, or drop to subprime.

$3000 per month doesn't qualify for a lot of house most places. So if you're thinking 3 bedroom house, you can be stuck with small one bedroom condo - if you want the best rates.

The second alternative is going stated income. This only works if the necessary income for the loan is believable for someone in that occupation. Somebody who makes $3000 per month is not likely to be in a profession where $8000 per month is a believable income, and most people tend to overbuy a house rather than underbuy, regardless of the fact that underbuying is a lot more intelligent in most cases.

The third solution is to go subprime, where you'll qualify, but get a higher rate. A single borrower with a 760 credit score gets a better loan, with less of a down payment, than the couple in this case - the primary borrower has a 560 score, remember - but they just won't qualify for as large of a loan because they can't afford the payments.

You might also go NINA, which is a "here I am - gotta love me!" approach where income is not verified, nor employment history. The loan you get is based totally upon your credit score and equity picture (how much of a down payment you make, in the case of a purchase). The rate is higher than stated income and the restrictions on equity is greater, but you'll get a better loan at a better interest rate in most cases for a NINA A paper loan than even a full documentation loan for a 560 score.

Now, as to what you were told, student does not, in general, count as time in line of work. As a question to make why this is obvious: How are you going to compute her average income over the last two years? That is the way full documentation loans are justified. Some subprime lenders will accept it (not the better ones), or the person who told you this could just be planning to substitute a stated income loan based upon your income. The fact is, that unless you're talking ugly subprime, they're not going to accept your wife's income until there's some time actually working it. Many people graduate school and never work in the field. They don't pass licensing, or they decide soon after they start that it's not for them.

In this case, you are talking stated income unless you go subprime. It's just the way things are computed. Sorry.

As I keep telling folks, there are a lot of shysters out there in my profession. The easiest way to get people to sign up is to promise the moon, and until you get the final loan paperwork you have no way of knowing whether they intend to deliver what they said.

Caveat Emptor.

Hello,

When my husband and I bought our home 2.5 years ago (two bedroom condo) we qualified for the loan ($250,000) based on both our incomes. Then I had a baby and stopped working. We've never missed a payment or even been late, and we're getting by just fine by being frugal. However, our loan is a 5/1 ARM, and I'm skeptical of our ability to pay the adjustable rates once our fixed years are over. Our original plan (when we got the loan) was to see about refinancing at the end of those five years. (Five years worked well for us because my husband was still in school and we knew we'd be here about that long, if not longer.) However, now that we no longer have my income, all the mortgage calculators online are telling us that we can afford a loan of just about half the value of our home. What do we do in a situation like this? Is it possible to do anything other than sell our home once our five years are up?

A few other (maybe) pertinent details: currently we're paying interest only on our first mortgage (4.75%) and a principal and interest payment on our second mortgage (8.75%) Our home has gone up in value since we bought it, and we've made some improvements as well. Likely selling price right now (based on comparable properties that just sold in our area) is $325,000 to $340,000.

What do you think?

The first thing I want to ask someone in this situation is "How long do you have until reset?" The second would be, "Are you going to be able to afford the payments when it hits reset?" These two answers I'm fairly certain of, looking at the information provided. The third would be "Do you intend to change something about the situation before that time?" and "What's your market trends?" would be the fourth. In San Diego, I know the answer to four, but three is a guess, and you're not in San Diego or close to it.

You have the loan. It is already funded. You have lived up to all the qualifications you agreed to in order to get it funded. You don't have to do anything other than make the payments in order to keep this loan. If this were a 30 year fixed fully amortizing loan that you were already making the payments on, there would be no reason for you to do anything, because I certainly can't beat that rate today. Nobody can. If you have already got the loan and you can afford it indefinitely, you don't have a problem.

Unfortunately, that's not the case here. You're fine for now, but not forever. You have a known time approaching at which point you will be unable to make your payments. To make matters worse, there's no way to get that good of a rate now and it's not likely that there will be before your initial fixed period expires. That's the worst news.

The mildly bad news is that you're not paying your balance down much. Assuming you're not paying anything extra, you're not going to pay that $200,000 interest only first down by anything, and you've only paid the $50,000 second down by about $1000 now, and you'll only pay it down to about $47,800 by the end of the fifth year.

The mildly good news is that you've got 2.5 years left to do something with. You could go back to work, and if you do so now, you'll have two years continuous same line of work before the 5 years are up. Assuming you make as much as you used to, you should be able to afford the property.

This 2 1/2 years is time on your side. I keep telling folks time makes a great ally or a horrible enemy, but it's never neutral. Right now, it's on your side - giving you time to do something to change the situation. Once the adjustment hits, or even gets close, time will become your enemy. Don't waste time, but right now it is on your side.

The really good news is that your market has gone up, and you have a good amount of equity. This is about as surprising as gravity, but it is still good news. You're under 80% loan to value ratio if the numbers you gave me are valid. I wouldn't touch your loan right now, if I were you, but if you were in a sub-prime situation to start with, chances are good that you'd be A paper by now. You've got a 5/1 A paper loan with plenty of the initial fixed period left - but there's a lot of folks out there with 2/28 C paper. Especially if your adjustment had already hit, moving from 8% adjustable to a 6.5% thirty year fixed A paper without points (as of when I'm writing this) makes a lot of sense. Even if you don't want to sell o refinance now, know that that kind of equity means you've got some breathing room if you've got to have it.

The bad news is that if you sell, you're going to sacrifice some of that equity. It costs money to sell property. Assuming yours sells for $325,000, you'd probably only net roughly $299,000, of which your loans would eat $249,000, leaving you with $50,000 in your pocket. Right now, a lot of places are in a world of hurt for trying to sell, so your could be out more than that and still have to take a lower price in order to get it sold. If your condo was in San Diego, for instance, you'd be doing extremely well to net $35,000 from an actual sale right now, even if your condo really was worth $340,000. The condo market is just saturated with conversions. I think this will change soon enough to surprise a lot of people, but I don't know for sure.

Let's assume that you don't intend to return to work. If your loan was adjusting any time in the next year, it would be time to sell. However, you've got some time. If your market doesn't look like it's in danger of collapse, I'd probably wait. I don't know about where you are, but here in San Diego, I'd bet the market is going to be better for sellers next year than it is now. Most likely, more than enough better to justify waiting. If your market is just peaking, however, you've got a real issue, and you might want to get out now before you've lost all of your lovely equity.

One final possibility is planning to wait and refinance, doing the loan "stated income", telling the lender that you make more money than you do. This is dangerous. Quite aside from the fact that you are intentionally defeating one of the most important safeguards for your protection as well as the bank's, this is not what stated income was intended for, and you need to be careful that you're actually going to be able to make the payments without going backwards (in other words, no negative amortization). Better would be a fully amortized loan, but since you're already in the property, interest only is acceptable. If the situation is at least stable, why incur the costs of selling while the property meets your needs? However, at this point we do not know what the rates will be two and a half years from now. I don't know what the maximum rate you could afford is. I think 5/1 loans are going to stay about where they are now, in the low 6s. Can you afford even an "interest only" payment on a 6% loan ($1250/month on $250,000), which is roughly 1/3 more than you're paying now? 6.5%? 7%

This isn't a situation that can be tackled using only numbers, but the situation is not likely to be sustainable as it sits. You do have some choices on the table. The three most obvious are that you can go back to work, your husband can start making more money, or you can start making plans to sell the property. Any of them beat the default option, which is "do nothing and let the situation ambush us when time is up." And if you decide it's likely you'll be able to afford to refinance, keep an eye on rates. I think 30 year fixed rate loans are going up to the low 7s, but that's just a projection of where I think the capital markets and our economy are going. I could be very wrong. There is a point at which you will be unable to afford your property. If rates hit that point, your choices become basically, "Start the sales process now or wait?"

Caveat Emptor
or


Figures don't lie, but Liars Sure do Figure!

With the loan rates being significantly higher than they were a couple of years ago, we've got a lot of people with loans in the low fives, interest rate wise. One of the tricks lenders are using to persuade them to refinance is Weighted Average Cost of Capital, which really does take a page out of corporate finance books, but ignores a lot of details and alternatives.

This was an actual example that someone put online as an argument to refinance:

Current situation:

$350,000 first at 5.25%
$100,000 second at 8.5%
$50,000 consumer debt at 12%

This person then used standard practice to compute a weighted average cost of capital of 6.575, and justify refinancing all of it into a new first at 6.25%. They also assumed a tax bracket of 40%, which is a little higher than most folks pay, even with state tax figured in. Furthermore, it just took for granted the fact that there's enough equity in the property to absorb the full amount of excess debt without PMI. Robert Heinlein introduced me to this kind of attitude in Stranger in a Strange Land, calling it "straining at flies and swallowing camels," which is an apt description of what's going on, which is basically theater.

What's really making the calculation work in favor of refinancing is that $50,000 at 12% without deductibility, and assuming a tax bracket higher than most people are in. Even the top federal bracket is 39.6%, so if you live in a state without income tax (quite a few), the article was overstating any possible current benefit. Furthermore, those states without income taxes tax mortgage loans on the basis of size, some of them pretty steeply. I just got an email from someone in one of those states back east, and for a mortgage under $250,000, the state was charging about $7000 in taxes. That's almost a 3% surcharge on the base mortgage, and if you're going to roll it into the balance, you're likely to be paying points up front. You're also paying interest on it basically forever.

Doing the calculation on the basis of pure interest rate calculation, like the manuals teach (I've got an accounting degree) ignores the costs of consumer loans. For corporate transactions, the costs are built into the the interest rate of the obligations. For consumers, this is not the case. You're going to be paying thousands of dollars for the privilege of refinancing - points and fees, and in many states, taxes. As I've made clear in the past, there is ALWAYS a Tradeoff between Rate and Cost in Real Estate Loans, and the standard WACC computations do not include cost of the loan in whether it's worthwhile, only the rate. This makes it seem like the rate with three or four points is necessarily better than the rate with none, when in reality it's likely to take eight to ten years before the lower rate pays for its cost in terms of interest savings. Most people will never keep a given real estate loan that long in their lives.

Now just for a moment, let's give the author of that article everything they're asking for. In order to be able to absorb this debt without PMI, the property has to be worth $625,000 minimum, plus 125% of whatever fees and prepaids get rolled into the balance.

What this means is that I could, without touching that 5.25% first, refinance that second into a 30/15 at around 7.25%, and still get paid half a point yield spread to do a very easy loan that costs the consumer less than $1000 all told. You see, not only do we get a price break for the bigger equity loan, but because it's only 80% Loan to Value Ratio (actually CLTV), and so we get a price break of

$350,000 at 5.25%, 40% aggregate tax bracket, 70% of the loan, =2.205% contribution from this
$150,000 at 7.25%, 40% aggregate tax bracket (on 2/3) 20% of loan = 0.870% contribution
$150,000 at 7.25% non deductible on 1/3 10% of amount =0.725%
2.205%+0.870%+0.725%=3.8% weighted average cost of capital, which essentially ties the projected 3.75% on 6.25% which is 40% deductible, but the lowered cost more than covers the difference in interest - $250 per year - for ten full years, just based upon the difference in closing costs, never mind points or cost of interest on the increased balance.

So why do loan officers push a full refinance when there are better options? Quite simply, they make a lot more on first mortgages than second, so it's in their best interest to make it seem like refinancing a first is in your best interest, even when it clearly is not. Second mortgages are something I'll do for existing clients, but it's not business I chase because I just can't make enough to make it worthwhile, and chances are that a credit union is going to do about as well as I can. First mortgages, however, are a different matter - and not just for me. The projected first mortgage would make me roughly 7 times what that second does, and my margins are low by comparison with the rest of the industry.

Because of facts like this, you need to know enough to think about alternatives like refinancing a second and leaving a low interest rate first untouched. This is also why you need to talk to more than one potential provider, to increase your chance of getting one of them to give you a better way of doing things.

Caveat Emptor

This woman made herself a victim



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



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





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





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





This is not correct. You do sign a 4506 form, but the whole idea behind a stated income loan is that the bank agrees not to verify your income. They verify only that you have a source of income, and the amount you claim you make must be reasonable for someone in your profession. If you can show income via two years of tax returns, that is a full documentation loan, and you get better rates (See this for information on documenting income). However, documenting income via tax returns is tougher because whereas the bank loves doing it, the number they will accept is the number that is after all the write-offs, often a significantly lower number. This is the reason for the stated income loan in the first place. Many business people, particularly small business people, are earning a heck of a good living but they find legal ways to pay for most of it with before tax dollars that they then are actually able to deduct. So they're living as if they make $10,000 per month, which they do, but the tax return only shows $3000 per month. Stated Income is intended to serve this niche, not the niche of people on weekly paychecks who don't really make enough money to justify this loan.





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





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



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



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





I:



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



• Did not tell the truth about my income.



• Took the first loan they offered me.



• Didn't read the fine print.



• Did not fix a budget and stick to it.



• Bought way too much house.



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



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



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



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



Caveat Emptor



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

Reserves

|

Thanks again for the terrific posts. I've learned more about mortgages in the past two months than I ever dreamed I might.

I am looking to buy my first home soon, and have myself in a good credit position to do so. My credit score is over 800 and I have no back-end debt - no car payments, alimony, student loans, etc. My annual salary is well over $100K, and while my down payment will not be as much as I would like, I should be able to put up 20% of the purchase price.

Before I shop for a loan, I have some questions and would appreciate your insight.

1. Do monthly "subscriptions" such as landline phone bill, cable, internet, cell phone, etc. come into consideration? As I have no cell phone and no cable (and don't intend to get them), I see my monthly expenses in this regard as significantly lower than most other borrowers.

2. Do my retirement savings come into play? I have saved conscientiously for several years and between IRA's and pension funds (fully vested) I have a significant amount put away.

Thanks again for the teachings


Gosh, I didn't think a dream client like this existed any more!

In general, there are only three instances when reserves really come into play. They are:

1) Stated Income. Since you are not documenting your income, for a true stated income loan they are looking for evidence that you are living within your means. The measurement that has evolved is six months PITI (Principal Interest Taxes and Insurance) in a form where you can get to it - savings accounts, investments, something. If you have a retirement account, such as a 401, IRA or similar, most lenders will allow you to use a discounted amount, most often 70 percent, as the money would require the payment of taxes and penalties. Roth IRAs may be treated differently, as the rules are different. There is a Stated Income Stated Assets loan programs, but when you get right down to it, those loans look more like heavily propagandized NINA (No Income, No Assets, aka No Ratio loans) than they do a true Stated Income.

2) Payment shock. If your payments are going to be much higher than rent was (or previous payments were), many lenders will require two to three months reserves of PITI payments in reserves.

3) Cash to close. No matter what the loan, the underwriter is going to be looking at the loan to make certain that you have the cash to close, and any reserve requirements are in addition to this. If your loan is going to require a certain amount of cash, either in the form of down payment or loan costs or most often, for prepaid interest or an escrow account, then the underwriter wants to see evidence you've got it. It's no good for the bank for the loan to be approved, the documents printed and signed, the notary paid, and then the loan doesn't close because you didn't really have the cash. Seller paid closing costs are getting to be a really touchy point with many banks, by the way, as they indicate the property may not really be worth the ostensible sales price.

In any of these cases, the underwriter is going to want to see evidence as to where the money came from. They want to know that you've either built it up over time or have had it for quite some time or that you can document where you got it from. What they are looking at with these requirements is the possibility that you got a loan from somewhere that you're going to have to pay back, and the payments on which may mean you no longer qualify under Debt to Income ratio guidelines.

Mind you, it never hurts to have money socked away. But it's not worth any huge amount of contortions to prove. For A paper lenders, the guidelines are razor sharp, and excessive reserves are not a part of them. You've either got the required amount or you don't, and the fact that you have $100 million in investment accounts isn't relevant - and it may cause some underwriters to start wondering why you're not paying for the property in cash or putting more of a down payment (Anytime you give an underwriter more information than required, you run the risk that they will ask you questions about it). Some subprime lenders may approve a loan they would not otherwise have approved, or maybe offer better terms than they might otherwise, but there have been enough adverse experiences with this that it is becoming more rare.

Monthly subscriptions (utilities, etcetera) are why the permissible debt-to-income ratio (DTI) isn't higher. You can cancel cable TV, you can cancel dish network, you can cancel pay per view, you can cancel magazines, although most folks want phone, gas, and electricity. They do not count against your DTI, just payments that you are required to make to keep the accounts on money you have borrowed current. So if you owe the utility company money because you got behind on your payments, that will count, but not the money to keep the utilities current.

Caveat Emptor.


I've been looking around for an answer to this but my searches haven't returned anything useful.

Say you buy a house and with that house you finance in a pool. House was $210,000 and pool is $40k. $250k mortgage. Okay, so two years later (the average!) you decided to refinance. Especially since you didn't get a good deal in the first place because you wanted a new house and to get the incentive you decided it was okay to finance with the company the builder tells you to finance with. Anyway, in those two years the housing market slumps a bit but for the most part after that time your house doesn't loose value. At the same time, the pool does not add value to your house. Comps in the area put your house at $220,000 but you still owe $245k. Is it possible to refinance? Was all the refinance hype only because the markets kept going up? Is this the reason why people who got an bad loan, maybe thinking they could refinance, are going to loose their house because no one will refi a house that isn't worth more than it was when you bought it?

No, the refinancing craze was only partially because values kept going up. Rates kept going down as well. What this combination meant was that not only were better rates coming along all of the time, but that people who were stretching to the utter limit for 100% financing could refinance into more favorable loans as their equity picture improved. If you bought for $180,000, and comparable properties are selling for $360,000 now, that's 50% equity even if you didn't have a down payment. So people who bought for $180,000 were refinancing into single loans without PMI once values hit $225,000. Let's use today's A paper as a comparison. Instead of a first for $144,000 at 6.25% and a second for $36,000 at 9%, with payments of $886.64 and $289.67, even if the rates are absolutely the same and you refinance after 18 months for the $177,000 you owe (paying closing costs out of pocket), when your appraisal says $225,000, that's one loan at 6.25%, with a payment of $1089.82. This cuts $86.49 off the monthly payment, which is how most people think, and cuts your monthly cost of interest by $81, which is how smarter people think. It probably isn't worth refinancing at anything like par for such relatively small savings, but rates were dropping at the same time. This led a lot of unethical agents and loan officers to lead a lot of clients down the primrose path by saying things like "real estate always increases in value," and "You can hold on for a year, right? You'll have equity and we'll be able to refinance you." Lots of folks have a tendency to assume trends of the moment are going to continue.

For the last two years, rates have been slowly climbing. People don't like refinancing when it will raise their rates, and quite often, they can't afford to refinance, even if they have to, if the payment is going to go up. This has caused many lenders to get desperate, and is certainly one of the reasons for the way the negative amortization loan has been pushed. Loan Officers don't get paid unless they are originating new loans this month, and negative amortization loans look wonderful on the surface, when all you know about is the minimum payment. (I'm also working on a post debunking the Weighted Average Cost of Capital scam some lenders are also using to persuade people to refinance out of low rates into high ones).

Furthermore, values have been declining, at least here local to me and in most other major urban areas. The problems this creates are far deeper than the benefits that arise when prices are rising rapidly. When the loans total $500,000 and the property is only worth $420,000, that's a problem. That's a real problem. Lenders do not want to lend more than a property is worth. The highest financing regularly available is 100% of value. The situation I have just illustrated is a 120% financing situation. On a straight refinance, that's not going to happen. Period.

Now before anyone goes too far off the deep end, being upside down is no problem at all if you don't need to sell or refinance. You just keep making the payments and everything is fine. It may be possible that real estate won't eventually return to the pattern of appreciation we've come to expect these last hundred odd years, but that's not the way the smart money is betting. I think that we're going to stabilize very soon and may even start seeing small amounts of appreciation. I was upside down myself for a little while after I bought in 1991. It was no big deal. I just kept making those payments, and the prices came back. By the time I had a reason to refinance, I was back at 80% loan to value. For those people who have sustainable loans, being upside-down is a non-event.

Where it becomes a serious problem is when you've got a non-sustainable loan. Whether it's negative amortization, or something somewhat less hazardous to your financial future such as a 2/28 or something short term interest only, you're looking at a time when refinancing is going to be pretty much mandatory. If you could have afforded the payment it's going to adjust to, you could have had a sustainable loan. But people have a tendency to stretch too far and buy more of a property than they can really afford.

There are some options and potential options if you need to refinance while you're upside down. The one involving the least amount of mental effort is to come up with the difference in cash. Most people don't want to do this even if they have it, but it's an option. Actually, it's a pretty good option.

There second option for refinancing is a 125% equity loan piggybacked onto an 80% first loan. The problem is that the terms on these are ugly. It's not likely to cut your interest rate or your payment, and they are all full recourse loans, where purchase money loans are mostly non-recourse. This won't work for a lot of people, not the least of the reasons for which is that the lenders that were offering these when prices were increasing rapidly have largely withdrawn them from the market now that prices have been decreasing. I can't remember the last time I had a wholesaler offer me one. Still, if you're in trouble it can be on option worth asking your current lender about. If you can't make your payment now and go into default, they lose money. If you can afford the payments on the 80/125 combo loan, and don't go into default, they won't lose money, not to mention they potentially move you from a non-recourse purchase money loan to a full recourse refinance.

In some circumstances, it is conceivable if highly unlikely that the holder of a second trust deed may agree to subordinate their loan to a new first. They're not going to agree if your payment or the loan amount on the new first increases, so you're going to have to pay all closing costs out of pocket. The amount on the new first is also obviously going to be above 80% of value, so you're likely to have PMI on it, but if it gets you from a 2/28 that's adjusted to 9% to a 30 year fixed at 7, it's probably worth doing. If the second goes from sitting behind a $410,000 first at 9% to sitting behind a $410,000 thirty year fixed at 7%, it has become more likely that second loan is going to be repaid in full, where if you default on the first trust deed that second is likely to be completely wiped out. Obviously, the holder of the second would rather not do this - they'd rather be refinanced out of their losing position. But nobody is going to come along and rescue them from their bad decision making if the property is only worth $420,000 and you owe $495,000. If you need to refinance your first in order not to lose the property, the holder of the second can either agree to subordinate, step up to the line themselves and be on the hook for the full amount, or be wiped out completely when the first forecloses.

The next option is the worst of all possible worlds: default and foreclosure. This is something you want to avoid if there's any way around it. Slightly better is a Deed in Lieu of Foreclosure, where you sign the title of the property over to the lender. Lenders may or may not allow this if you're upside down, though. Typically, they want to have at least a little bit of theoretical equity in order to agree to a Deed in Lieu. On the other hand, if they avoid the money that the whole default and foreclosure process costs, they may agree. A Deed in Lieu does hit your ability to get a future real estate loan, although it's not nearly so bad of a hit to that or your general credit as a foreclosure, particularly if you can see it coming and take action before you have a spate of late payments. Most folks won't.

Finally, if you need to refinance and can't, you can get yourself a good listing agent and execute a sale subject to a short payoff. This has potential consequences for your financial situation that start at 1099 love notes and might include a deficiency judgment. This is definitely not something to try "For Sale By Owner" or even with a discount listing agent. You're going to need an on the ball full service agent in order to make it happen, because the lender isn't going to listen to you as the owner, and a discounter is unlikely to be willing and able to devote the time necessary to get the lender to approve it. The big advantage to this is that it doesn't hit your credit nearly so badly as a foreclosure or Deed in Lieu, and if you want another real estate loan sometime in the next decade, you would probably rather do a short sale than go through foreclosure.

None of these situations where you need to refinance a mortgage you can no longer afford, but owe more than the property is worth, is a good situation to be in. But if you take action before you've got late payments or a notice of default, let alone a notice of trustee's sale, you can get away surprisingly little damaged. The worst thing that can happen, will happen if you don't do something to fix an untenable situation before it gets that far.

Caveat Emptor
Copyright 2005-2014 Dan Melson. All Rights Reserved

 



Buy My Science Fiction Novels!
Dan Melson Author Page

The Man From Empire
Man From Empire Cover

A Guardian From Earth
Guardian From Earth Cover

Empire and Earth
Empire and Earth Cover

Dan Melson's San Diego Real Estate and Mortgage Website

↑ Grab this Headline Animator

About this Archive

This page is an archive of entries from June 2007 listed from newest to oldest.

May 2007 is the previous archive.

July 2007 is the next archive.

Find recent content on the main index or look in the archives to find all content.



What I Do

Read My Promise To All My Clients

My Office Contact Information

There are no better agents in San Diego County!

There are no better loan officers in California!

Ask for your free consultation today!

**********
Favorite Loans Available Now

My Listings

Hot Properties!
Email me! danmelson(at)danmelson(dot)com
**********
I want your business!
Unhappy with your loan?
Can't afford your payments?
I can help!
---
Want to buy smart?
Want to sell smart?
I can do it!
---
Bankruptcy?
Foreclosure?
In Default?
Let Me Help!
---
Want to buy properties in distress?
(defaults, foreclosures and REOs)
Ask Me How!
---
Bad Credit?
No Down Payment?
Ask Me What I Can Do!
---
1031 Exchanges
Forward, Reverse, or Partial
I Get It Done!
---
Should I Buy Now?
Should I Sell Now?
Would It Help Me to Refinance?
I'll tell you if the answer is "No"
I'll help you if the answer is "Yes"
---
Contact me:
My Office

Want San Diego MLS?

Here's my office's link to San Diego MLS

Enter your email address:

Delivered by FeedBurner

Subscribe with Bloglines Add to Technorati Favorites

Not in San Diego?

My other site is here
Powered by Movable Type 4.21-en