February 2008 Archives

Somebody who's only looked at the specifications for the FHA purchase program will ask me if I'm on drugs. The answer is yes, I have taken my allergy medication today, but there really are ways to purchase a property through the FHA with no down payment, as I have recently discovered.

This is not the same thing as 100% financing. The FHA doesn't do that. The FHA really wants borrowers to have some of their own money invested into the property. In fact, they have supposedly made it very plain they don't like down payment assistance programs and using them can involve additional scrutiny - but the FHA will accept them if they're done right, meaning that some people are able to buy who would not otherwise be able to.

Here's what the legislation says: The FHA will allow the seller to assist the buyer with up to 6% for closing costs only. No seller carrybacks, and no cash back from seller to buyer (which is fraud, anyway). The owner cannot give the seller the down payment.

But the FHA allows up to a 6% gift for the down payment, and this can come from either immediate family members or from non-profit organizations. If your family members, usually parents, can come up with a gift - not loan - to enable the purchase of a property, that is acceptable to the FHA. Non-profit organizations may also do so. Indeed, there are non-profits that make it their primary activity to do so.

Here's the way it works. The owner (seller) of a piece of property agrees to furnish an amount of money equal to the necessary down payment assistance plus a certain small fee, but does not actually send any money until the transaction closes, at which point escrow is given instructions to . The down payment assistance non-profit then advances the money into escrow, with appropriate contingencies. When the transaction funds, escrow sends the money back to the non-profit for use with the next assistance client down the line.

This is just far enough from direct cash back that the FHA will sign off on it, and most lenders doing business with them will as well. Everything has to be disclosed to everyone - if you're ever involved in a transaction where somebody wants to keep some aspect a secret from some other participant, run away before it happens, or disclose it to them yourself. But there is a difference - a registered non-profit third party, and they are advancing actual cash even though they haven't received any yet. Furthermore, the buyer is not getting cash - what they are getting is money to make a down payment with. This changes the transaction enough that the principles that say cash back is fraud no longer apply, because it isn't cash back from the seller to the buyer.

These grants are in no way, shape or form free money. They come with extensive strings attached. They are an effective way to leverage the current market to make purchasing now, while the market is in the favor of buyers, possible, even for someone who may not have a down payment. Nor do they require repayment.

Why would an owner agree to do this? Two reasons: Price and saleability. First of all, owners who are willing and able to do this have the capability of selling to buyers that other owners do not. This makes the property unique in a way, and provides negotiating leverage because most owners are not willing and able to do this. Instead of eighty properties, a given prospective buyer may only have a choice of three properties. Now their property only has to compete against two others, and those others might not be suitable. The result is quite possibly that a given buyer does business with you or with nobody at all. Now they don't really have the opportunity of walking away from your property. You think maybe a competent listing agent could get significantly more money out of the buyer in such circumstances?

Furthermore, the price the owners might be willing to accept obviously gets raised. If they might accept $400,000 without one of these programs involved, but they have to furnish 3% for closing costs plus 3% for a down payment and $500 for a fee to the non-profit, they need $426,100 just to get the same gross revenue. When you consider that they're paying commissions based upon the higher number. At 6% total agency commissions, that adds over $1500 to what the owners are paying in commission, plus about $60 for owner's title insurance, $30 in lender's title insurance, and roughly $30 extra for each side for escrow, in this case. Your point of equivalence between this prospective buyer is about $427,700, as opposed to a generic buyer at $400,000, but it's very possible to get more than a breakeven amount - not to mention selling the property, where you wouldn't have otherwise.

I have to mention appraisal issues.. It doesn't help if the appraisal is below the purchase price, particularly for high value financing. However, this is one area where the factors working to push everybody towards the FHA loan also work in your favor, because due to the decline in prices that has the lenders in full on PANIC! mode, appraisals are generally fairly easy to justify above the purchase price. I've had to ask them if they could hold the value down a couple of times of late. I don't remember the last time an appraisal didn't come back with plenty of value on a purchase.

Another note is that it doesn't necessarily have to be an FHA loan to work with one of these programs, but the fact that the FHA is willing to work with these programs takes away a lot of lender anxiety, because the FHA guarantee is the only thing that has lenders willing to go 97% loan to value ratio at all in most of the country. Once the FHA signs off on the whole transaction, that guarantee eases lender fear, because otherwise the lenders are stopping at 95% or less. So it's going to be a rare lender that agrees to all of this without the FHA being involved.

Finally, it should be obvious that buyers would be better off to come up with a down payment themselves, rather than pay the higher price, especially as we're specifically considering a loan for 97% of value. The higher property taxes, the higher purchase price, and definitely the higher loan amount are all going to be something you have to deal with for basically the rest of your life. The seller gets their money, where it all comes out in the wash, and goes their merry way. The buyer is paying a higher price, more taxes, increased cost of money, has to deal with a higher loan to value ratio if they need to refinance, and will net less money if and when they go to sell. In the example given, I'd much rather come up with $12,000 cash for a down payment than have to deal with a purchase price $15,000 higher (remember it was 3% closing costs plus 3% to the down payment program, so half of $30,000), pay an extra $200 per year in property taxes, an extra $900 per year interest, and end up with $15,000 less money in my pocket if and when I sold. Wouldn't you? But none of this takes place in a vacuum, and if you wait until you can save that $12,000, the conditions at purchase are very likely to be even worse - because right now the market is in the tank, and buyers have more power and properties are likely to be more affordable than they ever will be again. If you can save $500 per month, by the time you are ready to buy it will be two years in the future, and I'm expecting the prices of properties selling for $400,000 now to be significantly higher than $415,000.

Caveat Emptor

General: La Mesa, 3 Bedroom, 1 Bathroom

Con:

What's Wrong With It: There is currently only one bathroom. There are no grassy areas.

Why It Hasn't Sold: Most people want two bathrooms already installed.

Who it's Not Appropriate For: People who need a lot of lawn. People with very young children.

Pro:

Selling Points: Hardwood floors and lots of light throughout! Kitchen is clean, bright, and very usable! California room and pool for entertaining on hot summer days! Private sauna! Very close to elementary school, park, and little league field.

Who Should be Interested: Families with children, particularly if they're older than about five. People who like to have other people over. People who like swimming pools.

Why it's a Bargain: because it doesn't yet have the second bathroom, but it does have an obvious place to put it.

Financial:

What I think I can get it for: $320,000.

Monthly Payment examples: I've currently got a thirty year fixed rate loan available for qualified buyers at 6%% without points!

With no down payment: VA 30 year fixed rate loan at 6% no points (FHA 97% financing) payment $1919, (APR 6.073)

With 20% down: Fully amortized payment of $1535 (APR 6.073).

Other financing options are available, potentially lowering the payments, but I'm quoting real loans that real people can get, that will stay exactly the same until you pay it off.

Investment potential: If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $320,000 the property would be worth approximately $520,000. If you held it those ten years before selling, you would net about $250,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $1700 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $190,000 ahead of the renter, after the expenses of selling.

To learn more: Agree that you'll use me as a buyer's agent if you buy it. If you don't like it or don't buy it, no obligation is incurred. If you're not working with someone who will go out and find properties like this, maybe you should consider working with me instead!

Contact Information:

Dan Melson, Buyer's Agent
Action Realty Inc
9143 Mission Gorge Road, Suite A
Santee, CA 92071
619-449-0723 X 116

The Best Loans Right NOW

5.875% 30 Year fixed rate loan, with one total point to the consumer and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2366, APR 6.011! 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 percent even!

Best 5/1 ARM: 4.875% with 0.8 total points and no prepayment penalty. Assuming $400,000 loan, payment $2117, APR 4.985. This is a loan where the rate is fixed for five years, and the payment pays your balance down! With rates on hybrid ARMs having dropped of late, they are once again something for people to consider. You can have a 5/1 ARM at a lower rate for no points than you can a 30 year fixed rate loan for two points! 5/1 ARMs as low as 4.00 percent!

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

Great Rates on jumbo and super-jumbo loans also available!

Zero closing costs loans also available!

Yes, I still have 100% financing and stated income loans!

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 any of the above loans!

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

I am an adamant believer in the Non-exclusive Buyer's Agency Agreement. In practical terms, as opposed to the Exclusive Buyer's Agency Agreement, it is so much to the advantage of the consumer that it isn't funny, and it doesn't usually hurt good agents. On the other hand, the proponents have one argument going for them that I do respect, having experienced it more than once. I start a client on the searching process. I explain it's going to take looking at a minimum of 12 to 15 properties before they know what the market is really like in their area in their price range. I find a whole bunch of properties, and start taking them to a few. I offer rational, real world comparisons of their comparative virtues. Ask about what they liked versus what they didn't, what they could live with and what they couldn't. And then, in between, one or both partners gets a wild hair about going to view another property. I've explained what their price range is, but they either don't realize it's out of their range or don't care. They just want to see what it's like. And because the property is out of their price range, it's going to be a more desirable property - that's why it costs more money!

So they go out, and after my careful work of making sure to stay within their budget, on a sustainable loan they can afford, this other agent shows them what, by comparison, is the property of their dreams and says they can buy it!, and he knows where they can get the loan! If this sounds familiar, it happens a lot. "Dan was showing us such ratty properties by comparison! This guy is showing us beautiful stuff we love! Let's buy one!" and the first I find out about it is they tell me they're in escrow on someone else's property, and of course they've applied for a negative amortization loan done stated income.

Most people buy based upon emotion. If you want to make one change in the value of your financial future, learn how to take emotion out of your decision-making process, especially on anything big enough to require payments. Once people have emotionally convinced themselves that they deserve this property, my rational analysis of the situation doesn't have a snowball's chance in July of talking them out of it. I know this very well. I could stamp out buyer's transactions at the rate of three or four per week by showing clients two or three ratty fixers within their budget and then moving in for the kill by showing one immaculate property in ready to move in condition for thirty percent more. But I'd have problems shaving without looking in the mirror, and I need to shave every day that I work. The reason that wasn't within their budget is that they cannot afford the payments, or they cannot afford the real payments.

And that's why there is money in fixers. It's all very well for people to say they are interested in the $400,000 fixer that fits within their budget and that they can fix it up and sell. Particularly first time homeowners, particularly young married couples, and especially if they have children, show them the $600,000 move in ready and they will bite almost every time, budget buster or not. Put all three factors together and not all of the wisest people in history together could talk them out of it.

So the smart operator offers $350,000 for the fixer that's been on the market for four months, spends $40,000 on upgrades like carpet and modernizing the kitchen or adding one more bedroom and bathroom, and turns around and sells for $620,000, of which she keeps approximately $186,000 in profit. If the buyer needs them to pay some closing cost in order to make the transaction happen, she still makes $175,000 for a few months work. Not bad, eh?

Now the average couple don't have $40,000 to upgrade the property immediately. I don't know the last time I saw or heard of a first time buyer who wanted to put a downpayment. Most potential buyers right now don't have anything significant they could put down if they wanted to. But if they buy that fixer, they have a lot more room on their monthly budget and as much time as they want. At 6% interest rate and California standard property tax rates, the $620,000 loan has a payment of $3717, plus $646 in property taxes. The lesser property, even if they buy for $400,000, the payment is $2398 and the taxes are $417. I know that it's smarter to split the loan into two, but work with me for the sake of simplification. So the already fixed property costs $4363 per month, while the fix it themselves costs $2815. That's over $1500 per month difference they have to put towards fixing it up. In two years, they've got the $40,000 from that $1500 per month alone. This is leaving aside the issue that the rate on the bigger loan isn't going to be as low. They can concentrate on the most important updates. Sure, it's a pain. That's why buyers are willing to pay $620,000 for the ready to move in property. Actually, they'll line up to pay $620,000 for the more attractive property. It's just the way things are. And they get done with their two year project, and now it's worth every bit as much as the property that was worth $620,000 to start with. At 5% for two years, that's $683,000. If they sell, that's approximately $235,000 in their pockets (tax exempt in most cases) instead of in the professional fixer's. If they bought the move in ready property and then sold, they'd net about $15,000 by the same calculations.

Now most properties, even fixers, won't generate quite this kind of quick windfall. But that is a real example I encountered not long ago. Moral of the story: fix it yourself if you can. By isolating off the emotional appeal, you've made yourself - or saved yourself - a lot of money. And the reason there is money in fixers is because most people won't do this, instead convincing themselves that they're good people and they deserve this beautiful property. But if you deserve the beautiful property, you also deserve the huge cost, and the huge payments to maintain it, and you definitely don't deserve all the profit that the folks who buy the first kind of property make from the sale.

Caveat Emptor

Every so often, someone who thinks they're a wit sends me a copy of The Rules For Relationships According To Women. Unlike those rules, which might have been funny around the time Nefertiti was a debutante, these rules are real and they are not based upon caprice.

Very recently, I was walking through a grocery store parking lot and heard someone screaming on their cell phone, "It wasn't my fault! The broker told me not to make that payment, and then they didn't pay the loan off on time!" Which leads me to Rule Number One: It is YOUR responsibility to make all payments on time. Nobody else. Your name is on that contract, not theirs. Under text that says essentially, "I agree to repay this loan on these terms." When you are in the process of refinancing, make it a point of paying that mortgage on time and in full. The worst thing that will happen is that you will get a check back a couple weeks later. Whereas if you blow the payment off, you are taking the risk, as happened to this person, that some incompetent person doing your new loan will not get the loan done in time to make the payment date. On the sixteenth, there's a penalty due. On the thirty-first day, it hits your credit, where it can conceivably make a difference of 150 points. And if the lender is getting ready to fund the loan the next day and runs your credit then and sees your drop, the terms of your loan just got worse, if they can fund the loan at all. It is the mark of a bad loan officer to tell you not to make your payments. A good one will specifically tell you to continue to make payments on time. I haven't blown a rate lock in a very long time, but there's always the possibility it might happen and the loan takes longer than I think it will. Don't let it happen to you. Make your payments on time, whatever you're doing.

Corollary to Rule Number One: You are responsible for getting it to them. All of this nice convenient stuff about mailing a check or sending the payment online is quite a convenience, but they do not legally have to do it. Your grandparents had to walk the check (or the money) in every month. You can still do this if your lender has branches and you suddenly remember on the 15th that you forgot to make your mortgage payment. Many lenders are very forgiving about this. But they don't have to be,

If that payment doesn't get made on time, it is your fault. End of discussion. If you mailed it off on time and it got lost in the mail, you are the one that owes the penalty. If you transferred the money online, and it somehow doesn't get credited to the right account, it is your fault. These don't happen often, but they do happen. The lenders are actually pretty forgiving about it, provided you can convince them that the payment was made. You have a receipt, a canceled check, something that says you made the payment in full and on time. If you're good enough about paying on time, sending the check on the first even though it's not officially late until the 16th, they're pretty forgiving about checks that get lost. On the other hand, if you are always paying on the last possible day, the lender is going to regard that late fee as the least they are due. While you are at it, always include something with your account number on it when you send the money. Write it on the check, include a coupon, put it in comments. Otherwise the lender could conceivably end up misapplying the funds of the check, especially if they figure to use the address on the check, and you're making a payment on another property. Most of the time they do get it right. But if they don't, it's your fault. If they get the payment with all of the necessary information and misapply it, that's their fault. If they didn't get it, on time or at all, or missing some important information, it's your fault.

There is no rule two, at least that I can think of right now. There is only one rule, but you violate it at your extreme disadvantage.

Caveat Emptor

This is a temporary program, launched by President Bush and Congress a few months ago. Its goal is to prevent as many homeowners as is reasonable from losing their homes through foreclosure. It won't help you if you bought a property that was far beyond your real means, but it is likely to help a lot if didn't stretch very much.

In order to qualify for FHA secure, you need to have a non FHA ARM that has "reset," which is lender talk for "passed the end of the fixed period, if there was one." FHA Secure probably isn't going to help you anyway if you already have a fixed rate mortgage. The limit on the loan is the current conforming limit, which is $417,000 nationwide (except Alaska and Hawaii) as I type this. We're expecting information in the next few weeks that details how big the loans the FHA will actually insure in a given area are likely to be due to Congress mandating raising their loan limit. Them being a government agency, they have to do what Congress says, but it does take time to implement these things.

FHA Secure mortgages are not like those "free magazine - take one!" offers. You do have to qualify for the mortgage under the normal FHA rules. This means full documentation of income on a fully amortizing loan with a debt to income ratio of 41% in the textbook case. They also have Loan to Value limits of 97.15%

The ONLY "normal" mortgage qualification that the FHA Secure is willing to overlook is whether you were current on your loan after it hit the adjustable period. You must have been current on your existing mortgage for six months before it hit the adjustable period, but if you made late payments or no payments after the loan hit the adjustable period, FHA is willing to waive the usual requirements to have your loan current. They're even willing to consider your loan if you are currently in default.

Another way that FHA Secure mortgages are different from most FHA mortgages is that there is no CLTV limit, and the FHA will allow secondary financing for FHA Secure loans. The primary form this takes is second mortgages carried by previous lenders for amounts over the FHA limits, either in terms of Loan to Value or absolute dollar value. Be aware that in some states, this is going to change your loan from a non-recourse loan into a full recourse loan.The protections given by non-recourse loans are generally over-rated, but it's something you should be aware of. Since the FHA normally funds up to 97% Loan to Value ratio, and conventional lenders and second mortgage holders don't want to go that high right now, they are not going to agree to fund the difference unless they understand the choice they have is between funding the difference and going straight into foreclosure. For example, let's say you've got a $500,000 loan on a property that you purchased for $500,000 with 100% financing on an interest only 2/28. You still owe $500,000, but the property may only be worth $440,000, and the FHA will only fund to $417,000 until the new limits are implemented. This leaves $83,000 (at a minimum) that the new loan is short. If the prior lender can be convinced that it's a choice between write a loan contract for that $83,000 and go straight to foreclosure, where they'll lose a lot more than $83,000, they may agree to carry that second mortgage. Of course, they also may not. It's their money and their choice, and there's no way to compel them if they won't listen to logic.

FHA Secure is otherwise similar to "regular" FHA loans, and it's not free. There's a funding fee of 1.5% charged up front, and an annualized half a percent charged on a monthly basis. The FHA's "Naughty List" also applies.

FHA Secure is not any kind of a cure-all. You do have to qualify for it as regards both Debt to Income Ratio and Loan to Value Ratio. If you stretched way too far beyond your real means - as evidenced by income documentable by tax returns and W-2 forms - this program is not going to help you. If you were late on your mortgage even before it hit reset, this program is not going to help you. If you're a member of that group that's always with us, people who have lost their jobs, careers, or otherwise seen a decline in income, it may not help you even if you originally qualified full documentation. It's also not going to help you if your loan was for $900,000, which is way over any FHA limit currently being contemplated. But if you're a middle class borrower who only stretched a little, figured you'd be okay with a hybrid ARM because of it, and now you're not, this may be the program that saves you.

Caveat Emptor

I want to state that I am in no way shape or form an FHA loan guru. I haven't done an FHA loan in years. But with the new developments in the market rapidly transforming FHA loans into being the most likely savior of the market, I invested in a class to learn some more about them. Between my general knowledge of loans and this information from someone who is an FHA guru, I think I can make some sense on the subject. Besides, one of the best ways to understand something better is trying to explain it to someone else.

FHA will guarantee loans up to 97% of the purchase value, not 100%. This means that you do need a minimum of 3% down from some source. The FHA will allow seller paid closing costs only of up of 6%, and the really cute thing is that they will also allow the down payment component to be a gift from family members or non-profits (provided they are not otherwise involved in the transaction), which opens up some interesting possibilities I'll write more about in another article. FHA loans can also be interfaced with some types of locally based first time buyer programs, although whether there is money in the budget at the time you apply for those programs is subject to funding, which usually goes quickly.

The first thing you need to understand about FHA loans is that they are intended to enable people to transition from renting to ownership of a primary residence. They are not intended to help anyone grow a real estate empire. For this reason, they will not work with investment property except in the case of non-profits. Second homes are only allowed where you already own a home elsewhere and can show an employment related need. Vacation homes are not allowed.

Refinancing is possible for existing FHA loans, up to a maximum of 85% 95% (see Mortgagee Letter 2005-43) loan to value ratio, provided it was purchased via FHA owner occupied loan. The only exception allowing FHA refinance of non FHA loans is the FHA Secure plan, which I'll write about in another article. There is no prepayment penalty on FHA loans, and they can be refinanced into conventional loans anytime you can qualify for conventional financing. Most folks do refinance FHA loans into a conventional conforming loans as soon as they can, because FHA rates aren't as good as conforming and conforming loans don't carry financing insurance. It's something to be decided on a case by case basis, on the basis of what is best for a given homeowner.

I did say conforming loans. FHA has loan limits which has mostly precluded them being a big player in most areas for the past several years. With the decrease in housing prices that has hit many areas and new legislation raising the conforming and FHA loan limits (which we're still waiting for hard numbers on), they are likely to be what saves the market as traditional lenders are seemingly more fearful of high loan to value ratio loans every day. Truthfully, I anticipate FHA loans as being what saves the bacon of traditional lenders and provides the upwards impetus to the market that will cause traditional lenders' fears to ease and relax their restrictions.

With loan limits preventing them from lending upon most single family residences these past few years, you'd think FHA would be friendlier to condominiums. Unfortunately, government bureaucracy being what it is, condos have to be approved by the FHA before they will fund loans upon them. Since relatively few developers care to do that, that means that most developments don't have blanket approval from the FHA.

Just because the FHA hasn't issued blanket approval to a condominium development doesn't mean that you can't get spot approval, however. The requirements, in addition to the usual ones, are no ongoing class action suits open or pending, and 60% or more owner occupancy for the complex. This last tends to be the most difficult requirement, as it's a little unusual that a particular complex has 60% owner occupancy.

Like all government programs, FHA loans require full documentation of sufficient income to afford the loan. No stated income or lesser loans will be funded. This is another reason they've been unpopular in recent years, as mortgage products for those with eyes bigger than their wallets proliferated, and agents and loan officers became accustomed to qualifying people for properties and loans far beyond their means. Now that that's all over and we're back to solid fundamentals as far as loan qualification, you can decide to stay within the budget for a loan you can prove you can afford, you can put a significantly larger down payment on the property to qualify for conventional financing, or you can do without buying any property at all. But FHA does not do stated income loans.

Matter of fact, the FHA doesn't do "interest only" financing, either. All FHA loans are fully amortized. However, the FHA does accept some hybrid ARMs as well as fixed rate financing. But no interest only, no stated income, no negative amortization. You must qualify for an FHA loan based upon the fully amortized payment and full documentation of income only, which eliminates most of the ways that people were being qualified for loans beyond their means in recent years, and is one more reason why the FHA has not been a major provider of loans in recent years.

Allowable debt to income ratios are 29% 31% front end and 41% 43% back end, according to the written guidelines. However, the 29% front end can be gotten around and the 41% can be subject to increase in the case of strong credit , high reserves, or a stable job. For instance, owner of a stable business of long standing. Nobody fires owners. Large amounts of money in retirement accounts is one that the instructor specifically mentioned as being a possible reason to get the debt to income ratio increased. The range of 45-49% is supposed to be reasonably possible to get the FHA to approve. Beyond that, exceptions are fewer and significantly harder to get.

There is no requirement for reserves with an FHA loan at all. With that said, however, having reserves can be a major point in your favor, particularly above 41% back end ratio. People with hundreds of thousands of dollars in retirement accounts that they could fall back upon if they had to is something the FHA will consider while traditional lenders would not. They'll even allow non-monetary reserves, the example given being a collector of old motorcycles which could be sold. Jewelry, automobiles, and other non-liquid assets may be considered. Of course, it's a very good idea to source and season every dollar you're using to justify the transaction, but the FHA has even been known to accept "mattress money" for down payments (not generally reserves), which is unheard of in other loans.

Here's the really cool part about an FHA loan: It's not FICO driven. You don't even have to have a credit score in order to be approved. With that said, however, I'm told that below a 600 credit score things do get tougher to get approved, and below the equivalent of about a 575 it's not likely to be approved. You can also use alternative credit , of which utility bills are probably the best example. Especially in some cultures, credit can be a thing that people aren't accustomed to having or using, so these capabilities are very helpful. You don't even have to be a citizen, but you do have to have the right to work in the United States.

Prior bankruptcy is allowable. Chapter 7 with two years of seasoning and re-established credit, chapter 13 with one year payment history and court approval.

Even prior foreclosure is not an automatic disqualification from an FHA loan. They will, however, require documentation of extenuating circumstances such as major illness. Job transfer is explicitly disallowed as an acceptable extenuating circumstance, so people who walk away from properties thinking they're going to get an FHA loan are going to be disappointed. What the FHA really seems to be looking for is debilitating illness, either one which you personally went through, or one where you had to care for an immediate family member.

For how easy they are to work with for individuals, however, loan providers find themselves with many additional requirements, which is yet another reason FHA loans have been less popular of late. In addition to everything else, in order to originate FHA loans, originators have got to go though an annual audit with an accountant who's specially certified FHA auditor. This audit costs a minimum of about $5000 just for the auditor, never mind the cost of the originator's own time or that of anyone else they may have to pay. The FHA does not permit an agent to hang their license with one broker for real estate and another for loans, either. If your broker does both, however, it may be permitted. The extensive paperwork means fewer providers - especially discount providers - are interested due to the increased costs, which drives things exactly opposite to what you'd expect the government to want - it drives prices of FHA loans up, by restricting the supply of those willing to do them. It is hoped by many that FHA modernization will change some aspects of this, but that has been stalled in Congress for over a year. It's pointless to speculate as to what will and will not be included in FHA modernization until Congress sends an actual bill to the president.

One thing not likely to change is the FHA's blacklist. It's not called that, but that's what it is. Once a real estate agent or loan provider is on their list, they are on it for life, and the FHA scrutinizes all transactions for anybody affiliated with it being on their "no way" list. If someone should default on an FHA loan, the insurer is going to look for a reason not to pay the guarantee, which insures that every FHA foreclosure gets scrutinized for fraud and a number of other offenses. If the agent or loan officer was involved in such an offense, onto The List they go, and they are forever barred from transactions involving an FHA loan. For this reason, it's probably a good idea for consumers to ask about this in their first meeting with a prospective loan officer or real estate agent - on the phone would be better. Just say that you're going to be needing an FHA loan, so if they're on the FHA's "naughty" list, they might as well tell you now, because they're going to be wasting their time. If they try and talk you out of an FHA loan, well, that should tell you everything you need to know. FHA loans are superior to anything that isn't conforming A paper, and if you haven't got the qualifications for that, FHA beats A minus, beats Alt A, and beats subprime like a drum (OK, so the VA is a better deal than FHA as well).

The FHA does not normally permit secondary financing, either in the form of second trust deeds or seller carrybacks. The one exception to this is in the FHA Secure program, which will have to be another article.

One final thing: FHA loans aren't free. There is an upfront cost of 1.5 points to fund the loan. This is over and above all other loan related fees. This pays for an insurance policy that insures the lender against loss, much like private mortgage insurance on conventional loans. In addition, there's an annualized cost of half a percent on top of principal, interest, taxes, insurance, etcetera - and this is included in debt to income ratio calculations. This will continue until the loan to value ratio is 78% or less, and if the loan period is over 15 years, cannot be removed for five years. If the loan period is 15 years or less and the loan to value ratio is initially less than 90%, there will be no continuing (i.e. the annual component) mortgage insurance charged, but the only way to elude the 1.5 point initial charge is by having a loan to value ratio of 80% or less. Since in any of these cases, it's overwhelmingly likely there will be better choices available to the consumer, essentially all FHA loans are going to have this financing insurance. The continuing cost is one of the main reasons people refinance to non-FHA mortgages, incidentally.

With lenders becoming increasingly fearful about the state of the market (far too late to avoid damage), FHA loans are an excellent way to qualify someone for financing that's at least close to 100%, and legal avenues do exist that can enable FHA financing to be essentially 100% financing. Given the state of the housing market, particularly the starter market, and the recently passed legislation which will enable FHA limits to be raised, the FHA loan is likely to be a very powerful force for market stabilization, leading to market recovery. It's a good alternative for consumers who cannot currently qualify for conventional loan financing.

Caveat Emptor

If a home for sale has a refrigerator included on the listing report, and the buyer's agent does not write that it goes to the seller in a contract, is the buyer actually entitled to the refrigerator. I am actually going through this right now.

The listing does not matter. What does the purchase contract say? That is the complete controlling fact of the whole entire transaction.

If the contract is silent, what matters most is whether the refrigerator in question is appurtenant to the land or not. Appurtenances are things which are physically and structurally attached to the land which is always the primary thing being sold in a real estate transaction. For a standard house, nobody would seriously argue that they have the right to remove it, because it is attached securely to the property. There are service pipes coming out of the ground attached to the ground and a foundation it is attached to. There are electrical service wires, telephone wires, and cable TV wires. All of which would come up if you pulled the house away. So the house is appurtenant to the land. This is how all real estate transactions are really structured, by the way. You are buying the land, and the house, if there is one, comes along because it's attached to that land.

So if the refrigerator is somehow built in, such that removal would be a nontrivial project, then it's appurtenant to the land. If all you have to do us unplug it and push it away on a dolly, that's not appurtenant, and there is no more reason why they should have to leave that than why they should have to leave their dog, cat, or child.

Now this is not to say that you can't build an excellent court case based upon the fact that there was an implicit promise made in the listing, and everything else in the contract was built off of what that listing said. Talk to an attorney for more information than I can ever give you on that score.

Even if they're not obligated, the seller might leave the refrigerator anyway. Maybe they've got another, maybe they are just living up to what they promised even though they might not be legally required to do so. Most people are mostly honorable.

In any of these cases, of course, the seller also can force you to go to court by being an obstinate donkey. It's not like you have the magic power of enforcing agreements. That power belongs solely to the executive branch, which will take no action in cases like this without a court order. Whatever the court says is final. Unless it's some $25,000 wonder fridge, however, it is not likely to be worth going to court over. Much cheaper to buy a new refrigerator, and your expected return on investment is much higher.

Caveat Emptor

I just moved into a rental house with an option to buy. I figure I can probably save up around $40-45k for a down payment in three years. how should i save? The Roth IRA tax loophole for first time home buyers maxes out at $10k and takes 5 years anyway. It sounds dumb, but the best safe short term investment I can think of is savings bonds. There has to be something better!

Your major constraints here are a relatively short time frame and you want a certain amount of safety. The idea of investing the money is that you want to get more money, not lose your investment savings.

So if you're going to move outside the realm of guaranteed investments for this purpose, you are going to worship at the altar of diversification. Stocks generally go up, but can go down (roughly 28 percent of all years since records have been kept), and indeed, are not anything like a panacea. Therefore, if you're going to risk the stock market or the bond market in order to obtain their higher returns, you're going to want to diversify, diversify, diversify in order to prevent anything short of a general market decline from ruining your investment.

With that firmly in mind, individual stocks are probably not a good idea. If successful, the idea is that the income will be mostly capital gains, which are taxes at a lower rate. Unfortunately for this idea, it's hard to get an efficient and diversified individual stock investment for less than $100k. At $100,000, you've got a down payment to be extremely proud of.

The same with individual bonds to an even greater extent. When most bonds run in $10,000 to $50,000 denominations, diversifying is not really an option when you're just trying to save up for a down payment. If one of them suffered a significant downgrade, your price would take a hit.

Next on the list is government savings bonds and bank CDs. These offer a guaranteed return. The problems are that it's a mediocre return at best, and it's all ordinary income. Still, 5.5% or so for bank CDs is safe and secure, even if it reduces to about 4% after taxes. US Treasury securities have a four year minimum holding period to get their guarantee. Me? I stopped loaning the government money twenty years ago.

All of the various insurance products are a bad idea. You're saving for something you want within five years, not something forty years away or trying to insure a possible loss. Nor does the tax treatment help. Secure commodities investment is one of those oxymorons like plastic glass.

Finally, there are mutual funds. These are diversified by their very nature. In fact, my usual complaint is that they are too diversified, but in this case, that's actually good. Pick a good fund family that covers all of the major asset classes, including bonds. Yes, you pay management fees (and advisement fees or a sales load if you are smart, to help keep you from over-reacting to short term market events), but you can average nine to 13 percent per year, pretax, seven to ten afterward. A large portion of gains will be capital gains, taxed at lower rates than ordinary income. This isn't a certain or guaranteed investment, and can lose some of your principal, even all of it in theory. Nonetheless if you're comfortable taking what is in my estimation a small amount of risk, it can really pay off.

Caveat Emptor

Yesterday I dealt with a very disturbing phone call from a would be client. He was very happy with the way I found bargain properties, and wanted me to find him such a property. All very well and good. But he said that a condition of the transaction had to be that he would receive cash back from the seller in order to rehabilitate the property while financing the entire amount. This is not so good.

I am well aware there are all kinds of self-proclaimed real estate gurus out there, many of whom push precisely this sort of strategy. That does not change the fact that it is *FRAUD*.

The lender evaluates a property based upon accounting principles, which is to say Lesser of Cost or Market. Whichever is less, the cost of the property or the market value. Market value is measured by the appraisal. It's not perfect, and it's not foolproof, but it's the best thing there is. Cost is measured by purchase price - the price at which a willing buyer and a willing seller exchanged the property. It has to be worth that much or the buyer would not have been willing to pay it, would they? It can't be worth more or the seller wouldn't have sold, would they?

Manipulating either purchase price or appraised value for financial purposes such as justifying a higher loan amount is fraud. Since there is no other rational reason to do that, it's pretty universal that manipulating appraisal value or purchase price is fraud.

Many people have all kinds of rationalizations why doing this sort of thing is permissible. "Real Estate goes up in value," "It'll be worth that much eventually," and "It'll be worth that after the renovations!" being very common. None of these addresses that fact that that's not the situation now, and the lender is lending based upon the value now, not later.

The purchase price, in particular, is the purchase price because that it how much money the buyer is paying and how much money the seller is receiving. But if the purchase price is $400,000 but the seller is returning $20,000 to the buyer, then the real purchase price is not $400,000, is it? The seller is only getting $380,000, and the buyer is only paying $380,000. If it was a cash transaction with no loan involved, there would be no doubt. If I hand you $400,000 and you hand me back $20,000, I've only given you $380,000, not $400,000, and there's no doubt about it. You've only got $380,000. Only the fact that there is a lender in the middle of most transactions gives any leeway to confuse the issue, and if you're hiding something about a transaction in order to induce some other party to perform a financial action they would not otherwise, that is a textbook definition of fraud.

Lest there be any mistake, you do have to hide it. If the terms of the purchase contract state that there will be this rebate, the lender will treat the purchase price as $380,000, and underwrite the loan based upon a $380,000 purchase price. Telling the entire truth defeats the possibility of it working, and once you have neglected to inform the lender of this significant fact, you are committing fraud.

Some people will cite the example of Seller Paid Closing Costs as justification for this, but that is an entirely different matter. Indeed, traditionally lenders treated seller paid closing costs, over and above the seller's usual share, as reducing the purchase price. It is only the last few years, when it has been pointed out that everything about real estate transactions is negotiable, and that the seller must have been willing to pay those costs in order to consummate that transaction, that the lenders began to allow it. But it is to be noted that all of that money is going to third parties, people who are being paid for their services in making the transaction happen, none back from the seller to the buyer.

Consider instead this scenario: Jim and Joe trade the stock of corporation A. The public sale price of that stock is $100 per share, but as soon as Jim has Joe's money, he quietly hands Joe back $20. The price Joe is paying Jim for the stock is $80, but to the observer unaware of the side transaction, it's $100. It's going to appear to the general public that both Jim and Joe consider that to be a fair trading price, and people will often be willing to pay both Joe and Jim that $100 per share price because it looks like that's the price, or think they're really "getting a deal" if Joe or Jim will sell to them for $98.

Now lest we be unclear, as soon as the side transaction comes to light, the SEC and FBI are going to sweep in and both Joe and Jim are going to find themselves charged with share price manipulation, which is to say, fraud.

The situation I've described as defrauding the lender in this instance is no different at the root. You are hiding a part of the transaction in order to induce the lender to give you a larger loan than they otherwise would have.

Now, before I leave this subject, I want to ask you what kind of an agent or loan officer you'd trust to commit fraud upon someone? When such activities are discovered, such agents and loan officers lose their license and usually go to jail. Do you want to do business with a loan officer or real estate agent who commits fraud? Who deserves to lose their license and go to jail? If they're willing to lie and commit fraud upon one part of the transaction at the lender's expense, why would they be unwilling to lie and commit fraud at someone else's expense? For instance, yours? If I were to point out some agent or loan officer who is under indictment for fraud, and is going to lose their license and go to jail as soon as the verdict comes back, I'm sure you'd all go right out and book a transaction in a hurry with them right now, right?

Now this would-be client quickly lost interest when I explained all of the above. He said, "I'll get back to you on the property!" and hung up. He'll find someone to help him out, no doubt about it. But that's one transaction a good professional wants no part of. I'm better off without him.

Caveat Emptor

FYI, I attended a class on FHA mortgages, FHA Secure and down payment assistance programs this morning. I'll probably have two or possibly three articles in the next week or so. In the meantime, if I can help with a loan in California, please Contact me.

We still do not have hard numbers on what the new FHA and conforming loan limits will be. Nobody does. I've heard estimates that say anywhere from another week to another eight weeks before all of that information is available. In the meantime, I must point out that, as I said in Conforming Loan Limits and the Economic Stimulus Package, the enabling legislation says that the limit can be up to 125% of the median sales value in your MSA most recent information here in pdf), up to a limit of $729,750. In other words, it will not be more, but it very well could be less. Nobody knows until Fannie and Freddie, and the FHA separately, publish their new guidelines. There is no safe harbor guess, no matter where you live, and all speculation will do in advance of publication of the actual numbers is get people mad or disappointed when the actual numbers hit.

If you live in California and want some strategies that make sense for you in a purchase or loan, Contact me. Otherwise, we all need to wait for official announcements from Fannie, Freddie, and the FHA, and I am planning at least two articles out of this morning's information.

Rates move up and down constantly. This is one of the strongest reasons both Intelligent consumers and intelligent loan officers love zero cost loans. Every time rates drop, I call or send an e-mail to those clients who signed up for low cost loans since the last time rates dropped this low, and voila, I'm saving them money for basically nothing.

A streamline refinance is a refinance where there is no cash out by Fannie and Freddie's definition. The rate must be lower, the payment must be lower, and the equity situation must qualify for at least the same program the borrowers had last time. If you roll the expenses into the balance cannot be higher than what was approved last time. Most streamline refinances are with the same lender, but there are a very few lenders who will or have in the past allowed streamline refinancing of another lender's loan.

Here's how and why it works. There is always a tradeoff between rate and cost. Rates have actually come back up considerably since a month ago, but that's good fodder for an example. I'm going to assume a $400,000 current loan. Closing costs on that loan are $2815 including appraisal, escrow, and title insurance. Usually, appraisals are not required for streamline refinances, but right now, lenders are in panic mode, so they are. Those who have the gold make the rules for lending it out. The A paper rates for the day I'm writing this (no longer available by the time you're reading this) are a thirty year fixed rate loan at 5.875% for two points, 6.25 for one point (actually about 3 tenths), or 6.375 for zero points. Here's a table listing new rate, new balance, monthly interest cost, and how long it takes to recover the cost for the loan via lowered cost of interest in months as opposed to the 6.75% loan that I can do for no cost to the borrower at all.

Now once you've paid those costs, they're sunk into the loan. Furthermore, your rate is locked into concrete. Just because better rates come along does not mean the lender is automatically going to lower your rate, any more than they can raise it if rates go up. That Note is a binding contract on both sides. So if you want to refinance before you've broken even, any money you haven't recovered yet is just gone. The alternative is not to refinance at all, and keep your old loan, horrible though it may be by the standards of a later time. And if you do want to refinance again, it doesn't matter what your current rate is - you're going through the entire qualification process anew, and you have to pay closing costs again as well as, if you want them, discount points to buy the rate down.

Let's say it's a year from today, and rates drop to where they were a month ago. 5.25 for two points, 5.5 for one, 5.75 for zero points, and 6 percent even for zero cost. Let me stress for the hard of understanding who may be reading this that this is a purely hypothetical supposition. Depending upon the loan you chose today, here's your situation in twelve months:

At our hypothetical rates one year from now, the person who chose 5.875% today cannot be helped without spending some money. In fact, I can move anyone who chose a loan costing one point or less down to a rate almost as good as what you spent $11,000 to get for absolutely zero cost. So their balances stay exactly the same, and here's the new situation

Notice that the person who chose that zero cost loan in the first place has a monthly cost of interest that's $8 to $17 lower than anyone else - and he owes thousands of dollars less on his loan! The people who spent money buying the rate down will literally never catch up to him! Even though the interest for the guy who keeps the initial 5.875% interest rate is a little lower, with thousands of dollars difference on the balance, you're still talking fifteen years or so for him to break even with the people who initially spent less to buy the rate down, straight line computation, never mind time value of money!

This isn't magic, and it isn't totally hypothetical. This is almost predictable. A few years ago the median age of mortgages was down to sixteen months. I can't seem to find it in the current Statistical Abstract, but I've heard it's all the way up to 28 months - still less time than it takes to break even for the costs of the expensive loan above, and pretty much the same as the break even for the loans where you spent some money to get the loan. Why in the name of whatever divinity you worship would you want to spend money that most people are never going to get back?

Now, considering this information, there's another loan that actually makes even more sense for most folks - a hybrid ARM. This is a thirty year loan with an interest rate that is initially fixed by the loan contract for a certain number of years, after which it will become an adjustable rate mortgage. For about 15 years, I've been doing 5/1 ARMs for myself. Even when the rates on thirty year fixed rate loans were ten percent, I've always been able to get a 5/1 ARM around six percent or less. For the last couple of years, the rates on 5/1 ARMs have been essentially the same as for thirty year fixed rate loans - meaning there's no real reason not to buy thirty years of insurance that your rate won't change. Why not, when it's been cheaper than 5 years worth of the same insurance? But ARMs are now diverging significantly below the rate/cost tradeoff of thirty year fixed rate loans, so now we're getting back to the normal situation, where people willing to relax just a little bit on a mental requirement for a thirty year fixed rate loan can reap substantial rewards. A month ago, a 5/1 ARM at zero cost was at 5.75%. Now it's around 6.125. So for the same zero cost of a 6.75% thirty year fixed rate loan, you can get a five years of fixed rate at 6.125%. On a $400,000 loan, this saves you $2500 per year - more than a full month of interest on the thirty year fixed rate loan. Furthermore, we've already covered the fact that the vast majority of people aren't going to keep their loan long enough for a 5/1 ARM to turn adjustable anyway. If you're among those 95% of all real estate borrowers who aren't going to keep the loan five years, there isn't any practical difference between a thirty year fixed rate loan and a 5/1 ARM except that you pay five eighths of a percent less interest - slightly over $200 per month saved in this instance. You can pay the same as a thirty year fixed rate loan and apply the interest savings to principal - which means you'll owe $14,000 less at the end of five years, assuming you keep it that long, and that rates don't drop so you can refinance at a lower rate, again for free. Another alternative is that you can invest the difference, in which case you'll have over $15,000 extra in an investment account, assuming an average 10% return per year. Who cares if you then need to spend $3000 of it refinancing if the rates never get this low in that period? Okay, I care, but since I'm still $11,000 or so ahead after I spend it, if I need to spend it, that is one heck of a good investment!

Some people prefer other ARMs. I see people encouraging the 10/1 and 7/1 for people who think the 5/1 isn't long enough. And if you're one of those folks who is going to lie awake every night for five years because you don't have a thirty year fixed rate loan, the difference between a 5/1 ARM and a thirty year fixed rate loan makes a difference of about $6 interest per night. Split two ways, for you and your significant other, that's $3 each for a good night's sleep. A good night's sleep is worth $3 to me, it's worth $3 for my wife, and I presume your sleep worth $3 per night to you, also. There's nothing explicitly wrong with choosing a 7/1 or a 10/1 as opposed to a 5/1, either. It's mostly a mental comfort issue. Most folks don't keep their loans 5 years anyway, so if I'm one of that huge majority of homeowners, why would I want to buy seven or ten years worth of insurance that my rate won't change? The only answer that makes any sense other than mental comfort is if the rate/cost tradeoff for those loans is cheaper, and that is only rarely the case. At today's rates, you're giving away three eighths of a percent for the same zero cost loan on a 10/1 basis - 60% of your savings, although the 7/1 is almost exactly the same cost as the 5/1, so that's a good choice. Most folks won't use the two extra years, but if it's essentially free, why not take it in case you do? For the 3/1 ARM, on the other hand, it's actually slightly more expensive at the zero cost level we're considering today, and even if it was cheaper, you're getting down closer to average holding period, so perhaps a third of the people who got it might want to hold it longer than the fixed period. Furthermore, I don't think I've ever seen a zero cost 3/1 more than an eighth of a percent lower rate than a 5/1 at the same cost. Let's say you could get one at 6% today for that loan, instead of 6.25. You save $41 extra per month - $241 over the thirty year fixed - but you've only got a maximum of 36 months of savings. $241 times 36 is only $8676, as opposed to $200 times 60 months, which is $12,000, not to mention more ability for compounding to have an effect in the case of the 5/1 ARM, and that the idea is refinancing to a favorable rate before the end of the fixed period. For all of these reasons, I can't really see choosing a 3/1 for any set of circumstances I can remember seeing any time in the last fifteen years or so.

To summarize, rate/cost tradeoffs between loans go up and down constantly - the rates for A paper change every business day, at a minimum. Nobody can predict exactly when they will rise or drop again, but that they will vary over a given range is pretty much axiomatic. Furthermore, there is always a tradeoff between rate and cost for any given loan type at any time, and if you choose a loan with low rates but comparatively high costs, it will be years before you have recovered your initial investment via cost of interest. Since by that point it is very probable that rates will have fallen below today's rates, and you will have wanted to refinance, this is only rarely a good investment. A better way to cut your cost of interest is to choose a hybrid ARM with a fixed period likely to cover the period of time you will keep a given loan in effect.

Caveat Emptor

The same as in every other area of life: Get out in front and stop it from becoming a problem.

I do not understand why many people approach real estate transactions like a casual outing. Go window shopping, decide on an impulse purchase, expect to sign a few papers and you're done. That might be appropriate for a toaster oven or microwave, possibly even for a refrigerator. In all of these cases, you're dealing with huge companies and products that are basically commodities. All the important stuff like price, size, and functionality is right out in the open, and you're spending $50 for the toaster oven, $100 for a microwave, maybe $2500 or so for a top of the line refrigerator with lots of bells and whistles. Furthermore, the huge companies that make and sell these need to sell millions of these to other people. It's not only not worth it, but actively counterproductive to their bottom line if they don't deal with complaints both quickly and generously.

Contrast this with the situation in real estate. First off, you're not dealing with a major company whose deep pockets are going to bail you out. You're dealing, at most, with a franchise operation that's paying big bucks to license a name, and consumers have no claim against the franchising organization. Here is a list of California license actions in the most recent three months for which information is available. Not one heavily advertised household name among them, although every one of those household names was affiliated with someone on the list. The big names might have some neat bells and whistles in the way of agent tools and client interface, but that's a distraction, especially in these days of expanding MLS capabilities, where any agent can set up a client gateway and get a link to the public portions of MLS on their website.

More importantly, the amounts at stake are, instead of fractions of someone's monthly salary, multiples of their yearly gross income. What this means is that the amounts at stake are many times larger, and therefore the potential reward. I don't know anyone who will cheat over a penny, and not many over a few dollars. But when the amounts at stake inflate to hundreds of thousands of dollars, that's a different level of temptation, and the list of people that can be trusted shrinks drastically. A smart agent working for you will always be on the list, if for no other reason than you can sue for breach of fiduciary duty and expect to win more than they could ever make for that breach. Unfortunately, as has been made clear to everyone who's paying attention, not all agents are smart.

Most important of all, a large fraction of the important issues aren't out in the open. Indeed, the amounts at stake are sufficient for the other side to do their best to bury them. Spotting these issues, particularly before a client has wasted time and money on the property, is one of the prime characteristics of good real estate agents. Whether or not you spot them is not the determining factor as to whether these issues are present, nor does keeping quiet make them go away. Even when called upon the facts, however, many sellers and their agents will still try to brazen it out in the best tradition of the communist party, by denying the issue. Several years ago, when buyers outnumbered sellers 4 to 1, many of them got away with it. Getting away with it is a lot less likely in a buyer's market like today. Furthermore, deceits of this nature are fertile ground for lawsuits, but despite the fact that it is far better - for both buyer and seller - to deal with all of the issues in a straightforward manner, there will always be those who think they can vanish with the money if only they can get that money wired into their account. They can't, but it can be more trouble than it's worth to track them down. Better just to deal with the issue in the first place, even if it's by choosing not to pursue that property.

When a good agent takes a listing, they have all the issues from appropriate pricing on down the line dealt with before the property actually hits MLS. The seller has to have restrictive showings? Reflect it in the asking price and tell everybody when and why in the property profile. There's an issue with the property? Make it clear in the property profile - showings where the prospective buyer aren't willing to deal with the issue do nobody any good. Even if you can hide it temporarily, you can't hide it forever, and the effects when the deception are discovered are going to hurt more than if you were honest in the first place.

When a good agent considers a property for their client's purchase, they consider it complete with shortcomings. If there's an issue with traffic, noise, structure, schools, or anything else, I want my client to be aware of it, and I want to have a plan to deal with it in negotiations, before my client says they want to put an offer in. Yes, this makes it more difficult to persuade a client to put an offer in, but if your agent hasn't explained that there is no such thing as a perfect purchase situation long before you get to the stage of making offers, something is wrong. I haven't seen a property yet that was an exception to this. They've all got problems and issues. The question is whether these problems and issues are ones that the client is comfortable dealing with. Even if there are no other problems, the issue then becomes, "Is your client happy paying the extra money not to have them?"

Any time the problem gets in front of an agent, they are playing catch-up, much like a Cessna pilot trying to handle a high-performance military jet. It's controlling them more than they are controlling it, and the same applies to real estate. Pilots have a saying to the effect of "he (or his body) got to the crash site fifteen minutes after the airplane." Real estate is no different, except the time lag is usually measured in months instead of minutes, and only gets caught up when a lawsuit is filed. I've seen agents - usually "team leaders" trying to pack in more business than they can really handle - so far behind the power curve on actually solving real problems for their clients that the client would have been better off with a fresh licensee on their first transaction, who at least aren't so busy delegating that they can keep track of what they need to know and what they need to deal with before it bites their client. Those subsidiary functions that busy high producing agents "delegate" to lower paid "team members" (which is 95% industry code for "poorly trained low-paid employees who have no idea how that piece of paper relates to everything else about the transaction but enable the agent they work for to rake in more commission checks")? You'd be surprised how often the details that bite agent and client both are buried in them, and any time an agent puts their focus on production, the quality is going to suffer. A better agent may not live so high on the hog, but their clients come out of the transaction much happier.

Caveat Emptor

With the market turndown, Liquidation auctions are becoming a big thing. They were just advertising one on all the stations around here. The other agents in my office asked if I was going, and I told them, "There will be no bargains there." Two of them went anyway, one going so far as to take a client.

To be fair, this only applies 100% to one specific auction house, which I'm not going to name - but the tactics and terms are pretty standard. Here's the claims they make: "Huge selection" (which means, in this case, 222 properties of all sorts, 147 of them in the county, 75 out of the county, as opposed to 20,600 active residential properties in San Diego County MLS on the day in question), "Easy financing" (they rent some space to one specific lender). In fact, they do their best to restrict choice of lenders - giving some minor preferred terms if you do business with their tame lender, which isn't known in the business for being a good lender to do business with. This violates RESPA, by the way. "Perfect for families." If you believe this, I own not only beachfront property in Florida but also a bridge in Brooklyn and an albino pachyderm, and I want to sell them all to you for a low discount package price -contact me for private details. You've got to be some kind of idiot to believe that it's a good idea to bring kids - a genetic and conditioned emotional distraction - to a real estate auction. Their commercials have sound bite interviews with people right after they win an auction - excited that they "won" an emotional battle for a house! Of their very own! Not later, once they've discovered how rotten the situation is that they have gotten themselves into.

Reading the fine print, it didn't take much to figure out what's really going on here: They want to get buyers together in an emotional auction environment where it's psychologically very easy to overbid for a property, get them committed to buying the property, and cut them off from all of the really good due diligence they're allowed to do on every other property out there. Lock the buyers into what they do in the heat of the most emotional moment these artisans can create - while the sellers are free to reject the deal on a whim. They allow the prospective buyers no "cooling off" period at all. This is legal for purchases, but isn't a good situation to be getting yourself into as a buyer, particularly not in the current environment for most of the country.

Here's the skinny: First off, prospective buyers need a $5000 cashiers check made out to yourself, which you will endorse over to them, and the balance of 5% of the purchase price in the form of a personal check or something similar. What this means is that no matter what, the lender is getting $5000 of that buyer's money. Period, end of sentence. Furthermore, they have to put 5% of purchase price into escrow. This is way above the "traditional" 2% which is far too high for most transactions nowadays. Putting it into escrow means that, at a minimum, somebody else is holding onto it until and unless all parties agree to release it or a court tells them to. Given that you have to use their special "purchase contract" which wasn't available ahead of time, what do you expect that the terms of that contract are as regards to things like liquidated damages and money owed to the lenders for the "privilege" of sitting in escrow on a property where there's no real due diligence done? Their brochure said the purchase contract was available on their website, but I couldn't find it, and I not only checked their site map, but clicked on everything that I thought could conceivably be associated with it - which was basically everything. It wasn't there, but I don't have any reason to distrust their claim that it renders you liable for damages if you don't carry through on purchase. In other words, you find out a reason why you don't want the property, you still pay for the fact that you had the high bid. Not to mention their purchase contract is completely mandatory, and you can't negotiate anything about it, and you don't even find out what those terms are until after you've agreed to the price. Since contract terms can move the price by thousands or tens of thousands of dollars in regular negotiations, it shouldn't stretch your imagination to figure there's a reason they're waiting to spring all of this upon you - most likely a contract people wouldn't have signed at the peak of the seller's market in 2003. Furthermore, you're required to sign a "winning bidder confirmation" immediately upon making the high bid. What that says also wasn't subject to prior investigation - which is a polite way of saying they want it to be a deep dark secret until you "win" the auction for a given piece of property. Use your imagination for a moment, and ask yourself, "Why would they want to keep it secret until then? What might such a document say?" I'll bet you millions to milliamps the reality would be worse. These folks are professionals.

Did I mention that you're agreeing that you've already done your due diligence? Yes, but I didn't go into what it really means. They supposedly have three open houses for inspection, but how many people are really going to drag an inspector, an appraiser, a termite inspector, etcetera out to the property just because they might be thinking about bidding on the property? That's sinking anywhere from $800 on up into the property just on speculation of winning the bidding. If a prospective buyer does this due diligence ahead of time, it psychologically prepares them to be willing to go higher on the bid (they've already spent money). If they don't do this due diligence ahead of time, they're putting that 5% of the purchase price - however many thousands of dollars - at risk. Suppose you bid $400,000 and it's accepted. You need to put $20,000 into escrow immediately! If a prospective buyer thinks they might bid on two properties, that's twice as much. Furthermore, although the purchase contract wasn't available, I'm quite willing to take the word of their brochure that there are no financing or appraisal contingencies allowed in that contract, even for their preferred lender. Their verbiage is adamant on the point of "as is, where is, including all faults." They're very explicit about no liability by sellers, which is basically standard for lender owned property, but they're not going to accept any requests for repairs either, which isn't. In fact, in some circumstances, it's illegal. Not to mention that you normally have seventeen calendar days to do your due diligence after there's a fully negotiated purchase contract, even with lender owned properties, before your deposit is likely to be in jeopardy.

They use a "property previously valued to" come-on, which is disclosed in the fine print to be the highest of 1) an appraisal 2) asking price, 3) assessed value or 4 ) broker's price opinion. You shouldn't need to be a Rhodes Scholar to figure out that this means the asking price - the exceptions just make for something even more cockeyed. It's been on the market for months, and it didn't sell for that price. If it had, they wouldn't be auctioning them off in these circumstances.

There's also an undisclosed reserve price. What this means is that if the auction doesn't get high enough to go over the reserve price, you don't get the property even if you have the high bid. Furthermore, reading through the fine print, you find that the auction has planted other bidders in the crowd, who can and will bid the price up. If claims they won't go over the reserve price, but since neither the identity of the plant nor the reserve price is disclosed, it's somewhat difficult to verify this. The job given these plants is plain and simple: Get the bidding going, and get it emotional, so people will keep bidding for a long time. Since the auctioneer knows both the plant and the reserve price, they can collude quite easily to a common purpose. As a matter of fact, the fine print says the owners don't even have to accept the reserve price. What does this mean? If, after all the psychological games they can play with you, you don't bid enough to make them happy, you still don't get the property! In fact, they've got 15 days to turn you down. You, on the other hand, are required to close escrow within thirty days, which means you had better get working immediately, even though they reserve the right to pull the rug out from under you.

If all of this isn't enough, they reserve the right to alter terms and conditions as they go, specifically including, "Advancing the bidding," which is a euphemism for jacking up the price for no apparent reason. In addition to that, there's a 5% surcharge on all winning bids in order to arrive at the final sales price. So someone knows their limit is $300,000 and advances the bidding to $297,000 before winning - only to discover that this translates to a "real" price of $312,000 - a price they already know they can't afford! Result? Minimum of $5000 in their pocket (your endorsed cashier's check), and they offer the property for sale again right away.

Have I mentioned the psychology of an auction yet? Particularly one with inexperienced bidders? Most of whom have no idea of the risks they are taking, let alone the fact that they should be compensated for them, or how much? I've heard too many inexperienced people saying that "Everybody knows" that foreclosures and auctions are great deals. I'd like to meet this Everybody, because he's spewing rank fertilizer in the form of unsubstantiated rumors that are far from universal even if they are sometimes valid when you've got a sharp agent on your side in a high transparency situation where both sides have to come to the table as equals. That's not the case here.

I looked through their book of available properties. There was precisely one that I had been in. It was a 3 bedroom 1.75 bath property on a lot that was mostly level because the developer had terraced it fifty years ago, with a deep crack in the foundation the entire width of the house - you could even see the evidence on the outside, for crying out loud. Nice paint, great view, some other nice touches - but flat roof I couldn't see, no yard, no close parks, no place for kids or pets, all the fixtures and surfaces other than the carpet were original, it sat on a busy connector street, and I couldn't tell you whether that house was going to be there tomorrow without a soil engineer's report on how well the leveling of the lot was standing up, how well the soil had been compacted, etcetera. I suspect problems, because the foundation wouldn't likely have cracked if there hadn't been soil compaction issues. I remember thinking, "Maybe $300,000, if the soil report comes back solid. Otherwise, you couldn't pay me to take this property." They were telling people it was valued at $429,000. Seriously, I would rather have a 1970s vintage townhome less than a mile away listing for $279,000 - and this includes HOA dues and dealing with a homeowner's association in the first place. More usable yard, a couple of small communal parks and a communal pool, and less environmental noise - not to mention that even if that condominium had structural issues I didn't spot, dealing with them would have been a communal issue as well. This seemed about average for what was being offered. The less desirable areas seemed to be heavily over-represented in their offerings. This is about as coincidental as falling down when you trip. All the usual war zones that people don't want, even when they think they're getting a deal.

The point of all of this is to get people foolish enough to bid on these properties locked into deals, where the sellers are not locked in at all. Get them emotional, so they bid up the price, and if they can't do that well enough, the seller has the option of taking their marbles and going back to what they were doing. So you can imagine that I wasn't very surprised when my two co-workers called me about halfway through the proceedings to say, "You were right. We're leaving. There are no bargains here."

Caveat Emptor

On a regular basis, I get emails that ask me what I think of a particular company. When I check out public forums, I see questions about particular companies every time. "What do you think of X Realty, or Y Mortgage?"

Reputation has a certain value of course, but in my experience, these people are overvaluing reputation. These people are looking for a "silver bullet" solution to their situation that lets them relax, and there aren't any. They want to be taken care of without doing the mental work of figuring out whether the person is really doing a good job. "This is a great company, and great company would never take advantage of me, so I must be getting a great bargain!"

This utterly leaves aside any number of issues. Suppose the Mortgage Firm of Dewey, Cheatham, and Howe were paying me a fee for every referral. Most people might have justifiable concerns about whether my recommendation was motivated by that fee or by the desire to get them a great loan. Well if you're chumming for a recommendation, you have no idea if the anonymous person recommending the firm of Dewey, Cheatham, and Howe is a virtuous benefactor - or one of their loan officers. The bigger the firm, the more loan officers they have. Huge National Megacorporation can have hundreds of their loan officers log on to the website anonymously and all endorse National Megacorporations loan programs for some mysterious reason. Suppose the person isn't affiliated with Dewey, Cheatham, and Howe, but does work for a similar firm. They could be trying to build demand for the same sort of operation that feeds them, so when people read about Dewey, Cheatham, and Howe's methods being recommended, and then encounter this similar firm, they are ready to do business.

Suppose the person answering is a complete babe in the woods? They just plain have no idea. They've never gotten a loan, or if they have, they got took just as badly as anyone else in the history of the world, and worse than most. Does the possibility of such a anonymous recommendation for the Mortgage firm of Dewey, Cheatham, and Howe seem like a thing you want to follow? Unless you audit that person's transaction and compare it to other similar transactions going on at the same time, you have no real idea whether this person would recognize a scam if it bit them. Even if you do audit their transaction, that doesn't necessarily mean anything, good or bad, for your situation.

Suppose the reason they thought Dewey, Cheatham, and Howe did a good job was because they didn't pay attention. They've read every single one of my articles, and they understand all of the things that could go wrong, and they actually know how to read a HUD 1 form, but they just didn't bother because their Uncle Joe works for Dewey, Cheatham, and Howe, and they trust Uncle Joe completely, and Uncle Joe would never take advantage of them. This ignores the issue that Uncle Joe is unlikely to be your loan officer, and even if he was, Uncle Joe may have compunctions about his family that do not apply to you. Furthermore, a very large fraction of the most unethical stuff I've seen since I've been in this business was Uncle Joe (or Brother Moe, or Sister Sue, or Cousin Lu) raking people over the coals who they knew would not shop around for a better deal. But even if they are completely unrelated, they decided to trust Joe, and didn't do the diligence that would have told them whether Joe was doing a good job, let alone the best possible job.

Now in both the loan and in the real estate business, service is provided by individuals, not companies. It's the guy you're sitting down talking to right here that decides how much of a margin they are going to work on, not some mysterious exalted Chief Operating Officer in New York City. That COO may lay out base requirements that say "no more than X, no less than Y", but it's the person doing your loan, or the agent doing your transaction, that decides where in that spectrum you fall. And I shouldn't have to point out that if they say "The corporate president says we have to make at least two points on every loan!" and somebody else offers you a better loan for you, that's their problem, not yours. They are not getting, or at least they should not get your business if you know of a better possibility. You don't owe anyone your business.

Finally, every situation is unique. People ask me what I think of a particular lender, and I'm thinking about the clients they'll do well with, or the clients where that particular lender's programs are most competitive. The lender with the best thirty year fixed rate mortgage in the business is not a lender I would use for an 80/20 short term piggyback on someone with a 600 credit score. That particular lender doesn't want to touch 100 percent financing, and refuses to do business at all with anyone whose credit score is less than 620. The lender I'd most likely use for the latter borrower has a rate and cost tradeoff for their loans that knocks them completely out of contention for the A paper full documentation 80 percent LTV thirty year fixed rate loan with no prepayment penalty. They're not competitive for that borrower, and both that account executive and I know it. They'd be grateful to me for placing the loan with them, and they'd certainly get it done, but my wholesalers and I have an understanding: The lender who has a program that can deliver the lowest rate cost tradeoff on the best terms for the client gets the business. They don't want to compete on price, but a good loan officer forces them to do precisely that. And if the wholesaler is one of those who refuses to compete on the basis I want them to compete on, there are plenty who will. Don't BS me about service. Everybody should have great service. If you don't have great service, we're not meant for each other, and the lenders I already do business with all have great service. What I want is a great loan for this client that you can actually deliver on time. If you've got that, we may have some business. If you haven't got that, we don't. This point, incidentally, is one of the reasons you'll end up with a better loan from a good brokerage than you will from the best lender. A broker knows how to shop loans better than any ordinary consumer.

This isn't to say you should just trust a broker. Indeed, my point is that you shouldn't trust anyone. Shop around, compare what's available, ask them what for written guarantees, verify everything, and don't give them your dollars to hold hostage until they've actually delivered. That's why I put out the yardsticks for measuring performance I do, that's why I give you the strategies for finding the people who will do a better job, and for forcing them to actually do a better job. You can't know if something is a good bargain except by comparison with something else like it, or several somethings. Given the amount of legal wiggle room there is, unless you pin a loan officer or real estate agent down with specific guarantees and conditions in writing, what they actually deliver is completely dependent upon their good will. If they have good will, you don't need to work nearly so hard, although comparison shopping would still be a really good idea. But if a decent proportion of agents and loan officers had goodwill, there would be a lot fewer problems with the industry.

Caveat Emptor

Legally, immediately.

With that said, there are economic reasons why it may not be a good idea for you to refinance.

If you have a prepayment penalty, you're going to have to save a lot of money to make it worth paying that penalty. Suppose you have a rate of 7 percent, and an penalty of eighty percent of six months interest, that's a prepayment penalty of 2.8 percent of the loan amount. So, in order to make it worth refinancing in that instance, you have to save at least 2.8 percent of your loan amount in addition to the costs of getting the loan done, all before the prepayment penalty would have expired anyway. So if it's a three year prepayment penalty, you have to cut almost a full percent off your rate just to balance out the prepayment penalty. The higher the rate you've got now, the bigger the penalty and the more you've got to save in order to make it worthwhile. On the other side of the argument, the longer the prepayment penalty is for, the easier it is to save enough to justify paying it. If you've got a five year prepayment penalty, you're likely to get transferred or need to sell or somehow end up paying it anyway.

Second, your home has not appreciated yet, especially not in the current market. You bought for $X, and your home is still worth $X, and you haven't paid the loan down much yet, so your equity situation is essentially unchanged. In fact, since relatively few loans are zero cost, you're either going to have to put money to the deal or accept a higher rate than you might otherwise get. Don't get me wrong; Zero Cost Refinancing is a really good idea if you refinance often. But when you go from a loan that takes money to buy the rate down to a loan where the lender is paying for all of the costs of getting it done, you're not going to get as good of a rate unless the rates are falling. As of right now, they have been going through a broad and more or less steady increase for the last two years. If you or someone else paid two points to get the rate on your current loan, you are not getting those two points back if you refinance. They are sunk costs, gone forever when you let the lender off the hook. If rates had been going down for the same amount of time, it might be a good idea to refinance, but that is not the case right now.

If you got your current loan based upon a property value of $400,000 and total loans of $380,000, that's a 95 percent Loan to Value Ratio. So your property is still worth $400,000, you've only paid the loan down $400. That's still a ninety five percent Loan to Value Ratio; more actually, as doing most loans is not free. So unless your credit score has gone way up, you can now prove you make money where you couldn't before, or you have a large chunk of cash you intend to put to the loan, chances are not good that refinancing is going to help you. If your credit score has gone from 520 to 640, on the other hand, or you now have two years of tax returns that prove your income, or you did win $100,000 in Vegas and you want to pay your loan down, then it can become worthwhile to refinance, even in a market like this one where the rates are generally rising. Unfortunately for loan officers like me, that does not describe the situation most people find themselves in.

One more thing that can influence whether it's a good idea to refinance is your rental and mortgage payment history. If when you got your current loan, you had multiple sixty day lates on your credit within the past two years, and now they are all more than two years in the past, that can make a really positive difference in the rate you qualify for. On the other hand, if you had an immaculate history before and now you've had a bunch of payments late thirty days or more, then it's probably not going to be beneficial to refinance.

Cash out refinancing is one thing many people ask about surprisingly soon after they close on their home. Now if you have a down payment, it's better to put aside some of the down payment for use in renovations rather than to initially put it towards a purchase and then refinance it out, as it saves you the costs of doing a new loan. If the equity is there and if you have the discipline to take the money and actually do something financially beneficial with it, it can be a very good idea. If you're just taking the money to pay off debts so you can cut your payments and run up more debts, it's probably not a good idea, even if your equity situation supports getting the cash out. It often can and does in a rising market. In the current market where values are retreating, not so much. If you bought any time in the last two years, it is unlikely that you have significantly more equity now than when you bought, making the whole situation unlikely to be of benefit.

A lot of situations have something or other that makes them an exception to the general rules of thumb. The only way to know for certain if the general rules apply to your situation is have a good conversation with a loan provider or two.

Caveat Emptor

About half the listings around here do not have a single number asking price, but rather a range in which offers will be considered. Even many agents have trouble understanding range pricing. I've seen and heard more than one agent rail against it, saying that it is essentially "repricing the home".

Range pricing began in Australia and was brought to the United States by a certain major real estate chain. That chain is not one I particularly like doing business with, but that doesn't mean range pricing is a bad idea.

Range pricing is a way of starting people talking, and to begin the negotiating process; nothing more. If there's no offer made in the first place, I can guarantee there will be no transaction. The idea of range pricing is to jump start the negotiations.

Range pricing is not appropriate for all properties, nor in all markets. In the buyer's market we have now, I'm certainly more hesitant to use it, as it offers more information as to the owner's state of mind. In a seller's market where prices are rising rapidly and sellers have all the power, it gives an indication as to what a serious offer is and what it is not. In a buyer's market like now it tells some buyers exactly how much leverage they may have. I'm also more leery of using it on commercial properties.

One thing many agents (and others) misinterpret range pricing to mean is that any old offer inside the range should be accepted. This is the mark of an inexperienced negotiator. If they say offers will be considered between $400,000 and $425,000, that is not the same thing as saying "I want $425,000, but I'll take $400,000." There are many other terms and conditions on a purchase contract besides just the price, and there is no mandate to agree with even a full asking price offer if those other terms are prohibitive. Indeed, an agent who knows how to figure out other terms to offer in place of higher price is likely to save you far more than any commission they earn. Even price is rarely just price. For instance, if I write an offer for $410,000 cash, no contingencies, with a $10,000 deposit, most sellers should rightly treat that as superior to an offer of $425,000 with the seller paying $10,000 of closing costs and only a $2000 deposit, contingent upon financing for sixty days. Note that the seller nets over $4000 more if the latter offer actually closes, but the former is a much stronger offer and if two such offers were to come in and other things were equal, I'd strongly counsel taking the cash offer, especially as the latter offer is indicative of a not very well qualified buyer without much commitment to the idea of purchasing the property, and there would be a high probability that the transaction will not actually close. There are all kinds of terms on purchase contracts, and having a discussion as to what's important to the other side can be a way of making your offer much more attractive without necessarily raising your price. For instance, owner occupants are often understandably nervous about whether the transaction is going to close, and committing large sums to alternative housing before it actually does close. If you can think of a way to address that concern, you're miles ahead of the negotiator who can't. Every situation is different, and what works one time may not be appropriate to even offer the next.

So if I see a property with range pricing of $400,000 to $425,000, I want to educate my buyer clients that an offer of $400,000 exactly, with the seller paying up to $20,000 of closing costs is not within the range indicated. Indeed, as I've said elsewhere for such offers, a $380,000 sales price with the buyer paying their own way is a superior offer from the seller's point of view. If they insist, I must and will submit it, but even in the current buyer's market I wouldn't be surprised to see it rejected outright with no counteroffer.

In the current buyer's market, those few buyers willing to purchase properties have an enormous amount of power, and this will continue until the seller to buyer ratio gets a little less lopsided. So in the current market, I might actually offer significantly less than the asking price range, secure in the knowledge that if this seller rejects it, I'll find something just as good tomorrow where the seller will accept. Some will. So if some won't, so what? You learn to spot the sellers that have the power to refuse, and the ones who have to take anything vaguely reasonable.

Now admittedly, I don't do a lot of listings, as most sellers don't like to listen when I tell them to price their property to the current market if they want to sell. (And if they don't, why are they talking to me?) I've only got one listing right now, and quite often, none. But when I'm showing them what the market is like, and what reasonable prices for properties like theirs are right now, I'll ask a couple of questions once I'm convinced they understand. Everyone knows what they want to get for the property, and by the time I'm done, they better understand what a reasonable asking price is and why it's stupid to list for more. But after that, once I've explained that the