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.

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



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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

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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!

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!

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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

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