April 2008 Archives


I just last week closed a transaction where my clients did not make the high bid (or even close), but did get the fully negotiated purchase contract and the property. By building an airtight case that this client was capable of promptly consummating the transaction, I persuaded a rational seller to accept less money than they might theoretically have gotten from another interested party.

Let me make it very clear that this does not work every time. It takes a seller with a certain amount of knowledge of the market to make it work, and their agent cannot be clueless either. Your first time home seller with no knowledge of the reasons why transactions fail, or how frequently, is not likely to realize where the probability of money is. So after that seller eats carrying costs for the property for two to three months at several thousand dollars per month before they discover that the buyer cannot consummate the transaction, they might start to get rational about what's important - providing they haven't lost the property to foreclosure in the meantime.

The better the agent is, the more likely they are to be on the side of the more certain transaction. Over forty percent of all escrows started in the last year locally did not result in consummated transactions. Why did all those transactions fall apart? The loan couldn't be done. No other reason but "the loan couldn't be done." Transactions that fall apart for other reasons - newly discovered major repairs, and all of the little problems with interpersonal relationships that strike between contract and recording - are mostly unknowable in advance. We can all spot the purchase offer (or seller's counter) that says "Danger, Will Robinson!" but most of them aren't that bad. And the fact is, no matter how unwilling sellers may be to deal with newly discovered issues, they're stuck with them and the buyer isn't. Nobody's going to buy a house where you can't flush the toilets, as I had to explain at length to a listing agent about a year ago (Indeed, both law and lenders will make it very difficult). The most important question in the mind of any rational seller or listing agent has got to be, "What assurance do I have that this buyer can consummate this transaction in a timely fashion?"

As a buyer's agent, that's what you want to sell in a competitive bid situation: increased certainty of the transaction happening.. Confidence that you and your client can make it happen, given the opportunity. Show the sellers why these buyers are qualified. Telling nothing but the truth, paint a coherent picture of an easy transaction. This is one of the big reasons why real estate agents need to understand loans, whether they're on the listing or buying side. Walk the walk, don't just talk the talk. If your clients are all cash buyers, pound the point home - and get rid of that financing contingency! What's the credit score? What's the income, how stable is it, what's the debt to income ratio? The loan to value ratio? With client approval, you can even remove the account numbers from statements, and show them where the funds for the down payment are coming from!

Pre-Approval or Pre-Qualification letters will not get this job done. Neither one of them means anything real. I'll write them, but the only one I trust is one that I wrote. Why should I expect any other agent to give them any more weight?

The more qualified the buyers, the bigger the down payment and deposit they're bringing in, the better this works. A good sized deposit says you and your buyers are confident you can get it done, particularly if you'll waive one or more of the usual contingencies.

You do need both a good agent and a good loan officer to make it work. If the loan officer and agent are both the same person, that's even better, but this isn't happening with a discounter if the listing agent has more than an hour in the business, even if they're a discounter themselves (although I've never had a competitive bid situation happening with a discounter's listing. I don't wonder why, and you shouldn't either).

This pretty much can't work if you're in a Dual Agency situation. That agent counsels the owner to take the offer made where they get both halves of the listing commission, but the owner gets less money? Ten minutes in court or a regulatory hearing and that agent is toast. Yes, some agents are that stupid - but this is a mistake nobody makes twice, because once puts them out of the business. Not to mention that that owner is going to figure that the agent is out to line their own pocket at their client's expense.

For my buyer clients, I'm always looking for something valuable to the seller that isn't cash, or isn't purchase price cash. This is one of the best, because it doesn't cost my clients a darned thing, and yet it really is valuable to sellers.

Caveat Emptor

Needs a Little Shining Up

General: La Mesa, 5 Bedroom 2.5 Bathroom

Con:

What's Wrong With It: The back yard needs some landscaping, and the pool needs refurbishment. The carpet needs replacing, walls need painting, and everything needs cleaning.

Why It Hasn't Sold: That's a good question, given the neighborhood, but most people can't see how easy it would be to improve something like this.

Who it's Not Appropriate For: People looking for something turn-key.

Pro:

Selling Points: Nice sized back yard, has great views of the neighborhood, and sits in an excellent school district. Public areas have nice open lines of sight, and the kitchen would be very nice once cleaned. This is a great place for entertaining, and there's even an upstairs retreat if you get tired of your own party.

Who Should be Interested: If you're looking to house a large family in a great neighborhood for a reasonable price, this is it! Alternatively, it'd be a good prospect for a college rental.

Why it's a Bargain: What needs to be fixed isn't expensive. Smaller properties in the same neighborhood are commanding higher prices..

Financial:

What I think I can get it for: $440,000.

Monthly Payment examples: I've currently got a thirty year fixed rate loan available for qualified buyers at 5.75% with just over one point, or 100% VA financing at 5.75% for the same cost.

With no down payment: VA 30 year fixed rate loan at 5.75% (FHA 97% financing) payment $2568, (APR 5.852)

With 20% down: Fully amortized payment of $2054 (APR 5.900).

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 $440,000 the property would be worth approximately $710,000. If you held it those ten years before selling, you would net about $350,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $2400 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $310,000 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

I don't know how many people have told me the story of the Purchase Offer That Was Accepted But Couldn't Be Done. They come to me because they lost their deposit or are about to and they want some way to make it not happen.

But it's never happened to offers I write for my buyer clients. I doubt it ever will. There are many reasons why real estate agents need to know and understand loans. First off, to save their backside. Somebody defaults on a purchase money loan, the agent is an obvious target to drag in. E&O insurance plus fiduciary responsibility equals rewarding target for lawsuit. The second reason is even more important than that: Saving the client relationship. What could possibly be more damaging for a buyer's agent than losing a client's deposit? There really isn't much. When I write a purchase offer, the built in structure is always of a loan I know that I can do.

This is particularly important where there's less than 20% down payment being contemplated. For the last ten years, there's pretty much always been a loan that could be done, no matter how poorly qualified someone was. That has now gone by the wayside. Stated Income and NINA loans are now much more difficult to find, and with declining market designators, I'm not certain I can do 90% Loan to Value loans stated income at all right now, even for a primary residence.

All government programs - VA loans, FHA Loans, FHA Secure (not a purchase money program), Mortgage Credit Certificate, and locally based first time buyer assistance - all require qualifying based upon full documentation of income.

Given this, you have to know if you can afford it before you make an offer. You're going to spend roughly $1000 to pay for an inspection and an appraisal as soon as you have an accepted offer, not to mention you're tying up a deposit of several thousand dollars in escrow - a deposit that's potentially "at risk" if you are unable to qualify for the loan that will allow you to purchase the property.

I know that I'm not very respectful of pre-approval, let alone pre-qualification. This is because there are no real standards for either one, and I've seen enough pieces of paper swearing a loan could be done when it in fact could not to make a fair sized bonfire. There are several reasons for this. There just isn't anything to gain personally, and everything to lose, for a loan officer to tell someone "Sorry, but you do not appear to qualify." So they issue the pre-qualification or pre-approval on hope and a prayer, because they might be able to get a loan done.

So you want to make the loan officer go over the numbers with you" Debt to Income ratio, Loan to Value ratio. Add up all of your other debt, add up the full payments for principal and interest, property taxes, and homeowner's insurance. What percentage of your verifiable monthly income (monthly average over the past two years) is that? How much do you have available to use in your bank and investment accounts? Does that cover the projected down payment and sufficient money for the closing costs you'll need to pay? If you need to buy the loan down with three points in order to qualify on debt to income ratio, is there still enough available to make the required down payment?

In some cases, writing the purchase offer correctly - structuring the transaction with the loan in mind - can make a difference between a loan and a purchase that can be done, and one that cannot. This is definitely the case if you are looking for anything over ninety percent financing, and especially if you want 100% financing. The only 100% financing available right now that doesn't require being extremely careful about how you write the purchase contract is VA. It can be done, even in declining markets, but you have to be extremely careful to write that purchase offer in consideration of loan requirements.

Now if your real estate agent is a highly qualified loan officer, it's no sweat. I write every purchase offer with prospective loans in mind. If I don't know I can do the loan, I find another way to write the purchase contract so that it can be done.

The time of writing a purchase contract and worrying about the loan after acceptance is gone, and it may not return. Even for well qualified borrowers with plenty of income and down payment, it can't hurt to get a loan officer involved when making an offer. For those with marginal income and not much down payment, getting a loan officer involved before you write an offer (or accept a counter) can make the difference between a viable transaction, and one where everyone's wasting their time and money. Yes, you can potentially renegotiate a purchase contract later. Is there anyone who wants to tell me that's as good as getting it right in the first place? Do you think you might be opening the door to issues of trust between buyer and seller getting in the way on those renegotiations? Do you think that the seller might demand fresh concessions, where if it had been negotiated correctly in the first place, you would have something that's essentially the same terms as the initial contract? Not to mention time lost, delays in closing, opportunities for the entire transaction to go south? Write your offers with loans that can and cannot be done firmly in mind, and you won't need to renegotiate for the sake of the loan.


Caveat Emptor

Despite all the hype, rates (or, actually, the tradeoff between rate and cost) are pretty darned good right now. I'm at home right now, but yesterday, for someone with average credit (national median) and 20% down payment or equity, I could have locked a thirty year fixed rate loan at 5.875% with one total point, and delivered same in thirty days. Lest you not understand, that's very good by historical standards. Last summer the same loan was in the 6.5 range, and I remember not too long ago when rates in the sevens were considered good. Nice, sustainable fully amortized 5/1 hybrid ARMs that most people will never keep five years anyway are in the low 5s for the same cost (starting to look like a worthwhile alternative again).

But you'd never know it to look at the headlines. "Lender meltdown!" and "You can't get loans!" are things you see in the mass media every day. "Hard to get mortgage" returns 435,000 hits.

The truth is, there is a meltdown. Lenders have suddenly figured out that risky loans are risky loans, and since they have their sense of humor surgically removed upon hiring, now they're mentally trapped in a humorless game of Paranoia. People with marginal credit or little in the way of down payment are finding it difficult to buy, and since their former ability to qualify was priced into the market, this limits the demand for real estate, shifting the supply and demand equilibrium (aka price) down. The loan market controls the sales market, and when the loan market makes it harder to qualify than it has been, times get bad for sellers. People looking to buy for the first time have to save more, and the people who would have sold to them aren't going to be able to move up either.

So all of the marginal cases that subprime lenders were lining up to serve until about a year ago can't get loans, and even people that have A paper credit may be forced to consider subprime loans, if they can get anything at all, due to high Loan to Value Ratio. This has become very much a positive feedback situation. Falling demand triggers tightening of lending standards, causing values to fall, further exposing lenders to loss, causing them to tighten their standards further.

When a lot of people have fallen below lender thresholds for acceptable risk, they can demand loans all that they want, but the lenders isn't going to supply those loans. But the lenders still have that money. If they don't loan it out, they're still paying interest on it to their depositors, and the investors are going to be angry that their stock isn't paying any dividends. So they've got to find somewhere to lend it out that does meet their standards.

So if you are one of those people who do meet lender standards, they want to lend to you, and there aren't as many people eligible to compete for that lender cash, which means the money is cheap in terms of what it really costs. The margin over inflation is lower than it was in Summer of 2003, when the rate/cost tradeoffs were lower than they had been in fifty years. Lenders want to lend money. For those who qualify, money is cheaper now than it was then, because the 5.875% loan you get today is less expensive, when considered in the form of "rate minus inflation," than 5% was then.

Having observed a few market cycles before this in cyclical San Diego, let me ask what happens as soon as things stop getting worse? Lenders figure out that they've been overly paranoid, they loosen the standards just a little bit, and because the loan market controls the real estate market, real estate prices starts rebounding as the new people who can now qualify in the loan market enter the real estate market. That same market that the loan climate has been hampering, gets helped when the loan climate loosens just a little bit. San Diego has been on the bleeding edge of this whole phenomenon. I see a lot of evidence, and hear of a lot more (thus far, still anecdotal because official records take a while to catch up) that says we're ready for a turn

Indeed, that lending wedge is already present, in the form of new FHA limits of $697,500 locally, when their former limit of $362,000 locally had meant FHA loans couldn't finance anything above a two bedroom condo. The FHA program in its base form gives a government guarantee of the loan for loans up to 97% of the purchase price, and there are ways to make an FHA purchase with zero down. Lenders like government guarantees - it means that even if the property does get foreclosed upon, they'll probably get their every penny of their money back. (I should also mention that the VA loan limits have also been raised, and VA loans are a better deal if you're eligible. Never go FHA if you can go VA, and I'm getting wholesalers telling me they'll do VA loans up to 1.5 million dollars) The control upon this whole thing is, of course, the fact that all government programs require borrowers to qualify "full documentation". Stated income and NINA loans are not allowed by any government program. However, San Diego's local economy will more than support current pricing levels. More than enough people make more than enough money to qualify for home loans at current prices "full documentation", and when people figure out that the mass media's Fear and Greed campaign is misplaced, what do you think is going to happen?

Caveat Emptor

I am seeking to sell my properties to my tenants. I want to create a mortgage and then sell the mortgages. Properties are undervalued in this area as they have been historically fixer-uppers. Ours are in very good condition due to major renovations. This would interfere with a regular mortgage, but temporarily holding one might eliminate this problem. Is there a way to do this or is this not possible?

The first question one would ask is why you would want to do this. The answer, easily enough, is that this way you aren't chained to lender requirements as far as the appraisal goes. When you've got a property above the neighborhood in quality, it's very hard to get an appraisal for as much as you might be able to get at top dollar. Why? Because there's nothing else in the area as good. This phenomenon has a name: Misplaced improvements. I've spotlighted a few of these. They are not good investments, but they are an excellent way to get a significantly better home for not much more in the way of purchase price. If you've got a beautiful 5 bedroom home with 3000 square feet and all the amenities, and nothing else in the neighborhood is over 1500 square feet, and kind of run down at that, they are still your comparables (comps). If I understand the rules correctly, the appraisal can only be a maximum of 25% over the comps. So if everything else in the neighborhood is selling for a maximum of $400,000, this one can't appraise for more than $500,000, even if it might be worth $800,000 in a neighborhood of like properties. Best property in a neighborhood: Bad investment (relative to other properties), but a good way to find a great home for your family to live in at a bargain price.

So this person wants to get around that, and has an idea as to how. Forget lender standards, he'll just make the loan himself. Well, he is permitted to do this. Willing buyer and a willing seller agree upon the price, and since a regulated lender isn't involved to force the evaluation into a LCM, or "lesser of cost or market" format, the appraisal becomes irrelevant. Buyer and seller agree upon a price, and part of the transaction is that the seller carries the note.

Now the first issue is the "due on sale" clause of most mortgages. So if you sell the property in this manner, any mortgages you have become due when you sell the property. No problem if you own it free and clear, or if you've got the cash to pay it off somewhere. A large problem if you don't. It is possible that some lenders may allow the loan to be assumed, and to put the loan you are actually holding behind their mortgage as a second trust deed. You then have justification for charging a higher rate of interest on the portion you actually hold. Cool, from the seller's point of view. Not so hot from the buyer's point of view. Remember, they've got to actually make those payments. Some lenders may also agree to modify their trust deeds so that you're still holding them, but they become "pass-through" type investments. Expect the lender to require a modification that raises the interest rate in this instance.

Now, let's ask the next question: Why would the tenant want to pay more than the area is worth? Well, I wouldn't, but it does happen. There are "Rent to Own" appliance stores everywhere, and PT Barnum underestimated by several orders of magnitude. Many people think that for some unguessable reason that they are not qualified to buy a property, or that they are less qualified than they are, and many loan officers and real estate sharks prey upon this sort of buyer. It is for this reason among many others that I counsel everybody to shop their loan around and find a good buyer's agent, who should inform you as to the issues involved and represent your interests, so that if you end up doing it, you walk in forewarned and forearmed, and have someone with a fiduciary responsibility to you and only to you that you can and should sue if they don't. Because buying under these conditions is not likely to be in the buyer's best interests in the kind of situation envisioned by this seller. The buyer ends up owning more than the property is worth according to a lender, making it difficult to refinance, even if general values have increased. I would certainly want some major concessions in price or interest rate in order to consummate the loan. Note that it isn't wrong of the seller to do this as long as you do not misrepresent the situation; everyone wants the best possible bargain and both sides are entitled to pursue that best possible bargain, and sometimes, one side does a much better job than the other.

Now, let's assume that all of the above has been done. Willing buyer, willing seller, price agreed, exchange made and now we are going forward to the seller wanting to sell the note. Can they expect to be able to sell?

The answer is that yes, the holders of the notes can sell, but in my estimation they would be better off not doing so, other factors being equal. You see, all of the other lenders out there selling their notes have a track record. Even lenders just starting out can document their underwriting standards. Furthermore, CMOs and MBSs are normally sold in lots of $50 million or more - in other words, pretty good risk diversification, as that is at least 100 different loans from 100 different borrowers in 100 different areas at a whack, and the chance of that lender taking a net loss is far less than if there are only ten or twelve. Furthermore, as most lenders can document their risk management practices, and the ones who have been at it for a while have a track record of thus and such a foreclosure rate, and thus and such a loss write-off rate, they get a price for their notes that is commensurate with the value. In most cases, pretty darned good, netting three or four percent over value after paying the security brokerages who act as go-betweens. Do this six or ten times per year, you make some pretty decent money even after paying for everything it takes to do those loans.

In the case under consideration, however, those security brokerages are going to charge about the same amount as they charge on much larger issues. After all, they have to do basically the same work, so they want the same pay. Furthermore, you're going to have some real trouble convincing prospective buyers that your risk management underwriting is acceptable, as you are missing at least one of the most basic protections for lenders that there is: the assurance that if everything goes south, they will be able to market the properties for something approximating their investment. Chances are, they are going to require that you perform an appraisal in order to sell the loan to them, and since the appraisal will come back with the same value that you were trying to ignore in the first place, and the price they will offer for the loan will reflect that, and they will offer far less for those notes than you have at risk. All of them are in the same area, and all of them have the same issues. A lot less diversification of risk than what they normally see, and with other issues as opposed to loans underwritten by regulated lenders, as well.

Now if you can sell enough in one area, the comparables will start to reflect these values, for which neighboring properties will certainly thank you, but the real point is that after a few of these sales, both in the MLS and publicly recorded in a short period of time, your appraiser can start to get value, at which point regular lenders start being willing to bite off on them, if you've got a good appraiser who can justify choosing the comparables that they did. If you're selling out a sixteen unit conversion, well, most of them should be "model matches," but if they are all single family residences of varying floor plan and not particularly close to one another, there are likely to be persistently difficult issues with appraisals.

The upshot is that in most cases, when you go to sell the note, you are going to take the same "loss" (of value), if not more, than you otherwise would have "suffered" by simply putting the property up for sale at prices that the neighborhood comparables would support, and letting the lender's chips fall where they may. Don't get me wrong; if you're in a position to hold the notes yourself it could be a great way to make some money, although you've got to watch out for foreclosure issues. But if you're planning to sell the notes, you're going to have to go through the same rigmarole that the regulated lenders do, and come out much the worse for the fact that you did not go through the same process that they would. Now just to note, this has a lot in common with a couple of scams I've read about, and Wall Street is certainly a lot sharper than I am on that score. Just because you're being honest does not mean that the flinty-eyed people who invest other people's money for a living are going to believe you're honest, especially when what you're doing looks like a known scam to them. Oh, you'll be able to sell the notes, of that I have no doubt. But I sincerely doubt that you'll be able to sell them at face value or anything like it.

Caveat Emptor

I am buying a house. I signed the contract but the seller said contingent to sell until she buys new house?


Is that normal?

People do it. It's smarter to avoid the stress and complications of dealing with both at once, but there's nothing wrong with a contingency sale, so long as you agreed to it in the contract. Note that once you have a fully negotiated contract, you can't just add a contingency to it. It has to be agreed to before there's a valid purchase contract, and if it isn't agreed to before then, the question becomes, "What concessions is the other side going to demand for this?" There will always be concessions, but by waiting to negotiate them after the contract is complete, you lay yourself open to a suit for specific performance. You agreed to that contract. Just because you forgot something important (or if you intentionally omitted it), does not mean you can just tack it on as an extra consideration, any more than the other side can unilaterally change the purchase price by $10,000.

Contingency does add a lot of complexity and not an inconsiderable amount of cost and uncertainty to the process, however. The buyer shouldn't lock their loan until they know when you can fund it, and if they don't know yet, this means the loan sits and sits, perhaps increasing in rate and cost. If you lock it, it definitely increases in rate and cost. This is one of the few possible exceptions to locking a loan rate right away. There's also the issue of whether your seller will qualify for the loan on the new residence, or the purchasers of your buyer's soon to be former residence can qualify for their loan. Not to mention the anxiety of whether you will qualify for your loan in time for the transaction to close so they can get their home, and I can go on.

There are better alternatives for this situation, and if your agent didn't give you a couple of ideas during the negotiating process, well, let's just say there are better ways to handle it, especially right now when you cannot afford to irritate or lose any buyers.

A contingency sale is most often for the convenience of the seller. Whereas this is just fine in a seller's market where as soon as you put the sign in the yard you get three offers, a buyer's market is something else again. By being unwilling to accommodate a particular buyer, you may not get another offer. I understand very well not wanting to move twice, but the person who is willing to work a little harder or go through some extra inconvenience usually gets it returned in the form of cash when the transaction is over. How much is dependent upon the competition of the moment. It can make your property a lot more attractive, and mean a significant difference on the sale price, if you're willing to cooperate with the prospective buyer on not making them wait while you find a new property to buy. In a market like today's, where buyers have all the power, it can make the difference between selling for a good price and not selling at all. Any time you find yourself unwilling to do something a buyer wants, you run the risk that you won't get another, or won't get another as good.

Some buyers want contingent sales as well. Just as being willing to work with a buyer without a contingency can make you money, a willingness to grant a buyer their contingency can also make money. You can ask for a larger deposit, a higher sales price, or for the right to continue to market the property - so you've got this offer, or a better one if that comes along, as they are not likely to be able to perform when you drop that Notice to Perform on them because you now have a better offer. If they could have performed, they would have already performed. If they really need that contingency, they've got to deal with the same market you're dealing with!

When there is a strong buyer's market, if you are willing to do what it takes, you are competing more strongly for the available buyers. Similarly, if you as a buyer have fewer needs that you ask the seller to cooperate with, chances are excellent that you will get a better price. Remember that there is a reason why he who has the gold makes the rules - because he's going to be shelling a good amount of it out in order to get his way on other things.

Caveat Emptor

One of the things people keep asking about is first time buyer programs. They exist, but lenders are not the first place to ask. Why? Because many, if not most lenders, actually charge a quarter of a point or so for first time buyers, in addition to their regular rates. They do this because so many of them fall out, and they want some money for their trouble. Also, interfacing with local first time buyer programs is a bit of a hassle, and it often takes much longer to close the loan, if it does close. Yes, you need to tell them if you are using a first time buyer program, but if you start at the lender you may get hit with the charge for your loan, and then find out at the last minute that that particular lender does not participate on the first time buyer program for that city.

The place to ask about first time buyer programs is the government of the city that you intend to buy in, usually the housing department, but sometimes the planning department. If you intend to buy outside of city limits, call the county housing department. Yes, you do need to know ahead of time where you're intending to buy. I know how many people hate to plan, hate to "limit themselves" and hate to do preparatory work, especially multiple sets with multiple cities if they're not certain where they will buy, but it's necessary if you're going to achieve a positive result.

Most first time buyer programs are funded with money that the municipality gets from the federal government. You'd think they would be similar, that funding would be consistent, and that participating lender lists would be mostly compatible. You could not be more wrong.

Once each city gets the money, they are still subject to federal oversight, but that is broad and there's a lot of latitude. One of the things that all of them have in common is that they charge a fee for a lender to participate every year. Unless that lender gets a lot of business through that program, it's not cost effective to automatically renew every year. I only routinely pay the fees for the much broader Mortgage Credit Certificate program every year - I wait until someone wants a given city's program before I pay the fees associated with that program. So the list of approved lenders is going to concentrate heavily on major direct lenders with offices in that city. This has the effect of limiting the competition, although brokers who are willing to sign up still have all of the advantages of brokers, because for the vast majority of these programs, it only matters that the originating office participate, not that the funding office does. Once I'm signed up with most programs, it does not matter what funding lender I use because originating office is what's important, not the actual funders of the loan.

Now, each and every first time buyer program will be different. Any similarities between any two programs are basically coincidence. Income limits, qualifying properties, amount of funding, how long it lasts into the fiscal year (or quarter), how much money they get from the federal government relative to the population and cost of living, and most importantly, whether they have any funds at the time you want them and qualify.

Even the form that the first time buyer program takes is wildly variable. Most common is a second (or third) mortgage with nominal payments and a nominal rate. For instance, one east county city requires a 3% interest only payment. Also very popular is a "silent" second (or third) mortgage with no payments, but it needs to be paid back in full if you sell, and in many cases, if you refinance. Some first time buyer programs work off of a "shared equity" basis, with no payments and no interest charged, but they own a fixed share of the property and are entitled to payment in full at sale, and in many cases, of the base loan amount plus appreciation if you refinance. This lessens the financial benefits of home ownership, because normally the appreciation belongs entirely to the homeowner. Nonetheless, without the program, you wouldn't have had any of the benefits of ownership, economic or otherwise. Still other cities have programs geared towards maintaining a pool of limited income housing in that area, and the price you sell for when you sell will be restricted, negating most of the financial benefits of ownership. Some programs are even tiered based upon income, and those making a lower amount will get more favorable terms that those who still qualify, but make more than people in the first group, and there may be more funding available for the lower tiers. It all depends upon the locality where you buy, and if you apply and qualify for a first time buyer program in City A but end up buying outside of that City limits, you are out of luck. For this reason, you need to work with a buyer's agent who knows the programs and their boundaries and is careful about them. Just because it has the appropriate ZIP Code or telephone prefix does not necessarily mean anything, and I find properties with the wrong ZIP Code in MLS quite often. For instance, properties that are actually in northern Pacific Beach here in San Diego will quite often have the more upscale La Jolla Zip in MLS. Before making an offer, you can always call to make certain the property is within the boundaries covered by the program, of course. You want to double check, because you will pay a fee, usually several hundred dollars, when you apply to the first time buyer program, and I don't know of any that refunds the money if you don't qualify, if you are outside the area, or if you just don't get the funds because they are out of money right then.

Please note that one other feature all first time buyer programs have in common is that they require owner occupancy of a single occupancy dwelling. These are not intended to help investors grow their real estate empire. These programs are intended for people who would not otherwise be able to afford the property and intend to live in it. In some cases, moving out triggers a requirement for immediate repayment in full (and just when it got more expensive to refinance because it's now investment property, too!). In others, so long as you live in it for a given number of years, you can keep it going providing you don't break other rules. Every program has it's own little twists on the owner occupancy requirement. None of them permit you to buy residences suitable for more than one family, either. Duplexes and apartment buildings are disallowed from every program I've worked with.

First time buyer programs are not grants. I've dealt with them all over southern California, and I don't know of any that are outright grants. In many cases, that would be more cost effective, not only to the buyer but to the city as well, than the hoops that have to get jumped through. So I suspect that outright grants are prohibited by the enabling federal legislation, although I've never read the regulations.

Some first time buyer programs do have mechanisms for forgiveness of the loans after a certain period of time. The requirements and length of time vary. I've seen those that have the forgiveness feature be as short as five years and as long as fifteen.

Prospects for subordination if you refinance are also variable depending upon where you buy. Some require payment in full if you refinance at all, while others will allow themselves to be subordinated to new First Trust Deeds providing certain requirements are met. Chief among these are usually requirements that essentially prohibit cash out refinancing unless you pay off the first time buyer program.

One final caveat to these programs is that most of them will not pre-approve you. In other words, they won't look at your application before you've got a fully negotiated purchase contract. I know of only one program that will pre-approve applicants, and none that will commit funds before you have a fully negotiated purchase contract. If they run out of money in the meantime, that's just too bad. - you're out the application fee. For this reason, you need to stay on top of not only the program requirements and boundaries, but also the funding status as well. If they don't have any money when you actually have a contract to buy, you are wasting the time and money to apply.

Now I don't mean to say these programs are not worthwhile. They can and do make the difference between being able to afford the property and being forced to continue to ride the rent escalator. I should also note that they are basically a band-aid to treat the gaping economic wound caused by artificial restrictions to the housing supply. But if the conditions are right for the band-aid to help you, there is no reason why you shouldn't take advantage of it.

Caveat Emptor

Showplace Needs a Little Finishing!

General: San Diego, 4 Bedroom, 2.5 Bathroom (1 full, 2 3/4)

Con:

What's Wrong With It: The owners ran out of money and it needs another few thousand dollars to shine! Roof is getting old.

Why It Hasn't Sold: People can't see how easy it would be to finish!

Who it's Not Appropriate For: People with very young children. People who need grass.

Pro:

Selling Points: Very low maintenance yards. Once finished, the property will be low maintenance inside as well. Nice large combination room with good lines of sight. The back yard has a nice pool and spa, and a deck with views over the entire area. Second story separates the master suite from the other bedrooms, and itself has a nice observation balcony. 4th bedroom downstairs would be ideal office, and is insulated enough to be good for day sleepers.

Who Should be Interested: People who love pools, or love entertaining, or both!

Why it's a Bargain: This is a great neighborhood, and with prices such that I would expect properties like this to be selling for about $40,000 higher than the asking price.

Financial:

What I think I can get it for: $410,000.

Monthly Payment examples: I've currently got a thirty year fixed rate loan available for qualified buyers at 5.875% with one point, or 100% VA financing at 5.75% for the same one point

With no down payment: VA 30 year fixed rate loan at 5.75% one point (FHA 97% financing) payment $2427, (APR 5.883)

With 20% down: Fully amortized payment of $1940 (APR 6.020).

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 $410,000 the property would be worth approximately $660,000. If you held it those ten years before selling, you would net about $320,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $2400 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $280,000 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 5.125 percent!

5/1 Rates are becoming attractive!

Best 5/1 ARM: 5.0% with 1.8 points total to the consumer, and NO PREPAYMENT PENALTIES! Assuming a $400,000 loan, Payment $2147 APR 5.201. This is a fully amortized loan with a fixed rate for the first five years. 5/1 ARM rates as low as 4.75 percent!

10 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 (full documentation) 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've been saying this for a long time: Short sales are poison for buyers. I don't know why people encourage buyers to look at short sales, because there is no advantage for buyers that I am aware of. In fact, there are several decided disadvantages. I'd much rather make offers on lender owned property, or anything else for that matter.

For those sellers who desperately need to sell, which is pretty much every short sale, I really am sorry. But I have a fiduciary responsibility to my buyer clients, who come to me wanting a better property for less money, and less hassle. The facts of life in short sales work against getting a bargain, while sabotaging our (mine and my clients) ability to control the transaction. Therefore, I advise against. Much better for buyers to look for lender-owned or other property.

The issues lie with the lenders, who are in denial of the situation. I've never come across anyone in any lender's short sale department who didn't have their head stuck in cloud-cuckoo land. Instead of making a prompt approval or disapproval of an offer, they sit and delay and hope for a better one. Most often, I've got the purchase financing ready to go in about two and a half weeks from the date of the purchase contract. For any other property, it's pretty trivial for the listing agent to be ready to close by then. We're done, and my client is happy.

For short sales, we usually won't get word as to what the lender is going to do for at least a month after that. I've literally never had an approval from a short sale lender within a normal escrow period of thirty days. This has implications for the buyer's loan. Mortgage Loan Rate Locks are more expensive for longer periods. Pulling a rate sheet at random, a 45 day rate lock adds a sixth of a point to the costs for a thirty day lock, while a sixty day lock adds four tenths of a point. On a $400,000 loan, this works out to roughly $667 and $1600, respectively. If you need an extension, a tenth of a point (roughly $400) buys five calendar days. Some lenders aren't extending locks at all for loans above the conforming limits. Or buyers can float the rate, leaving themselves at the mercy of the financial markets as to the loan they might eventually get. None of these is an optimal situation from a buyer's point of view.

When they do respond, the short sale lender will always try to squeeze more money out of the transaction. They're in denial about their loss, with the practical effect of making that loss worse. The property is only worth what it's worth. The first few days on the market are the best time to get the highest offer. If you didn't get an offer then, you're not likely to get more money later, as I said in How to Sell Your Home Quickly and For The Best Possible Price. But loss mitigation departments are congenitally clueless about this - and they will forget whatever you manage to teach them within 4.3 nanoseconds. They are structured towards shaking the most possible money out of the transaction, and seem completely unable to learn that all this does is result in a failed transaction, no matter how many times it happens. What's that definition of insanity again?

So what usually happens (after 45 to 60 days - weeks after my buyer clients could be living in any other property) is that the lender wants two things: A higher price out of my buyers, and a commission reduction on my part. I'm not going to say that I'm in love with commission reductions, but I'll agree in order to make clients happy. But the deal-killer is that they want the buyer to make a higher offer. Ladies and gentlemen, I went out and negotiated a good deal that my client is willing to accept with the seller, despite all of the delays and problems in short sales, and here's this third party essentially vetoing the purchase contract. If I did get a heck of a deal, it's now gone. In any case, my clients are going to be unhappy, being presented with what amounts to an ultimatum: Pay more money or lose the property. Show of hands, please: Is there anybody reading this that would be happy to get such an ultimatum? Unilaterally attempting to alter the purchase contract is forbidden with any other transaction. Why in the world would a rational buyer want to subject themselves to that? Why would any but the most clueless of agents not discourage them from doing so? I'm not going to say it's impossible to get a great bargain on a short sale, but it is highly unlikely.

I do consider my clients being willing to deal with a short sale to be worth some serious concessions in the purchase contract, as does every other agent with any experience in dealing with them. So it's not difficult to negotiate a pretty good bargain initially - but it's extremely difficult to keep that contract intact when the short sale lender gets involved, because their priority, the only thing that's on their radar screen, is shaking as much money as possible out of all the participants.

Nor is there anything I can do as a buyer's agent that's going to make the transaction fly faster, or prevent the short sale lender from sabotaging it. I can argue until I'm blue in the face. They're not going to listen to me. They might listen to the listing agent, but not the buyer's agent. I can help them with what to say, but I'm still relying upon someone else to convince that short sale lender. Whatever they do, they're going to take their own sweet time responding, hoping for a better offer.

The cold hard statistics is over eighty percent of all short sales fall apart, and most often it doesn't even get as far as whether the buyer is qualified. The short sale lender wants more out of the buyer, wants the seller to come up with more money than they've got, the buyer gets tired of waiting and moves on - something. No matter what is is, my buyer isn't going to be happy. Quite often, I get the blame, at least in my client's mind, for the transaction failing - even if I warned them as to why this was a bad idea in the first place.

If you do get an approval from a short sale lender, quite often they're written on a ridiculously short deadline. Given all of the facts above, I'm not going to advise my buyer clients to spend their money on appraisal, inspector, etcetera until we do have an approval. That's just money thrown away if the short sale lender doesn't approve it. But waiting on them means it's likely to take more than a week to get the loan done once we do have an approval - and dealing with a one week deadline was an actual experience I had once. Not to mention the effects of waiting for such an approval on the buyer's due diligence period, and possible exposure to loss of my client's deposit (at the very least, it's sitting there tied up in escrow while everything gets sorted out).

Seller paid closing costs, integral to most transactions currently, and Down Payment Assistance are also extremely difficult to get approved. These are money out of the lender's pocket, and they're going to require a higher than what they consider "market" price in order to compensate them. This is intelligent and reasonable, but if you're looking for a bargain due to them not understanding their bottom line, it's not going to happen, and in fact, when one or both of these things are part of most transactions, the "market" is priced to include them. Result: The buyer who needs one or both of these is likely to have to pay more for a short sale than any other property they might fix their eye upon. And those buyers are wanting me to find them a better property, cheaper. Are you still in doubt as to why I advise buyers against short sales?

It is far more fruitful for most buyers to focus on properties in other categories. For this particular property, better to wait until is is lender owned, at which point the bank is on the hook, paying money out of their pocket, and usually the money tied up in this non-performing asset costs that lender heavily in leverage on their working capital. Lender owned properties get turned over to different employees, with different performance incentives, with the instruction of getting that property off the lender's books! The money this costs the lender is their own management's fault.

For any lenders reading this and not liking it: The responsible party is you. If you don't want them to become lender owned and cost you much more money, get real about your short sales! Publicize your criteria so buyers and their agents will know they're not getting into a "black hole" situation, and respond in a timely and reasonable fashion without trying to leave people who weren't involved (the prospective buyer and both agents) holding the bag for your mistake. It will save you money by dealing with the situation before it goes to Trustee's Sale.

As far as writing this article goes, the only one I have any sympathy for is the current owner, who really does need to sell. No matter what past sins they may or may not have committed, that owner is currently trying to face reality and deal with it. As the buyer, however, unless you believe that seller's plight is worth wasting several tens of thousands of your dollars, there's nothing you can do. Buyers should avoid short sales. They're not likely to end up happy.

Caveat Emptor

Here was an idea I had: Pack a list of the most important things consumers need to know about buying real estate, as packed into the words I can say in sixty seconds without sounding like an over-clocked squirrel.

Here goes:

Spend some time making your property shine before you put it on the market. Doing it yourself is better than giving an allowance. Spend the effort to find a good listing agent, and sign a listing agreement at least a week before you want people to know your property is for sale. Consult the agent as to what can be done to make the property more attractive before anyone sees it. Agree to pay your listing agent for the good they do, and offer buyer's agents at least an average commission - you don't want them trying to sell someone else's property to the people who like yours.

The property is only worth what someone will pay. Price it correctly from day one. You'll end up with more money, faster, than if you start too high and reduce the price. Not all goods are in the form of cash - decide what's important to you, what's not, and how much money it's worth, before you have an offer.

Once the property hits the market, make the property as available for showing as you possibly can. If you don't show it when people want to see it, they might not come back. If you possibly can, don't be there when your prospective buyers are.

Negotiations are give and take. You shouldn't expect to get unless you're willing to give, and a stubborn attitude can sabotage your sale. Remember, you have a property and you want cash. There are lots of other properties out there

How's that?

PS: this guy is one of the best real estate agents there is!


Most of the articles and things I read about the price of gas seems to be based upon an implicit assumption that the price of gas is only as high as it is temporarily. This is not the case. Gas isn't going to get significantly cheaper than today. As a matter of fact, the way to bet is that the price ten years from no will be much higher. It's a matter of supply and demand. Two billion people in China and India are joining the consumer society, and they want our standard of living. Today, there was an article in AP headlined Gas guzzlers a hit in China, where car sales are booming.

But while sport utility vehicle sales in the U.S. are tumbling, automakers are finding that for China's newly prosperous car buyers, bigger is still better.

So General Motors Corp. has made the Escalade a star of its auto-show display and is eager to get it on the market here.

"If you look at the fastest-growing market segments in China, there are two - SUVs and luxury cars," said Joseph Y.H. Liu, GM China's vice president for sales and marketing.

It isn't a matter of price gouging by the oil companies, or even by OPEC. The real bottleneck is in refining capacity. Oh, there's only a finite supply of oil and eventually it will all be gone. But right now, the things limiting supply are how fast we can get it out of the ground, and how fast it can be refined to a usable form. Doesn't matter how much water is in the lake if you need more supply faster than the pipes can carry it.

Suburban and exurban real estate grew on cheap gas. Five years ago, gas was $1.40 per gallon. A car that gets 20 mph can go 70 miles on $5 worth of $1.40 gas. With gas around here up over $3.80 per gallon, things aren't nearly so rosy. Instead of 70 miles, that $5 will only barely take you marathon distance (26.3 miles), and it's going to get worse. At $5 per gallon, the consumer with a job in downtown San Diego who lives in Temecula (60 miles) has gone from spending roughly $2100 per year on gas for their commute to $7500 per year. That difference of $5400 is $450 per month right out of the family budget. In most cases, two spouses are driving separately, which means that difference goes to $900 per month, or almost $11,000 per year right out of their after tax income.

Temecula isn't the furthest of San Diego's bedroom communities by any means. I know people who commute from Lake Elsinore, Hemet, and El Centro. Many commutes are over 100 miles, plus all the people from even further afield (for instance, Yuma, Arizona) who may not commute every day, but have doctors or other activities here. Despite greatly augmented gas mileage, hybrids aren't going to offset this increase and even if they were, people would be adding the cost of at least one new car in order to do so. I don't know if you've looked recently, but hybrids aren't economy car priced.

With this effectively raising the cost of property further from the job, one of two things will need to happen: Either the places where the jobs are will have to relocate to the exurbs where their workers can afford to live, or people will have to start finding places to live closer to their jobs. The person in the next cubicle over who lives in Clairemont will have the same gas bill that someone from Temecula had five years ago. The older communities closer in have long been less attractive than new developments further out, but raise the price of making that trip enough, and the macroeconomic reality will force people to start thinking more in terms of shortening the commute, even if it means they have to settle for a 1200 square foot house built in 1950 instead of a new 2600 square foot one way out in the exurbs. People are willing to make sacrifices when it's mostly time out of their day, but when it's a continuing drain on the wallet that means little Billy can have an 8x8 bedroom and food, clothes, and a college fund, or a 15x12 bedroom and none of the others, you can expect more people to start choosing the former.

What this means is that exurban bedroom communities become less valuable, while older communities closer in to the job centers become more valuable. For those who may not realize what I'm saying, the closer it is to places where people work, the more valuable it will become. This factor has always been present, and the cost to commute has always been part of the cost of the property, no matter how many people pretended it wasn't. It will become a more important component as time goes by and gas prices rise further. And the further people have to drive to work every day, the less a given area will be worth. The people who work there won't have these costs, of course, but most of the skilled trades that get substantial paychecks have to work in the main job centers, and there aren't as many of those in Hemet or Westmoreland as there are in the central areas of San Diego. Corporate facilities are where they are, and if you can't afford to commute, you're either not going to work there or not going to live there. This has implications not only for where corporations decide to do business, but for zoning regulations as well.

Caveat Emptor

From an e-mail

I've been talking to agents lately and I ask them about the things I've learned about from your site. I thought I would say things like "I want to apply for a backup loan" and they would say "Good idea!" instead of "Why would you do that?" I try to answer the why and next thing you know none of my why's make sense anymore. Here is a summary of that conversation:

Me: Okay, so I need to get a "pre-approval" or "pre-whatever" from a lender so I can put an offer on this house . . . that sounds fair . . . but I want to shop my loan around and in fact, I want to get a backup loan.

Agent: Backup loan? What for?

Me: Because from what I understand what you are told at first isn't what gets delivered and you are at the mercy of the loan officer if you don't have a backup plan

Agent: They have to fill out the form and give you what they promise so you are protected.

Me: So it's the law that they deliver what they fill out on this form?

Agent: No, it's not the law but they wouldn't dare change the terms or I wouldn't recommend them.

Me: Well, most people don't know they're getting screwed until later and most of the ones that notice don't do anything about it.

Agent: Well, if you hire me to be your agent then you should trust my advice . . . otherwise why would you hire me?

A similar conversation ensued when I talked about a "exclusive" vs "non-exclusive" buyer's agent agreement. "There is no such thing as "non-exclusive"". What is the benefit to you? If I have multiple agents then they all work to find me the perfect house and the one that finds me the one I like is the one that get's rewarded. Nope! If you tell an agent you have other agents he won't work with you. Okay, well, I wouldn't tell the other agents. But any good agent is going to make you sign an exclusive agreement.

Anyway, the sales techniques here are right up there with car salesman.

Let me ask you about your experience with monopolies? Your electric provider, mass transit provider, cable provider - do they furnish top notch customer service? Do you think someone might be able to do better, cheaper? Quite likely, because monopoly situations encourage rent seeking behavior. Monopolies are the classic example of rent seeking - do business with them, or not at all, meaning you're stuck with whatever service they choose to give you at whatever price. Why in the world would you do that to yourself?

Only two possible reasons: You don't have a choice or you don't know any better. You do have a choice, no matter how much various people may choose to pretend you don't. I certainly haven't noticed any shortage of real estate agents or loan officers. There's something like 7500 licensees in San Diego County alone. That leaves you don't know any better. It doesn't matter whether it's through ignorance or not following through on the knowledge.

In fact, if you think about it, someone who insists upon exclusive rights to your business is telling you they're worried about comparisons to other professionals. They're telling you they're afraid they can't compete and they're not willing to try. Does this sound like someone who's likely to give you the best service? Someone who's not willing to compete?

Just because an exclusive agreement isn't in the consumer's interest doesn't mean that it isn't very desirable for agents. In fact, most agents take a lot of classes in learning how to lock your business up and cut out the competition before anyone else gets to the starting line - several times more training than the average agent ever takes in learning how to actually give good service and good value to their clients. Look at the average agent symposium sometime. There will be easily ten times more offerings in how to cut out the competition than there will be in how to get your clients the best value. If the average agent doesn't offer a non-exclusve buyer's agency contract, they can pretend such a thing doesn't exist. It does exist; it's available in every state. In California, it's form BBNE in WinForms, the standard computerized package. But if they can persuade you to sign an exclusive contract, they're guaranteed to get whatever buyer's agency commission is due - before they've done any real work, before they've demonstrated that they are really going to guard your interests at all. I've written about the drawbacks of an exclusive agreement before, and even given examples in shopping for an agent, and the games that get played with consumers by agents. If you've signed an exclusive agreement, you're stuck. If you don't, you're not - indeed you keep far more control in your own hands.

Some agents will try to sidetrack you with an exclusive agreement "but you can fire me any time you want!" The first question is where is that written into the agreement? Show me please. In fact, the standard exclusive contract is written to be very difficult to break for any reason. The second question is that even if it is written in, how is that not functionally equivalent to a non-exclusive contract? The answer to that is they've still got your business locked up until and unless they make an obvious blunder. As long as they don't make that obvious blunder, they're still in the driver's seat. But this doesn't mean that they're a good agent - you have no standards for comparison. Indeed, you are agreeing not to acquire any standards for comparison. Matter of fact, they can be the worst excuse for an agent ever and still not make any mistakes that most people are going to fire them for. Plead for one more chance, and most people will give it - dozens of times. The bottom line is that they still avoid any chance at having to compete.

Now just because your agreement is non-exclusive doesn't mean you have to go find other agents. At least half of my clients never talk to another agent. But they have the option of doing so, and that knowledge is one of the things that motivates me to do the best job I can for my clients, and why I keep the list of clients I'm working with at any time short enough so that I'm certain I can handle them all with no deterioration of service. If I don't, they can fire me and find another agent as easy as crossing the street. That motivation just isn't there if you give someone an exclusive agreement. Do you want the agent whose motivation is to concentrate on giving a few clients the best job they can possibly give, or do you want the agent who's a half-notch above getting fired, whose motivations are to lock up as many clients as possible, secure in the knowledge that none of those clients are likely to actually fire them? And if they're confident they can give you such a terrific job, why are they requiring an exclusive agreement? If they're really that good, they should be eager to compete. That;s the best confirmation of their abilities possible - the fact that someone else tried and couldn't do it! As I've said, most of my clients see the job I do and never talk to another agent, and most of those who do end up telling me how much I shine by comparison. But it takes confidence in my own ability to offer that non-exclusive agreement. The ones who won't are telling you that they don't have that confidence. Do you think there might possibly be a reason for that lack of confidence?

Probably the largest number of agents and loan officers compete by being what I call "Social predators" Involved in Boy Scouts, Soccer, Little League, the church, PTA, whatever. They try to make those they come into contact feel obligated to do business with them, because they are after all, a good guy (or girl), they help the cause, etcetera. Surely such a person is worthy of trust? Surely they will treat you right? They lock up the business with an exclusive agreement or a large deposit, raising the barrier to competition as high as they can. This effectively sets you up for the kill. My personal experience leads me to believe that such agents and loan officers are responsible for a truly outsized proportion of the people who are losing their property to foreclosure in the current crisis. It seems like everyone I come across who's in the process of foreclosure has a "social predator" story to tell. Most of them have no clue what happened until I dissect the entire process and show them that their "little boy's wonderful scoutmaster" bent them over and took advantage. The thought process is natural, but the conclusion does not follow from the premise - a thing most people don't understand until how it bit them (past tense) is plainer than the nose on their face.

Ronald Reagan loved a very applicable phrase: Trust but Verify. It's not accident that this principle, which he applied as President, served him and the country very well. On a more personal level, you are willing to trust agents with your business (otherwise you wouldn't be talking to them), but you want to verify that they're earning it. You're not willing to take trust to the level of the spouse who's clueless about their spouse telling them they worked late when they come home at 3AM six nights in a row smelling like someone else's perfume or cologne. This is the best function of a non-exclusive buyer's agency agreement. This means you still have the right to go out and get the only valid standard of comparison: Another agent who has the same opportunity to do the same job as them.

In your situation, I'd be very blunt: "What you're telling me about requiring an exclusive contract makes me believe that you know very well you don't measure up to a good standard. In fact, the harder you argue for an exclusive agreement, the less willing I am to believe you are worthy of one. I'll willingly give you a chance to earn my business with a non-exclusive agreement, but I'm not going to sign any exclusive agreements with anyone. Since you're not willing to sign a non-exclusive agreement, I am wasting my time. Good-bye." They have as long as it takes you to get to the door to change their mind. Walk out and never look back - find someone else who will offer non-exclusive agreement. In fact, taking this stand in your self defense is the first and most critical point of Shopping for a good buyer's agent. The standard non-exclusive contract is truly a bet you cannot lose as a consumer. There literally is no risk. Doesn't matter if they're a freshly minted licensee who's never done a transaction in their life (How often do you hear that from someone who actually has significant experience?). Go ahead and sign a non-exclusive agreement, and the worst that can happen is they don't get the job done. You're still free to use anyone else who does. You have lost exactly nothing - as a matter of fact, both you and that agent are mathematically, provably ahead for having signed that non-exclusive contract! Hiring them thus can only increase the probability function in your favor! This improvement may be marginal or even zero, but so long as you do your due diligence it cannot be negative.

The same thing applies to the loan officer an agent recommends. The reason they're choosing that loan officer has nothing to do with the best choice for you and everything to do with the best choice for them. That's a loan officer they trust not to screw up the transaction by telling you, "You know, I'm not certain you can really afford this property." That's the loan officer they trust, by hook or by crook, to have a loan ready at the close of escrow, no matter what it takes, so that that agent can get paid. Has nothing to do with how good their loans are, how competitive they are, or any other advantage to you - only that they trust that loan officer to insure their paycheck. That's what the agent is really telling you. The loan officer may be really good, and very competitive on price. Then again, they may not, and the one thing I'd bet significant money on, sight unseen, is that they will never tell you that maybe you're stretching beyond your means - that agent will never send them another client if they do! The only agents I'm certain could tell the difference between good loans and loan officers and bad ones if it bit them are the ones who are also loan officers themselves.

If an agent is recommending a loan officer on the basis of "This person wouldn't dare cheat my clients!", ask sk them for a copy of the initial MLDS (California) or Good Faith Estimate (the other 49 states) and a copy of the final HUD 1 for that loan officer's last five transactions with their client. (sarcasm on) What, they don't have them? What a surprise (end sarcasm). But if they don't, how can they possibly know whether that loan officer does or does not quote accurately? You've just asked for the only possible evidence, and they don't have it! Nor does this cover how well they compete on price, and as long as the terms are the same and the rate/cost tradeoff is better, a loan is a loan is a loan. There is no reason not to apply for multiple loans and see which loan officer actually has the best loan ready to go at signing time. In fact, to do anything else is trusting someone without verifying - you have no effective control upon their behavior at the end of the transaction. Maybe they'll treat you right, even without such. But loan officers can make more money very easily by adding a few hundred dollars here, a half a point there, and if you're the only loan you signed up for, your choice is sign their paperwork and take what they offer you or don't. As I said in Getting a Loan Provider to Agree to be a Backup Loan, if you apply for two or more loans, you can explain to both providers how they shouldn't be worried about the other one if they're telling the truth, so the only reason for them not to cooperate is if they're not telling the truth. "Trust but verify". It really is a simple, powerful formula, but to use it effectively you've got to understand that it's not words that are important, but actions.

You're right that these sales techniques have a lot in common with used-car sales. Everybody in any sales business wants to avoid competing if they can - it means they don't have to work as hard, and get higher profit margins. Consumers, for their part, need to learn to understand what actions mean, and that actions are important, not words. That's part of the reason why I'm writing this article.

Sales persons, properly handled, are your best friends in the whole world. Nobody solves your problems as well as an expert with the motivation of getting paid for their trouble, and there always seem to be problems that lay people don't realize exist until they're bitten, which is almost always far too late to avoid all the damage that's coming down the pike. Kind of like having a Terminator after you. If you don't have your own very special protector, they're going to get you. I don't like having my clients bitten - not tomorrow, not next year, not ever. One bad transaction can ruin you as an agent or a loan officer, and I intend to be doing this for the rest of my life. So I'll do everything I can to keep it from happening before it happens, and you want someone just as dedicated working for you. The only way to be certain is to watch them in action over time. But if they're asking you to sign that Exclusive Agreement beforehand, how in the heck can you possibly have the knowledge of their business practices to give it to them?

Caveat Emptor

People sometimes ask how they can improve their credit if they have old collections on their credit record.

The answer is NOT to simply pay them. Paying off a five year old collection can cause your credit score to drop by 100 points.

You say that makes no sense? Well, here's the logic of it: Collections are weighted by how old they are; when your last activity was. They are weighted heaviest for the first two years, then somewhat lighter from two years to five, then lighter still after five years. If you pay it off, it's still a derogatory notation, because after all, you were way past due on it. But now the date it gets marked with is TODAY, and now you've got an absolutely fresh collection on your credit record. In other words, it comes back to bite you just as hard as it ever, for another two years.

So what you do is get a promissory letter of deletion. This says that if you pay $X, they promise to issue a letter of deletion. You need this promise in writing. Call or write the company involved, and come to an arrangement that if you pay however many dollars they want, they will give you a deletion letter. Tell them to send it to you at your current mailing address. Don't pay until you do have the promissory letter in your possession, lest your credit suffer the hit I discussed above.

Once you have the promissory letter in your possession, then pay the bill. Include a copy with the bill to remind them. They will wait until your payment clears. They should then issue an actual letter of deletion. This is on company letterhead, has a contact name and phone number and an authorized signature. It should be short and sweet, reference the account, and say "Please delete this account."

You then send copies of that letter to the credit reporting agencies (Experian, Equifax, and TransUnion) and get your account deleted. Once the account - and the negative reference - is deleted, it's like it never existed.

Now, if the company reneges on the deletion letter, you have the legal ability to sue them. That promissory letter is a legal contract, with offer, acceptance, and consideration, for a legal purpose, etcetera. Talk to a lawyer about the details, I'm just a loan officer who's helped people with this a few times.

This entire process does take a month or two. It's not something to try when you already have a mortgage loan in process; it's something to do before you apply. Trying to do this while you've got a loan in process is expensive, because you're going to blow your lock period and need to extend it, sure as gravity. Thirty days of extension for your loan lock is approximately half a percent of your loan amount, so on a $400,000 loan, that's $2000. Most collections are a lot smaller, and you may have to resign yourself to the hit on your credit in some instances, in which case you should probably wait and have it paid via the escrow process, where the loan will be funded and recorded before paying off that old collection hits your credit score by being brought up to the present day. Otherwise, you could find your loan denied due to credit score dropping, and discover that you're not getting another one on anything like comparable terms. Maybe you are not getting another loan at all, because your score has dropped too much. Be careful, plan ahead, and take care of old collection accounts ahead of time.

Caveat Emptor

In all of my conversations on mortgages with prospects, there is one subject that comes up over and over and over again, and that is the subject of payment. "But that loan over there only has a payment of $1450! The payment you are quoting is $2700! The other guy has a better loan!" Then I tiredly have to tell them about negative amortization loans and what is really going on, and why my 6% thirty year fixed rate loan is a better loan.

Usually, they don't believe me. Over 80% of people are in denial when I'm done explaining how a negative amortization loan works. They so desperately want the Negative Amortization loan to be a real payment, and they trust the guy trying to sell it to them. After all, he told them all about his little girl's soccer game, or whatever irrelevancy he used (like all the good sales books tell him to) to make him seem like a trustworthy human being. So I'll tell them about what is usually my favorite loan, the 5/1 ARM, but with an interest only rider. "Now I shopped eighty lenders for real loans and real payments that you would actually qualify for. Of all those lenders, this 6% was the best thirty year fixed rate loan for no more than one total point. But I have got this other loan over here that another lender is willing to give you. It's at 5.375%, and the payment is interest only to start with, so you'll only be writing a check for about $2015. How does that sound?" They'll say it sounds better but not as good as that other loan that the other guy is offering. Then I'll tell them the downsides, "That's okay, because this loan's rate will adjust starting in five years, and at the same time, it'll start to amortize, meaning your payments will go up. If the index stays where it is now, it will jump to 7.25% that first month after five years, and your payment will be over $3250 in that sixty-first month. Furthermore, you'd have had to pay over three points discount to get that rate. So adding $10,000 extra to your balance, and suddenly having payments $1200 per month higher, is the price you pay for cutting your payment about $650 per month. What do you think the price is for cutting your payment by $1250?"

Well, as I've covered elsewhere, the price for a negative amortization loan in these circumstances, by whatever friendly sounding name they have for it, is a real rate two percent higher than you could have gotten, a balance that increases by about $70,000 over a five year period, and a prepayment penalty for the first three years, while your real rate isn't fixed even for one month, let alone 5 years.

Selling by payment is the number one trick of unscrupulous people. You go out car shopping, and someone says you can get a $20,000 car for $608 per month, while the lot down the street says you can get a $25,000 car for $303 dollars per month, that second car sounds fantastic, right? Never mind that the loan is based upon a ten year repayment, and the interest rate is two percent higher than the three year loan the first car was based upon. Never mind that the used car dealer is actually going to give you a payment of $339 after they soak you for $3000 in bogus fees simply because you are so happy you got this wonderful car for half the price, and you're so happy with that payment that you don't watch what they're doing as closely as you normally would, because, after all, you're getting this car for about half price! Except that you aren't.

Real estate, and real estate loans, are no different. You've got to be able to make that payment - the real payment, not that minimum payment. But if someone's quoting you a payment that much lower for the same thing, there is a reason. But it is amazing the number of people who would never fall for the low payment line of patter out on the used car lot when they're talking about a car will fall for it the nice plush office in real estate that some of that money they soaked their suckers for bought. Those few I can get to own up admit to thinking of the mortgage loan as something akin to rent, which is kind of like thinking of your car payment like you would think of bus fare. Hey, here comes a bus that's seventy-five cents cheaper than the express bus right here - but this other bus is jam-packed, you can't get off until the driver's shift is over, and it's going in the wrong direction!

Payment is not price. Most people know this, but they forget to apply it. The amounts at stake in real estate are usually many times the amount at stake in any other product aimed at consumers, and the chance of banks giving away that kind of money are correspondingly lower. The great rule that applies everywhere else applies equally strongly for real estate: Sales folk who try to sell by payment are trying to get you to pay too much, and not just for the item you are purchasing, but for the loan as well. I have helped folks who first bought their houses in the seventies for forty thousand dollars, and who now have four hundred thousand dollar mortgages on the same property. They have refinanced ten or twelve times (except for the two that added a grand total of $45,000 cash out, and the loans mostly had smaller payments, and each one added $20,000 to their balance in fees, and now they need to sell the house and they are walking away with $20,000 instead of $450,000 they would have had if they had simply been more careful and paid attention to hard dollars being spent instead of payment.

One thing to remember is that you can never go backwards in time with what you know today. What is important is not just the type of loan, but the interest rate and the cost it takes to get it. Mortgage loans are not free - all of the people whose help is required do not work for free and you - the borrower - are going to pay for every penny they make in one way or another.

Now, your greatest friend once you have own a home is inflation, particularly if you've got a fixed rate loan. You only borrowed $X. Just because they are now worth less does not increase the number of dollars you borrowed. If you have a fixed rate loan, or at least long enough to get through the period of inflation, you don't care that the interest rates on new loans are 14%. You've got this nice 6% loan locked in for as long as you care to keep it. Matter of fact, in situations like this, lenders will often offer you a much cheaper payoff if you will, in fact, pay it off. But four years of ten percent inflation and that $400,000 loan is worth about $273,000 by the standards of the day you took it out, and all the folks who were laughing at you because your monthly cost of housing went from $1650 rent to $3000 mortgage are now paying $2350 and getting none of the deductions you are, while your costs are fixed and theirs are still riding the escalator up, and if they want to step off now, that property with a $400,000 loan is now $5100 per month!

Nonetheless, choosing a loan based upon payment is financial suicide. If you cannot afford a real loan with a steady payment on the house you want, instead of a loan that messes you up for life, consider buying a less expensive house. Yes, everyone like house bling, and the more expensive of a house you buy, the more leverage works in your favor. But, as millions of folks are finding out the hard way right now, if you can't make the real payment on a real loan, you are at the mercy of the market, and the market has no mercy.

Caveat Emptor

The answer is a modified no. The same answer applies to property that is only structurally damaged, but not condemned.

That condemnation is a matter of public record. I've seen any number of them while perusing title records. It shows up kind of prominently on the title commitment, which every regulated lender is going to require.

Now it is a rule of regulated lenders that they will only lend upon the state of the property right now. If a house is condemned, you can't sell it to anyone as a house. Furthermore, with a condemned house on the property, it really isn't vacant land, either. It's less valuable than bare land, as you have an expense that vacant land does not. You have to pay for demolishing the structure and hauling away the garbage.

In the case of structurally damaged but repairable property, regulated lenders won't deal with it as a house either, although some may deal with it as if it were vacant land, less the cost of demolition and haul away. It depends upon lender policy.

The only place to get loans upon structurally unsound or condemned property is a hard money lender. They don't have the Securities and Exchange Commission to answer to, and only much smaller responsibility to the Federal Reserve Board. Many of them are individuals holding the loans in their own name. They can do most anything they want. If one of them can be convinced that the property can be marketed for a given sum, they will typically loan based upon that sum. It's all a matter of what they want to do.

Hard money lenders will loan a maximum of only up to about seventy-five percent of whatever the marketable value of the property is, and the rates are unfriendly, to say the least. However, they can choose to lend where a regulated lender can not. They can be your only option other than no loan at all. Most brokers will have at least a couple hard money lenders available to them, but your average direct lender cannot. As a final note however, before doing business with a hard money lender, you want to think long and hard and consult some experts as to whether you should - whether it's a good idea or not.

Caveat Emptor


Way back when I was just out of high school, I was doing a lot of things with my time. Working, dating, competing on the fencing team, gaming of various sorts. But every once in a while, I dropped in on one of those math courses I was registered for at UCSD. One of those courses was Math 110, "Introduction to Partial Differential Equations and Boundary Value Problems" Bozemoi. That was the course that convinced me that I was not, after all, cut out for a career as a mathematician. All the other undergraduate courses, I got a handle on fairly quickly, but the way my mind works made that one course something like having those alleged brains pounded out between two large gold bricks wrapped in lemon.

I eventually got through it. But one thing I took out of that class in no uncertain terms is the form a real solution to those equations took, and the fact that if you were missing terms ("parts of the answer" for those less mathematically inclined), your answer was wrong. Not incomplete. wrong.

One of the standard ideas of internet commerce is "cut out the middleman and their fees." You can find this in lots of fields. Some of them begin far earlier than the world wide web. "Discount" brokers have been going for decades, for both stocks and real estate. The internet certainly helped them, however. Loan quote services were probably one of the first ten business ideas on the world wide web. On-line this, on-line that. Do business with the faceless on-line corporation with cheaper fees (or none!) and you can't help but be better off, right? It's easy to illustrate that difference to just about anyone. There's money they're not spending, that anybody can point to as a savings earned by doing business in that fashion. But is that the whole story?

Indeed the whole discount proposition cannot succeed without an implicit or explicit assumption that the value you receive from having paid that fee is zero. But if that were the case, these professions would never have gotten going in the first place. Who wants to pay money you don't need to? Anybody want to raise your hand? I certainly don't. The world, humankind, and even our financial markets survived for millennia without stockbrokers, real estate agents, travel agents, or any other sort of business that is now being subjected to disintermediation. Why did these professions come about? It wasn't because our great grandparents were stupid, uninformed of the alternatives, or had no choice. They could and did buy and sell stock and real estate directly. The reason these professions, and others (such as journalism) arose is because they added value to the entire process. The people who made use of these professions profited by their choice. Not necessarily directly in dollars with every transaction, but statistically, the people who spent that money emerged notably better off in one or more important respects, and therefore, our predecessors made a choice to do so until essentially everyone did so.

There you have it: An explicit refutation of the assumption underlying the entire discounter promise. It neglects an essential term in the answer as to whether you end up better off. Was the money you didn't spend really the whole answer? What if by spending that money, you end up better off?

Suppose you save three percent by not having a real estate agent sell your property. Seems like a great idea on the surface, doesn't it? On a half million dollar property, $15,000 in your pocket for what you think is a few hours of work. I'll even start by granting you the same ability to market that an agent has, which isn't the case for the vast majority. But what happens if the price you pick isn't right for your market? I've gone over that. What happens if you don't disclose everything you need to? Then let's consider negotiations. Trying to match wits against a buyer's agent whose been in everything that sold in your neighborhood in the last six months is a guaranteed lose. Do you know what's appropriate for contingent sales? What about negotiating repairs disclosed by inspection? These and many other things need to be negotiated, and just telling the other side to do it your way will result in a failed transaction. Do you know how to find out if a buyer is qualified? The two months you spend waiting to find out that your prospective buyer can't qualify costs you roughly six thousand dollars all by itself. I could go on and on.

The same applies on the buyer's side. In the current environment, any decent buyer's agent who tries can make at least a ten percent difference by suggesting the correct property, negotiating to their strengths, and using the seller's weaknesses against them. Usually it's more than that. My average is running about twenty percent. Sound like a good bargain to you? Spend ten to twenty percent to save three? If so, come on into my office, and I'll give you $30 for $100 until you're broke.

The intelligent question is: Does spending that money save you more than it costs? Most people will spend $10 to save $100. That's rational. Most people will spend $90 to save $100. That's still rational. Some people will spend more than a hundred dollars to save $100, though, and that's not rational. Nor are all of the costs in money, either. How do you quantify not making a mistake that most people don't know is there until and unless it bites them?

That's really the whole question, isn't it? Furthermore, it has to be answered individually, because few situations Admittedly, with the internet, it's gotten easier for consumers and more difficult for members of those professions. But the internet can only help you with questions you actually think to ask, and then do the work to make certain you debunk wrong answers to find out where the truth really lies. It's not going to tell you any of dozens of reasons why this freshly remodeled home of your dreams is going to turn into a nightmare.

I'm getting ready to close on a property right now where the folks contacted me with information from a popular discount model brokerage in their hand, and those were the first properties they wanted me to look at (which I did). The difference in value they are receiving for their money is such that they never went back to that discounter, because I went out and looked at properties, I gave them reasons why this property was or was not one that they were going to be happy in, I gave them reasons why this property was a Vampire while that property was not. I explained to them how the surrounding environment was going to impact them in the property. I showed them what needed to be fixed, and gave them an idea what was involved. When I found an especially good value for their money, I got them out there and told them to act fast if they wanted it - if I hadn't, it would have been gone by the weekend. I can't talk about some other stuff until the transaction is done, but I can truthfully say that I wrote an offer that the seller chose to accept even though it wasn't the highest offer they had, and the difference was a lot more than my company's three percent commission. If those kinds of services aren't worth money to you, then you're not a good candidate for my services anyway. But all that discounter had to offer was how cheap they were, while I gave my clients more value than they would have saved before they put the offer that was accepted in, and they knew it. Once the clients started thinking in terms of what they were receiving by giving up that discounter's commission rebate, the discounter never had a chance. By CMA of all comparable properties in the area, my buyers are saving at least (temporarily censored but over ten) percent, and that's just by square footage - not including all of the amenities the property has that the competing ones don't.

I'm not going to pretend this one isn't an above average bargain, even for me. I'm not going to pretend that every full service agent can make that kind of difference on every transaction, because I know it isn't true. But making more of a difference to the client than the three percent a full service agent makes is an awfully easy mark to beat for the agent who tries.

Caveat Emptor

Here was an idea I had: Pack a list of the most important things consumers need to know about buying real estate, as packed into the words I can say in sixty seconds without sounding like an over-clocked squirrel. Here goes:


Figure out what you can really afford before you do anything else. Shop by purchase price, not payment, and refuse to look at properties which cannot believably be obtained within your budget.

Listing agents are contractually and legally obligated to sell the property as quickly as possible for the highest possible price. They represent sellers, not buyers. If the listing agent can sell you the property for $100,000 above comparable market price, they have done nothing except their job. Never allow the listing agent to represent you as a buyer.

Buyer's Agents represent buyers, not sellers, and having a good buyer's agent will make more difference than anything else to get you a better property value for less money. Get at least one buyer's agent before you start looking. Sign only non-exclusive buyer's agency contracts, insist they cover bad points as well as good on every property, and fire any agent that won't, or any agent that shows you a property that cannot be obtained within your budget.

There is no such thing as a perfect property, or the perfect time to buy real estate. Properties in immaculate condition command premium prices because the owners can get more money. If you want a bargain, be prepared to do some cosmetic work. A good buyer's agent will help you know what's cheap and easy to fix, versus what's difficult and expensive.

How was that?

P.S.: This guy is one of the best buyer's agents there is

I know 401k contributions impact a persons Adjusted Gross Income, thus would it also affect the amount a person could qualify for? If so, I will delay enrollment for a few months...

This depends upon what documentation you use to qualify. For most of those who are salaried or hourly W-2 employees, debt to income ratio is calculated using gross pay from w-2s and pay stubs. This is more more than half of the people out there. For these people, it doesn't matter, because the computation is based upon gross pay before any deductions - even withholding. The thinking goes that you can always stop retirement contributions if you need the money now to afford your mortgage .

For those who have to use the full federal tax forms to qualify however, the computation is based upon Adjusted Gross Income. This is basically three groups: The self-employed, commissioned sales people, and construction trades, the last being notorious for periods of unemployment between the end of one project and finding another project that's hiring. Adjusted Gross Income, or AGI, is after retirement contributions from taxable income, as well as business expenses and several other things are deducted. The reason for this is those people have more expenses that statutory employees, whether those employees are cube farm dwellers, have a corner office, or whatever. Lenders are well aware of this. The only reason why they're willing to accept taxes as proof of income is very few people will tell the IRS they make more money than they do when it means paying so many cents of every dollar they didn't make in taxes.

This can make it very difficult for people in these three groups to qualify via documentable income. This is the reason why stated income loans were created. I don't like them, but there is a reason why they exist. The rates are higher and the underwriting requirements are tougher, but without that, some people would never be able to qualify for a home loan, no matter how credit-worthy. As I've said before, stated income is subject to abuse, and you'd really rather qualify "full documentation" if there's any way you can, especially now when lenders are suffering stated-income-phobia and it can mean having to come up with tens of thousands of extra dollars down payment and pay an interest rate that might be two full percent higher than people who can qualify full documentation will pay, and might not be able to find a lender who will lend them all of the money they need for the purchase.

So it will make a difference if you're one of those who needs to use tax forms, but if you're someone who can use w-2s to qualify, it shouldn't.

Caveat Emptor


Notice that it doesn't claim that you can do so legally.

I saw another of these signs on the way to the office this morning.

When things are going sour, there are any number of scam artists who will promise the moon. We had them in the early nineties, and we have a lot more of them now.

Perhaps the largest number of these are flat out liars. They have no ability and no intention of actually delivering whatever they're dangling out there as bait. They're just putting something out there to get you to call, so they can get you into their office and try to do whatever it is that they do. Most of these are probably fishing for victims of a "subject to" scam. Notice that they didn't say they could do it for everyone? "Subject to" deals are illegal, but quite often the lender will let you get away with it. Of course, if they don't, they go after the person who signed the Trust Deed, not the scamster who talked you into it. Note that if they're reasonably careful, the people who are dangling "subject to" deals are legally in the clear. Nor is it illegal (as far as I know) for them to use an advertising hook they have no intention of delivering. Even if it is illegal, it's not like anybody gets charged for the initial handmade sign by the side of the road that's long gone before there's any investigation into what happened.

Even if these people are telling the truth as far as they go, there is something wrong with this scenario.

Either 1) you weren't in a negative equity situation in the first place - you really could sell for at least what you owe on the property, or 2) You are going to commit fraud, and the lender is not going to be happy when they find out. Expect a very unpleasant visit from the FBI, large legal defense fees, and an extended vacation courtesy of Club Fed.

There is no lender in the world that is going to accept a short payoff where the borrower walks away with cash. End of discussion. That's the entire bargain you make with a lender when you borrow money. They get paid every penny they are due first - and you get only the excess, however much - or little - that may be. If their payoff is short, they will not accept you walking away with a single penny from the sale of that property. To do anything else is a violation of securities and banking regulations. The Wicked Witch of Wall Street may be politically dead, but this is one issue that the financial world has developed extreme sensitivity to.

If the lender did not know about this cash that you are supposedly getting, you are going to be committing fraud. The person who sold you this scam is very probably committing fraud as well, but you definitely are committing fraud if you do this. That lender is going to require you, the owner of the property, to sign a statement to the effect that you are not receiving any money that the lender does not know about. So let's add perjury to the list of charges against you, and quite likely conspiracy. Your defense lawyer is going to cost more than any cash you're going to get out of it.

I had someone ask me whether an agent can volunteer to just give you some money from their commission. I'm not a lawyer, but as far as I am aware, it is legal. However, if they're bringing you into their office and getting you to sign up with them to sell their house based upon such a promise while the lender ends up with a short payoff, you are still committing fraud, perjury, and conspiracy when you sign that document that says you're not getting any money from the sale from any source, and that agent is committing at least fraud and conspiracy as well. The whole set-up is pre-arranged, and that give-back is a condition of the transaction that you and the agent are both aware of, but the lender is not. This makes you guilty of those three crimes. My understanding is that In order for the "gift" to pass legal muster, it has to be a pure gift, conceived by the agent with no pre-arrangement, executed for no consideration and no exchange of value on your part. Since that is not the case - they're luring you in with the promise of cash from before they even saw you - it's not going to get past the courts. Furthermore, even if such a gift was a pure gift on the part of the agent, it's not likely that the courts or a jury is going to believe you when there are well-known scams like this going on.

People put these scams out there because they figure they've got an angle whereby they can still make money. I can think of several ways to do so off the top of my head, from using the property as bait to meet buyers (see Tina Teaser) to having you sign an agreement for a very large listing commission, and several ways in-between. All of them involve a violation of that agent's fiduciary duty to you. Show of hands: How many people would sign up with an agent who straightforwardly told you he intended to scam you, and that as a consequence of this transaction, you would be likely to spend several years in prison? Anyone?

It is kind of elegant in a way: The victim of the scam (that would be you) can't complain without putting themselves in line for several years as an involuntary guest of the taxpayers. But it's amazing how often some outside causes the whole thing to unravel. Actually, cancel that. It isn't amazing at all. Real estate and mortgage operations are all a matter of public record, and audits and record keeping are a part of life for anyone in either field. Failure to keep complete records is in itself an offense that practitioners can and do lose their licenses over, and the escrow and title companies have their own record-keeping requirements, and the lender will most certainly keep records. Matter of fact, if they can show you've committed fraud - and you have, make no mistake - then any legal shelter you may have had from their ability to collect the money they lost simply vanishes.

You don't want any of that to happen, and once you do it, you have no defense except to hope that you get unreasonably lucky, and nobody notices until the statute of limitations runs out. The only justification for doing a stupid stunt like this is if it gets you out of a worse predicament. It doesn't. If anything, it makes any existing predicament worse.

Caveat Emptor

You see it all the time at open houses and elsewhere. People who desperately need buyer's agents, but think of Buyer's Agents in the same way they think of automobile sales folk, and that's the complete opposite of the way it is.

They don't want to deal with an agent, because an agent will use high pressure tactics, convince them that this property is the one they want even if there's better stuff out there cheaper, and trick them into signing on the dotted line. Or so they think.

Actually, the above person is part of the transaction. They're called the Listing Agent, and they're the one you're going to deal with regardless of whether you want an agent or not. It is their job to get that property sold. They have a fiduciary responsibility to the owner of that property to get it sold for the best possible price in the shortest amount of time. They only responsibility they have to the buyer is that they're not supposed to lie, mislead, or conceal the truth. All of those are tough to prove. If they can sell the property for $100,000 more than neighboring properties in better shape are selling for, they have done nothing else except their job. They have no responsibility to tell you there's a better deal around the corner. To a listing agent, the only importance of a better buy three blocks over is to hope you don't discover it.

Lest you think I am kidding or in any way exaggerating, consider this: Within five miles of my office are at least 100 Planned Unit Developments (PUDs) built within the last three years. These are legally condominiums, but they have detached walls. Most often, the developer puts up a 1700 to 2000 square foot two story dwelling, separated by maybe six feet from the next dwelling over. In many of these, the first thing most of the inhabitants do every morning is greet their neighbors in the next unit over, then get out of bed. Not that I'm against condos - I'm not - but the townhome I bought in 1991 has more privacy than most of these, and it's got a shared wall. The inhabitants of PUDs usually - not always - have a small quasi-private back yard, and they units may or may not have shared walls. The garage is always within the walls of the unit, because they are packed so tight there is no room for a driveway or outside parking. The developer slapped on false granite counters and travertine floors at a cost of maybe $300 extra, and with their in-house agents who dealt swiftly and efficiently with those who come to look, sold them for $100,000 to $150,000 more than comparable dwellings sitting on 8000 square foot lots and without a homeowner's association (and association dues) to deal with. Those PUDs are not going to be new forever - and as a matter of fact there are a much larger than representative percentage of the new owners trying without much success to sell them right now. Whether they decided they didn't like their neighbors whom they practically share a master bedroom with, they want a place with a yard where they can build a pool or even just a horseshoe pit, or that they want to paint the place a slightly different shade of off-white (and can't), they are finding out the difficulties, and trying to sell. But they're asking the same kind of prices they bought them for, and without the massive marketing campaign the developer used, it's not working. When you're trying to sell 20 units on what used to be two lots totaling half an acre, you can afford the kind of marketing campaign that pulls in the suckers. At $520,000 each for twenty units that cost you $150,000 each to build, if you spend $100,000 on advertising, you'll make it back in spades. Not so much if you spent that $520,000 buying one of those units and now the market has declined and you need $570,000 to break even - and I'm finding my prospects single family homes on their own 8000 square foot lots for $330,000, where they can spend a lot less than $240,000 putting in travertine if they've got to have it.

A Buyer's Agent is not the person who's out to sell you their property no matter what. That's the Listing Agent's job. A Buyer's Agent is there to represent the buyer's interests, the same as the Listing Agent represents the seller's. Buyer's agents aren't car lot sales folk. Buyer's Agents are comparable to the folks who make a good living representing people who don't want to deal with car lot sales folk, so they charge people who want to buy a car $300 and save them a couple of grand off the sales price. Buyer's Agents get paid out of money the seller has agreed to pay anyway - they don't cost buyers a dime - and will usually save their buyer clients a lot more than that commission, even if they did get it by doing without, which you usually don't.

Buyer's Agents don't make their living selling one specific property. They make their living helping people to find and buy the property that is the best bargain for them. It is a Buyer's Agent's job to point out all of the little and not so little stuff I talked about two paragraphs ago, as well as a lot of other stuff I haven't talked about here. Buyer's Agents make their living getting buyers a better bargain - just like Listing Agents make their living getting sellers more money for their property. Real estate is a lot more costly than automobiles, and a lot more games get played. The Buyer's Agent is the one with the responsibility to say "Slow down, let's stop and check out everything else that's available, and consider the state that the market is really in - and where it's likely to go," not to capitalize upon the emotion of the moment and get the prospect sucker's signature upon dotted line before they walk off the lot. So long as they stick to a real budget, that Buyer's Agent gets paid about the same no matter what you buy - and the happier you are when it's all over, the more likely it is that they will get paid again when you send them your friends, or when you come back again when you're ready to move up or buy an investment property.

This is not to say that Buyer's Agent's won't play games; this is why I use and recommend non-exclusive buyer's agency agreements to stop most of them. These agreements give the buyer's agent everything they really need - assurance that if they find the property you want, they will be the one getting paid the buyer's agent commission - while not committing you to work only with them. If they waste your time, don't get the job done, if they act more like a Listing Agent, or if you just decide they're not putting your interests first, you stop working with them and that's the end of it. Unlike the exclusive agency agreement which locks you in to dealing with that agent, and four months after the last time you see them you might still be obligated to pay them a commission on a property somebody else showed you, the non-exclusive agreement lets you go your own way, and so you have nothing to lose by signing it, unless you're the sort who will stiff someone who's done work for you. Let's face it, the Buyer's Agent finds you a property you think is worthwhile, you are doing yourself no favors to ditch them in favor of your brother-in-law who didn't or couldn't do the same, or the discounter who doesn't do anything, but generously allows you to keep half the commission which they did precisely zero good for you to earn. Who do you think will get you the better deal: The agent who went around with you to ten or fifteen properties (and looked at forty others that weren't worth your time) and knows the market that property is competing against, or the agent who only leaves the office to cash commission checks? Who's going to negotiate harder? Who's going to have more negotiating power? Which agent is more likely to get your the better total bargain? There are exceptions, of course, and sometimes the long shot beats the triple crown winner, too. But that's not where smart money bets when the payoff is structured on strictly one to one odds, as it is here.

Now buyer's agents do get paid, but it's out of the commission that the seller has agreed to pay no matter who sells the property, or for what price. Buyer's Agents will make more difference to the sales price - not to mention the quality of the property you end up with - than any reduction in price you might get by agreeing not to use one. We're out there in the market all the time. We know the market you're in, and we know the tricks in ways that you, the buyer, are not going to equal, unless you spend the time it takes to learn everything they know. And unless you're a buyer's agent yourself, you pretty much can't. You've got your own living to make. What are the chances they could do better than you at your profession? The odds are not good. even if they have the book learning, they don't have your experience. Why would you think the situation is any different when the roles get reversed?

Caveat Emptor

Or: Please don't believe everything you read on the internet!

Rarely a week passes by that I don't get a request from someone to link to their website or article. I'm happy to link to good sites and good articles with real consumer information. Unfortunately, this is not the majority of what's out there.

I got three requests in the last day. Two were obvious spam sites, one didn't even address me by name. The third was a little harder, an article that claimed to be written for consumer benefit. Unfortunately, its five main paragraphs were wrong on every point of substance, and so vague as to be useless on everything else. But when I sent them an e-mail suggesting they improve it, I got a three letter response: LOL.

For those of you who may not understand geek speak, this stands for "Laugh Out Loud." In other words, my request was laughable to them. They wanted free links to the site, and were willing to research email addresses and such, but weren't willing to produce actually informative correct content. My primary hypothesis, which I'm not going to bother to test as it involves motivations I don't care about, is what they did write fit their own agenda better than something closer to verifiably correct. I see people writing - or who have written and are flogging - articles with similar points to that one every day.

Unfortunately, this attitude is far too common. People build these websites to optimize their chances of getting a relevant search term hit. None of the search engines tests any site for reliability of the information it contains. A search engine referral is not a guarantee or even indicator of reliability - it means they found the relevant search terms there. Testing the veracity, correctness, completeness, and usefulness of the information contained is left as an exercise for the potential reader.

I also get e-mail from consumers. One recently thanked me, saying it's easy to find real estate information, but it's difficult to find good loan information. Actually, it's just as difficult to find correct real estate information. More of what's out there is somewhere in the general vicinity, but just because it's apparently closer to the truth does not mean it doesn't contain deadly traps, made all the more plausible by association. When you're talking about real estate and mortgage loans, there's a lot of money at stake. This is all the reason necessary for some people to say whatever it takes. Remember, none of the search engines tests for reliability of the information, and failure to examine everything you read - particularly in an area where few people have competence but many people think they do - can often lead to a situation which appears to be successful until years later. Real Estate is one of those fields. I'm going through a transaction right now where it's becoming more and more challenging not to speak ill of the listing brokerage as a whole. I've got the buyer's end done and there's no termite clearance, no zone disclosure report, none of the other required disclosures, they took the lockbox off without informing me or my clients (itself a violation of MLS rules) so we couldn't do our walk-through yesterday, and that's not all by any means. That seller is sitting fat dumb and happy - and liable for basically everything in the known universe. Yes, it's a discounter. Why do you ask? Oh, right. Because I've got to do their work so that my client is aware of what they need to know before we actually consummate the transaction. But I don't have any legal liability to do so as the buyer's agent. It's simply my desire to prevent my client from unknowingly walking into a bad situation, and if I didn't, it could be ten years from now when my client discovers something, and goes to court for a fat settlement from sellers and listing agency, or even forcing them to buy the property back. Apparently successful for years, but in the end a disaster. Not to mention a couple of things that I can't talk about until the transaction records.

People have various reasons for building websites. In some cases, they're trying to sell advertisements. In fact, there's a lot of those sites, where the entire purpose of the website is to collect money from people clicking off of the site to one of their paid advertising links. I've got some of those; One direct, a couple more through AdSense and BlogAds. It pays my bandwidth charges, and usually some of my domain renewal. I'm far pickier than most about my ads, and I'd like to get to the point where I can tell AdSense to take a hike, because they don't allow me any ability to reject individual ads that may be objectionable.

Other people build their website with the explicit intent of selling something specific. I'd like to sell something specific: My services as a real estate agent and loan officer. However, I'm nonetheless doing my best not to write anything that I could not defend in an academic thesis if I were a professor and tenure was at stake. I don't get offended when people question what I write unless it's in an obvious shill way. Furthermore, I'd like to think I'm as evenhanded and complete as possible in dealing with the pluses and minuses of everything. Everything I write is designed to be tested for its veracity. In other words, if you check out what I say, whether in an actual transaction or by checking with knowledgeable neutral parties, I would be very surprised if there were substantial points of disagreement. This isn't to say I can't make mistakes (Brian, you were right about 45 day locks in January. I blew a thirty day lock for the first time since 2003, and had to pay the 5 day extension out of my own pocket). But that I try very hard to make everything I say verifiable by independent test makes me highly unusual on the internet. Some people are every bit as careful as I try to be. Others are somewhat less careful. Probably the majority do not care so long as it enables them to sell more of whatever they're selling.

What I'm trying to say is that you should make every attempt to test everything you see on the internet, including my stuff, before you bet large amounts of money on whether we're right by conducting a real estate transaction in accordance with what we say (Although if I'm your agent or loan officer I become responsible for what I say financially and professionally). That's one of the reasons why I'm not hesitant to drag out a calculator or spreadsheet and show you the numbers. If it cannot be expressed in mathematics, it's not fact - it's opinion (Thank You Mr. Heinlein for teaching me that while I was still young enough to absorb it. This isn't to say that if it can be or is expressed in mathematical terms that it is true. You've got to crank the problem and see if everything matches). Try to debunk it if you can. Does the evidence - independently gathered - confirm directly, confirm circumstantially or tangentially, confirm with exceptions, partially confirm, fail to confirm, contradict tangentially, contradict circumstantially, or contradict directly what is said? In the absence of substantial contradiction, is what we say at least internally consistent? If there is contradiction, how far does said contradiction unravel the claims? It's very different if it contradicts the central point or points and causes everything to fall apart, versus if it only contradicts some tossed off side track. Logic and the scientific method are always your friends.

Another trick is to observe whether the source admits things that bolster an opposing case, or something against the point they're trying to make. The more opposing viewpoints or evidence against their point they entertain, the more likely they're honest. Especially if they're scrupulous in the way they handle to evidence against them. None of this helps if the central tenet of what they're telling you is flatly contradicted by a known and verified fact, but in the absence of such, honest treatment of the merits of alternate explanations is a very good sign.

The quality of the confirmation or contradiction - how credible and detailed the piece of information you use to check it - is also important. You could find yourself having to check out many different interpretations before you're certain where the truth really lies.

Absolute truth can be a difficult thing to attain, there is often room for differences of opinion, and there are many logical fallacies to which even people of good intent can fall prey. The difference between a valid and invalid argument or statement can be very fine. Please, do not take anything you read on the internet as gospel truth without thoroughly vetting it for incorrect information, false premises, and false inferences. I don't believe I'm infallible. I do see stuff on the internet every day which is thorough nonsense even though it may appear credible on the surface. Sometimes it's with malice aforethought, sometimes it's an honest mistake, sometimes it's a simple misunderstanding of source material, and sometimes it's even just viewing source material from a viewpoint that distorts the answer. For my part, I try very hard to get it right and to cover information that might disagree with what I'm saying, but there's a reason why I end every single article here with

Caveat Emptor

I got this email the other day, responding to one of my Hot Bargain Properties posts:



I am currently working with a coworker with no agreement. However, she has offered to rebate 50% of her commission. Are you negotiable with your commission?

I am very ready to buy a place at a bargain or discounted price. I have been pre approved by DELETED for $550 but I do not want to spend more than $525, preferably around the $450 range.

I have sufficient liquid funds for 10% down and have an excellent credit score...score 3 months ago was 752.

Let me know.

Now, I do have lower cost and commission rebate packages for when buyers bring me transactions that have the property at least settled upon. The reason is that not only is there much less work to be done done, but I'm providing a lot less value in those circumstances. I'm not going out and going over dozens of properties, eliminating eighty percent of them before taking them around to see the good stuff. I'm not doing background checks on all those properties, looking for issues. At the point that the property is settled on, at least half of the value a good buyer's agent brings in is already moot. We've already dealt with the issue of which property (or properties) are worthy of making an offer on. Now we're down to negotiations, where I still provide a lot of value, facilitation of the transaction, which any real estate agent worthy of their license can do, and looking out for problems, which starts earlier when I'm locating the property, but when you have title companies and building inspectors and appraisers getting into the act and getting paid, it becomes easy. It's no longer a matter of spotting the issue before an offer is made, it's a matter of dealing with the issue if and when it pops up. Much easier, much less time consuming, and much less liability on my part. When you've decided to make an offer before I even come into the picture, there is no issue with did my representations cause you to make an offer on the property when you would not otherwise have done so. I haven't been sued yet, but that's the number one cause of real estate lawsuits. Sometimes it's an unscrupulous agent telling the folks that the airport is going to close, but sometimes it's also people who think the agent said something they did not in fact say, and sometimes it's people who make something up stuff due to buyer's remorse. If you've already decided to make an offer, that whole issue is gone. Liability? Much less. Amount of work done and time invested? Way less. Amount of value provided to buyers? Also much lower. So yes, I'll work for less in those situations.

When I find the property, I retain the entire commission.

Yes, getting half the buyer's agent commission seems like a good idea on the face of it. One to 1.5 percent of a purchase price in the hundreds of thousands of dollars. But how much value do those agents really provide? Consider: Did that agent find you something as interesting as the property they emailed me on? If the agent they were working with was finding them properties like that, there would be no need and no interest in working with me. If she spent enough time shopping the market that she even knows what is and is not a bargain, this person would never have contacted me. Does she look for problems and issues or does she just say "Here is the living room," and try to talk you into making an offer on every property? What value is that other agent providing you? If the answer is, "not much," then no wonder she's willing to rebate half the commission! As far as she's concerned, the half she does keep is free money for going around and looking with you. My goal is that my clients end up with at least 10% they would not have had without me - either a better property for the same money, or the same value property for a lower price, or some combination of the two. Now, if getting half of a two point five percent commission via rebate sounds better than saving 10% of the value of the property, or getting a property 10% more valuable for the same price, by all means keep shopping agents who rebate commission. If getting a property that is worth more, or paying less for the same property, is what you are after, you need someone who is likely to deliver that, and those discounters business model does not allow them to invest the time and energy to do so. Quite frankly, if they don't make a habit of it, they aren't likely to have the necessary expertise, even if they wanted to.

You may ask about how this squares with my attitude about loans. Yes, I'm one of the deepest loan discounters there is. That's because a loan is a loan is a loan, as long as it's on the same terms, and most folks qualify for better loans than they get. A thirty year fixed from National Megabank is the same loan as a thirty year fixed from the Bank of Nowhere in Particular, provided the rate, costs, and terms are the same. Only difference is who you make the check out to.

No two properties are alike. Especially in the current market, the difference between shopping smart and not doing so is multiple tens of thousands of dollars, far more than a commission rebate. I don't rebate buyer's commissions because I provide more than that in value. In my estimation, and that of the people who are working with me, it's money well spent. You get what you pay for.

Good buyers agents make a habit of looking for real bargains, whether or not they have a client it's appropriate for. It's called market knowledge. With market knowledge, a good agent can not only identify the ones that are bargains, you are able to negotiate better terms on those bargains. Good buyer's agents usually have bargains they know about that they just haven't found the appropriate client for yet. If you'd like to work with them and get shown these bargains, or have them go looking for bargains specifically for you, there is a price to be paid, and that price is that they make a little more money than the do-nothing discounter. You don't pay it, at least not directly, the listing agent does, and through them, the seller. If you believe that the final price might be somewhat higher to reflect that, you would have some justice on your side, provided you don't consider the value in locating the bargain property, the value in negotiating for a better price, and the value in avoiding problems before they happen, or dealing with them in initial negotiations rather than at the end of escrow. If you don't see the value, then not only are you saying that you don't see the solution, but that you don't understand that there is an issue. This indicates someone on the first level of competence: The unconscious incompetent. Not only do you not know how to do it, you don't realize that there is acquired knowledge and acquired skill involved.

Now a good agent who knows they provide value should have no difficulties asking only for a non-exclusive buyer's agent contract. if you don't like what that agent does, if you do not agree that there is value in that agent's approach, this leaves you free to stop working with them at any time and go work with someone else. If the agent doesn't perform, as in find and deliver a property that you agree is more "bang for the buck" than you would otherwise have gotten, by all means go work with the bump on a log who splits the buyer's commission with you.

If you want a Yugo agent that breaks down in the middle of the transaction and leaves you stranded, that's no skin off my nose, but you are not the client I'm looking for and the bargains I find are for my clients. I am neither obligated nor inclined to share them with people who want to use some other agent. Go find them yourself if you don't think I'm providing value. Just the knowledge that something like that is available should be a large amount of help. But if you can't, perhaps you might consider that perhaps I might be providing a certain amount of real value for my pay?

Very few people reading this are likely to be receiving minimum wage for their employment. If you are not prepared to concede that it is possible for more skilled, more knowledgeable people to deliver a more valuable product, whether that product is service or commodity, what possible justification do you have in making more than minimum wage? For that matter, unless you are one of those people whose work has to be done on site, why isn't your job being done by some subsistence level worker in a Fifth World hellhole? Even if we limit ourselves in the application of this principle to qualified and licensed people here in the United States, my guess is that your boss could probably hire other people to do your job more cheaply, but his additional investment in you probably makes him more money than that cheap replacement worker would save, and that's the reason you are worthy of your pay. This very same reason is why I am also worthy of my pay.

By the characteristics they are claiming, the person with the email at the top of the article is a very qualified buyer. Don't you think that should be working with someone who knows how to use that as leverage to get them a better bargain? Suppose they weren't. Don't you think it might be in their best interest to have an agent who knows how to structure a transaction so that it can work, and can help avoid wasting time and money on properties and transactions where it can't and sellers who do not have the option of working with them in the requisite way?

Or you can pay full price for a mediocre property, and console yourself with a much smaller amount of cash, that when you consider the entire situation, is a fraction of the money that came out of your pocket but didn't have to. Pay too much, and get a check back for maybe a fifth of it in cash. Sound like a good deal to you? Maybe you didn't pay cash for the property, but then you've got a loan, and you paid additional fees based upon the size of that loan, and interest because you borrowed that money, and more in property taxes because you paid more than you should have. All of this eats away at money you would otherwise have in your pocket and equity that you would otherwise have in the property. Just because there's no explicit dollar figure on it doesn't make it any less real. How would you feel about writing a check drawn directly on your net worth for some unknown amount? Not so hot? That's what you are doing by using some bump on a log discounter who basically allows you to keep a percentage of what they provided no real value to earn. This is one of the largest transactions of your life. Scrimping on the compensation of the person who has the knowledge and skills to save you many times what they cost is almost as intelligent as OJ Simpson hiring a cheap lawyer. Even though I hope that you haven't been accused of murder, using a less skillful agent means you wasted money. Even though that's not a crime and you did it to yourself, it's still nothing beneficial to your overall financial picture.

Caveat Emptor

Today's Turkey

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It's been quite a while since I did one of these. I should probably do them more often, just to make my point.

This Eyesore Is Falling Apart But Was It Designed by a Famous Architect!

General: La Mesa, 3 Bedroom, 1.75 Bathroom

Con:

What's Wrong With It: Quicker and easier to ask what isn't. Sits on a secondary street that's the main route through the neighborhood. Cars fly up and down that street at freeway speeds at all hours of day and night. No grass and nowhere for kids to play. Several nice mature trees, but their root systems are spreading, the front yard is covered in ankle deep plants to no good purpose, the back yard is split up into half a dozen areas too small to get any use out of, and has a small cracked and leaking swimming pool that's currently the color of ichor and a breeding ground for mosquitos.

The building itself may have been designed by some famous architect, but it reminds me of the pre-WWII navy housing over in Linda Vista and Serra Mesa. It's basically a long rectangle the width of the lot and maybe twenty feet wide. The window frames are falling apart, I don't think anything has been painted for at least thirty years, the carpet reminds me of my elementary school library (it's about that old, too).

There are at least three major cracks in the concrete slab floor. The wall paneling looks like it's probably original 1949, and was sitting in someone's mountain cabin before that. I counted seven major structural cracks in the wall before I got tired of the game, and any number of smaller ones. Nor is the ceiling exempt. I was kind of nervous it might fall in on me.

Why It Hasn't Sold: New on the market, and I wouldn't expect it to last. Structurally, that is.

Who it's Not Appropriate For: Anybody who can't afford to tear it down and start over - and that includes the landscaping. It may have been designed by some famous architect, but it's been maintained by Larry, Moe, and Curley, with assistance from the Addams Family.

Pro:

Selling Points: It does have a reasonably large lot. Unfortunately, zoning in the area is solidly R1. I'd peg the likelihood of getting an up-zone at "none"

Who Should be Interested: Nobody. Danger, Will Robinson!

Why it's a Bargain: It's not. The only way to salvage this property is to "accidentally" run a bulldozer through it. Forty-seven times.

Financial:

What I think I can get it for: Why would you want it? The owners aren't ready to be rational about this property. Let me go find you something else better. That's easy. The hard thing would be finding something worse!

Monthly Payment examples: I think if they paid me $1000 per month, I'd consider taking it off their hands.

With no down payment: They don't pay me, I don't take it.

With 20% down: 80% of nothing is still nothing.

Investment potential: If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of 0, the property would still be a Money Pit. If you held it those ten years before selling, you would net whatever the negative of ten years of property taxes and insurance is. Not to mention what you'd have to pay to get rid of it.

To learn more: Why would you want to? I felt like I had wandered into a story by HP Lovecraft. I would be happier if I'd never seen it! But I escaped with my life and some small shreds of sanity!


Contact Information:

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

I recently closed a mortgage loan. The loan officer told me there would be no prepayment penalty. When the documents came there was none and the loan funded and closed.

Two weeks later I got an e-mail stating some documents had been missed and we need to sign and return them. They contained a new TIL, prepayment rider and addendum.

The original TIL states there is no prepayment penalty. I have not signed these and the lender is telling me I have to because of the compliance agreement.

Is this true?


Talk about scummy behavior!

I wouldn't sign the new documents. As a matter of fact, talk to your state's department of real estate about this behavior immediately. I hope that whoever is responsible for this loses their license to do loans in your state. You also will likely want to consult an attorney, as a precaution. A lender attempting to modify the contract after funding requires your consent. This strikes me as a a good candidate for fraud, depending upon the particulars of the contracts. Explain to them that you would not have signed the documents had this been presented as a condition of your loan funding, and so to attempt to alter the contract ex post facto (after the fact) is, in some cases, grounds for a prosecution based upon fraud.

That contract is a two-sided document, freely agreed to as it originally was by both parties. The fact that the loan funded is evidence of this. I have never heard of needing to sign a pre-payment agreement as a compliance procedure after the fact - except to comply with getting that lender paid more.

If lenders could require this sort of thing, they could unilaterally change the agreement any way they want to after funding. So what if you signed a thirty year fixed rate loan at 5.5 percent and paid three points to get it? You new rate is eight percent, "for compliance"! According to everything I know about contract law - which is limited, because I'm not an attorney and you should talk to one - they have no legal grounds to demand this of you.

At the very least, it would be the case that signing these documents is what starts the clock on the the three day right of rescission. That the lender funded the loan before then is evidence of a severe error on their part, and they would have to restore you to the situation as it existed prior to you signing the original documents. If you get a sharp enough attorney and help from your state's regulators, it's possible that you might get yourself some concessions or even a settlement from the lender.

Every state's laws are different, so you need to talk to your state's department of real estate, and I do suggest consulting an attorney before you draw any lines in the sand, but this is my best understanding of the situation.

Caveat Emptor.

The Best Loans Right NOW

5.5% 30 Year fixed rate loan, with one total point to the consumer and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2271, APR 5.633! 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 4.75 percent!

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

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Yes, I still have 100% financing (full documentation) 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

Is there any problems with having all your money in only real estate?

That was a question I saw.

The answer is YES there are problems!

1) No diversification. The real estate market tanks, like it has right now, and you are hosed. The more so because of the leverage attaching to most real estate investments. If you own five properties with a total value of $3.5 Million, and it loses 20% of value, you may have lost more than the entirety of your equity.

2) Most people who do it get too strongly leveraged. Leverage is great, it makes your money work harder. But you've got to do some heavy thinking about how much you're going to do. If your cash flow is positive or tolerable, you can last out downturns. If you get into a situation where you can only make the payments for a certain amount of time, that can create desperation, and force you to accept an offer that leaves you owing money to the lender, and money to the IRS.

3) Real Estate is not liquid. This is the real kicker that drives the first two. You can't just call your stockbroker and get cash in seven days. You have to find the right buyer to get a decent price. If you need money in a hurry, this can force you to sell property for less than it's worth. If there are no good offers but you need to sell, you can find yourself forced to accept a bad one.

4) Landlord issues. The more properties you have rented out, the more likely that either blind chance or one of your tenants is going to do something to one of your properties which requires a lot of money in a hurry. If you're maximally leveraged and have no money anywhere else, where are you going to get that money? Particularly if the nature of the damage renders the property uninhabitable, in which case you're not likely to get any new loan on the property until it is fixed, and your lender might just decide to keep any insurance money in order to cut its losses.

If they're not rented out, of course, you're flushing cash every month.

Don't get me wrong. Real Estate is a great way to make money. In fact, given the phenomenon of leverage, you can make more in real estate with less risk than in practically any other investment field. But you've got to have some money somewhere else, and the larger your investment in real estate, the more money you need in other investments.

Caveat Emptor

I usually write long articles, Part of that is because I've done all of the easy subjects, part because sound bites facilitate sloganeering, not serious thought that's likely to result in a better answer - or the realization that you've been wrong in the past.

But long articles take a lot of time (not that short ones are easy, as Mark Twain knew well). So I've been trying to come up with ideas for short articles, and one of the things I came up with was: Pack a list of the most important things consumers need to know about mortgage loans, as packed into the words I can say in thirty seconds without sounding like an over-clocked squirrel.

Here goes:

***

There is always a tradeoff between rate and cost. Never choose a loan based upon payment or APR. Shop by the cost of money and what you get - not by how much somebody is making. People refinance about every three years, so the higher rate may be better.

Ask the right questions of every lender. Lenders can legally lowball you on the initial paperwork, so ask for a Loan Quote Guarantee when you sign up. But since enforcing guarantees is difficult when you need the loan now, sign up with more than one loan provider, and check the final documents carefully before you sign.

***

How'd I do?

I recommend this guy for loans. I can guarantee he'll treat you right! ;-)

Caveat Emptor

Lender Owned with Panoramic Views!

General: La Mesa, 3 Bedroom, 1.5 Bathroom

Con:

What's Wrong With It: Stained Carpet is the only thing I can find.

Why It Hasn't Sold: New on the market, and I wouldn't expect it to last!

Who it's Not Appropriate For: People who can't handle stairs.

Pro:

Selling Points: The view looks out over the city and goes all the way to the ocean. Good sized back yard, nice and private! Large family room. Two car garage with inside access!

Who Should be Interested: This would be a great place to live! Good schools for families!

Why it's a Bargain: The view is fantastic!

Financial:

What I think I can get it for: $410,000.

Monthly Payment examples: I've currently got a thirty year fixed rate loan available for qualified buyers at 5.5% with one point, or 100% VA financing at 5.75% for the same one point

With no down payment: VA 30 year fixed rate loan at 5.75% one point (FHA 97% financing) payment $2427, (APR 5.883)

With 20% down: Fully amortized payment of $1862 (APR 5.642).

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 $410,000 the property would be worth approximately $660,000. If you held it those ten years before selling, you would net about $325,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $2150 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $270,000 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

Hi--I just found your site today. The best I've ever seen/read, etc. Thank You!! I do have a question I didn't see addressed regarding our current situation/dillemma:

Our present home, which we've lived in for 8 years, is worth around $180,000 (yes, it's a small town...), and we owe $105,000. My husband has been working for about 5 years now, & has a pretty good salary (around $100K) but we have a LOT of debt --mainly a result of having had 2 babies while in school. We have about $40 K in credit card debt, a $775/mo. student loan payment, & a $500/mo car loan which will be paid off in 18 months.

We've been planning on moving across town for a few years (MUCH better schools there), but had been holding out as long as we could with the idea that the longer we waited, the better house we'd be able to afford. And besides, the kids are still young, & their elementary school isn't intolerable, etc.

The problem is that the school situation DID become intolerable about 3 weeks ago, at which time I began to homeschool them, which is also intolerable! So we need to get this moving across town show on the road!

My question is this: I know we need to at least take out a home equity loan so that we can pay off the credit cards. Some of the rates are outrageous, and I'm sick of fighting with them. That would put our equity at $35,000. But since we want to move ASAP now, I assume we could just use the sale proceeds of the house to pay off the cards, & use the remainder as a down payment. Or, am I wrong? Our current debt to income ratio is so poor--will the lenders even consider our current plan to pay off that debt using sale proceeds, or will we have to refinance now & wait a period of time before pursuing a new house to show them that we're not just going to rack the debt up again? Oh, but we haven't incurred any new debt or put any new charges on the credit cards in about 3 years--does that make any difference?

Also, the houses in the neighborhoods we are looking at are around $300,000. I'd sure appreciate your advice on this. We really want to move immediately, but not if waiting until later, like this summer, would be be better...

Your situation is a classic example of the urge to hurry a situation, and how to come out better if you don't.

You don't mention how the market is in your area, or what your credit score is like, and yes, it does take a while for bills to show as paid off. It can take over sixty days. I see some options for you, all of which have drawbacks. This is a complex situation, and I don't have nearly all of the information it takes to recommend a particular solution.

You can refinance, sell, or do nothing with your current residence, and you'll want to rent it out if you don't sell. You can rent or buy a new property, although you do want to buy before long. There's some issues that need to be dealt with, and they take a little time to deal with them properly. You can rush the situation, but doing so will cost you some big bucks.

You don't mention what rents are in your current area. By the time you pay for the refinance, my guess is your balance would be $150,000, maybe a bit higher. I'm as certain as I can be without full workup information that you're in a sub-prime situation, which means you can choose a very high rate or a prepayment penalty that'll run you about another $5000 if you sell while it's in force. The high rate is the better choice, because it's only for a few months, but it also has implications for your debt to income ratio. The reason I ask about rents is that I'm wondering if they'll cover your mortgage on the place. The rate you'll get might be higher or lower, but let's assume seven percent. That's principal and interest of about $1000 per month, plus taxes and insurance. Now your husband makes plenty to afford some negative cash flow on the property if you folks have to and the rest of your debts are gone, but not a huge amount of it. You'll only get credit for seventy-five percent of the rent, as opposed to all of the expenses, but better to have it rented for a little bit of a theoretical loss than not to have it rented.

Now whether you refinance or sell, it's going to take a grand total of about three months to get your bills showing as paid - once month to get the refinance done, two months for your current finance companies to get off the dime and report the accounts as paid. It might be longer if you sell, depending upon how long it takes to get a good offer made and the sale consummated, then add two months. On the other hand, if your property is in good shape, vacant properties in good condition show very well.

Now, with your new property, your debt to income ratio is going to sink your loan if your current bills aren't paid off. Unfortunately, A paper has an issue with paying off bills after your initial credit is run. If it's a credit card or other revolving debt, guidelines have issues with paying them off in order to qualify. If you pay off a credit card, the wisdom goes, you could turn it right around and charge it up again. Even if you pay it off and close it, the reality is that you could get another. So they qualify you based upon your current situation. Even paying off installment debt to qualify is at the discretion of the underwriter, and I have seen them turn it down. So you want to have the debt paid off, and showing as paid off, before you make the offer for a new place. That can take up to two months after they actually are paid off.

So you're going to want to wait at least two months after you pay the debt off before you make your offer on the house you want to purchase. This means either staying where you are for now, which I can see is unacceptable, or interim renting something in the area you want to live, which is likely to be better, and you might get a line on an extra-good deal if you are living in the area. Yes, you want to buy, but you don't have to do it all in one step.

So I'd most likely go rent a place - which gets you into the new school district now - while I tried to sell or refinance the current place. If you're not living there, be advised that a refinance is a cash out investment property loan, which carries higher rates and more difficulty. I'd probably try to sell instead, but that does place you at the mercy of the market, and not only do I not know your market, but we're coming up on the worst time of year for sellers. Which means settling for a lower price than you might otherwise get, but you will be rid of the debt without the headaches of being a landlord at a stressful time in your life. You can learn that situation later.

Now, if you sell, you get a down payment for the new place. If you refinance, you probably don't. Your credit score may dictate the sale option; I don't know. It should improve after everything is paid, but I can't guarantee that, and I definitely can't say by how much. Better to plan on the status quo than to bet on it improving.

Now, a couple of months after the debts are paid, you'll be a a position to make an offer on home you want to raise your family in. If you have a decent credit score (580 or above, with 640 making things easier and 680 better yet UPDATE: It takes about 660 now, unless you're a veteran), 100 percent financing is no big deal deal. If you've got serious credit issues, you're going to need a down payment. For the school year, you may want to delay until late spring or summer to give the kids some stability for the rest of the year. Worst time to buy, but you're looking at moving again in February if you get on the stick right now.

Now it's a real pain to move a household once, and here I am telling you to plan on moving twice. Let's look at what happens if you risk the solution that cuts the Gordian Knot.

Your husband is an attorney. I don't know what attorneys make around your area, but around here they can make several times $100,000. So somebody advises you to do stated income, state that you make several times what you do, and just make a bid right now on the home you want to raise your family in, while putting your current home up for sale. And if your credit score is decent, I could get such a loan done pretty easy. But let's consider what happens next.

Now you not only have your current debt load, but you also have the payments for a brand new $300,000 loan on a $300,000 house. In California, with good credit, that would be 6.125% right now on the first, maybe a little under 10 percent on the second. $1460 on the first, $530 on the second, plus property taxes (California would be about $315 per month) and insurance of about $100, more or less. Total obligations added: about $2400 per month, on top of what you're paying now.

You don't say, but if you weren't struggling at least a little bit, you would have paid those debts off by now. So you are fairly close to the edge. My best guess as to your reserves: Non-existent. Now you have to come up with another $2400 per month. Where can it come from? Borrowing is the only thing that comes to mind. Charge up the credit cards, personal loans, payments start getting behind, your credit score drops - and it won't come back quickly if you start making those payments on time. Especially if mortgage payments on either place end up being late. Meanwhile everything is compounding, eating up your equity, even if the house sells fairly quickly. As I've said, we're coming up on the worst time of year for sellers. Its entirely possible you won't sell until Spring, no matter how good a job your listing agent does. In short, things get desperate quick. Not only is your cash flow unsustainable, you get motivated to sell for a lot loss money than you might have otherwise. With everything compounding, it's very possible that you end up selling to a shark for less than you need to get out from under your debts. This perpetuates the situation you're trying to get away from, and makes it worse because your credit is likely to take major hits.

So tempting as it is to take the situation at one go, you eliminate a lot of risk and stress by taking it in stages, and you render yourself a lot less of a target for the sharks of the real estate world. Yes, it adds something to your cash flow to go rent for a while, but not nearly so much as if you just bought straight away, and you give yourself a line of retreat if you have to take it.

There are a lot of things that could change this. As I've said, there's a lot of stuff I'd need to know before making a final recommendation for a client, but I've sketched out the stuff that needs to be considered.

Caveat Emptor

I've seen many new home developments with vaulted ceilings, mini-vineyards, huge houses on little tiny lots...Why can't some developer built some homes for us regular people? A normal sized home with plenty of closet space and a decent (not designer) kitchen that is set more than 3 feet from the neighbors house.

I realize that they need to make money, but more people could afford homes in this state if the builders weren't catering to people who already own 2 and 3 houses.

The developer has a certain amount of LAND for a development. That's all they have, and they are not getting any more. For this, they paid a set amount of money. Furthermore, once they have it, it's likely to be years going through the permit process before they can even start to build. That money they invested in the project, both upfront and as the project goes along? If they wanted to invest it in say the stock market, it's be earning income - for years - before the first spade of earth gets dug. If it's three years from purchase to completion, that's a 33.1 percent necessary return just to break even from the opportunity cost (at ten percent per year - very doable). If it's five, as is more likely, they need 61 percent. If it's seven, 94.9 percent. To this, add property taxes as they go, the costs of environmental studies and obtaining the permits and paying for inspections and certifying everything. If there's a loan going on, they have the cost of interest going on as well. Now there are ameliorating factors as well, but given the sheer amount of work that has to be done before they nail the first two boards together, a rational person could maybe be forgiven for thinking that society wants housing to be prohibitively expensive.

Furthermore, it's silly, but people buy a property based upon the structure and the amenities. Well, it's not silly to make that one of the factors, but people go overboard. They will buy a 5 bedroom 2800 square foot house on a 3000 square foot lot before they'll buy a 3 bedroom 1800 square foot house on a 20,000 square foot lot. The same structure is really worth a lot more when it's on a bigger lot, and even a lesser structure may really be worth more if it's on a bigger lot, as is likely to be the case here, but for most folks, we're talking emotional appeal, not rational thought process. In other words, like many people looking for a mate, they see the gorgeous sculpted toned and tanned member of the opposite sex, and ignore the abusive personality behind the beautiful exterior. I'm not certain I've ever met someone who wanted to live in such a development, but they sure sell like hotcakes! Add travertine and granite countertops and the fact that it's new to the 2800 square footer, and you've got people willing to pay $800k for the first property as opposed to maybe $550k for the second. In their mind, the first property might be a "flipper's investment" while the second is "the keeper" that they are going to make improvements on for the rest of their lives, but economically, we vote with our dollars. If you opened your wallet for the house where you don't have any land, guess what? You're voting for developers to keep building them. You know something else? That brand new cheek-by-jowl development isn't going to be new forever. Considering market returns, that older $550,000 3 bedroom on half an acre is a better investment, even if it needs updating. Curb appeal and house bling and "ooh, it's new!" are the best ways I know of to sucker buyers into paying too much money.

The developer knows this at least as well as your average real estate agent. The developer has all of this researched down the the last centimeter of the lot lines. They are not in business to build wonderful homes that people are going to be happy in forever; they are in business to make money, and the blinged-out houses on the smallest possible lots bring in the most money for that developer. The fact that you're the very first person to live in the house is a further attraction to the kind of person who buys new cars, which is to say, most of the population, and it's worth serious money to that developer's bottom line, although it will cost you money in the long term.

Nor is the developer alone in this endeavor. They wouldn't make the most money from homes like that if people didn't pay the most money for homes like that. You want the real culprits in this scenario, look around you in any large crowd. It's all to easy to blame the developer, but the desires of the average home buyer and the regulatory environment both played huge factors in getting the state of new housing to where it is now.

There are ways to potentially fix the problem. They start at real consumer education, easing environmental restrictions and the permit process, particularly for high density housing, which may not be desirable, but when your front yard is the size of a postage stamp and most people wouldn't use it anyway, doesn't it make more sense to put all the community lawns together in one park that someone can actually get some use out of? Say, a place for kids and dogs to play? People say they hate condos, but condos townhomes and row homes are all that's available if the price of land stays where it is. Environmental regulation and slow growth policies are fundamentally at odds with affordable housing in high demand areas. I'm not saying throw them out entirely in the name of putting up cardboard shacks, but I am saying that we can certainly choose a point friendlier to low cost housing than we have chosen. I can only conclude that society must value the environmental status quo more than it values lowering the cost of housing, in which case the status quo is the correct choice.

None of this has any measurable political support. Everybody is for lowering the cost of housing, at least for the poor, but put it on the ballot against loosening environmental protections and it loses. There are a certain number of addition reasons why this happens, of course. Multimillionaire developers are not politically popular, but Least Tern environment is. Rarely do people stop to consider that by constricting the supply of housing, you unavoidably increase the price. Nor can you do anything by governmental fiat to fix the problem that doesn't price even more people out of the market. Demand is a given - it not directly controllable. There are 300 million Americans and they all want housing they can afford. Even kicking out the estimated 11 million or so who are in the country illegally wouldn't do a whole lot to really solve this problem. The only way to treat the issue is by increasing the supply, which does seem to include being nicer to those multimillionaire developers, but in this case the issue is more affordable housing for everyone, and being nicer to the developers means that you get more housing units, which drops the price of housing from whatever it would have been without being nice to the developers. Because any time someone else enters the United States, whether legally, illegally, or simply by being born, you create a housing need. Every time there is a new American without another place for that American to live, we create somebody without a home. We price somebody out of the market. We now have an American who cannot afford to buy a home.

Now how to handle this issue until such time, as any, as society changes its mind and decides to make housing more affordable? Your best bet is to find a good buyer's agent to defeat the problem on a retail level, that is, for yourself, because wholesale solutions are not likely until people get rational about solving society's problems. You can't make people build the kind of housing you say you want. But you can make informed choices between what's out there now, and a good buyer's agent will look as far out as you tell them to.

Caveat Emptor

When and Why does a Mortgage Company Sell your Current Loan to another Mortgage Company?

Lenders sell their loans because the lender can make an immediate premium of anywhere from 2.5 percent to four percent by selling your loan to Wall Street. Yes, this is less than the six to eight percent per year interest that most primary homeowner loans get, let alone second loans, commercial loans, etcetera. Nonetheless, they can turn the money several times per year, earning far in excess of what they could earn from the interest on your loan itself, and that's why they do it.

Selling your loan doesn't just get them four percent once. It lets that lender turn around and do another loan and make more money without getting more money in deposits. Many lenders can turn the money three to six times per year, getting them a twelve to eighteen percent bonus in addition to anything they make those few months that they hold the loan.

Now there are several philosophies on when to sell the loan. The one that seems to have the most adherents currently is the pure packaging house philosophy, where they sell it off immediately upon closing, or within a few days. Given this, they can turn the money a dozen times per year if they work at it, selling the loan for a smaller premium, but getting twelve markups per year, amounting to somewhere between twenty-four and thirty percent on the money.

The second philosophy is one that is practiced by a smaller, but still significant number of lenders, who fall more into the traditional lender's model of doing things, and that is to wait until one payment has been received. Since this eliminates a noteworthy fraction of the fraud that's out there, they get a better markup for their loans. The downside is because they have to hold it an average of two months before the first payment is received, that means they can only turn the money six times per year at most, as opposed to the twelve for the previous model of lender. So they get six markups of three percent or so, maybe close to 20 percent over a year. To this, they add maybe three percent, to cover the interest they actually received from borrowers directly. Net: maybe 22 percent. Furthermore, this leaves them stuck with those loans where the first payment is late, because nobody wants to buy those. Better from their mortgage bond buyer's point of view, not so hot for their bottom line because there is a high percentage chance of those loans becoming what is known as "non-performing." In other words, default. The bond buyers got stuck with the results of default in the first scenario, which the lender views as a much better thing than dealing with it themselves. In other words, this scenario forces the lender to actually live with the results of their riskier underwriting scenarios. They actually can sell those loans, but anybody who's paying to assume that kind of risk is going to demand a commensurately lower price for it, which is reflected in a lower bottom line. So the lenders who hold a loan until after the first payment usually have tougher underwriting than those with pure packaging house mentality.

Finally, there are still a few lenders who wait until they have three payments, giving them the best prices of all when they sell. Unfortunately, it takes about four months for them to be able to do this, so they get four percent for the loan, but can only turn the money three times per year. This actually gives them a chance to fix bill paying problems that might have afflicted the second group, but on the other hand, more people have a late payment somewhere in the first three. Nobody wants to pay a good price for loans that are not current, and a little less if it has been delinquent but is no longer, as that's a flag for possible future problems. These lenders get maybe 12 percent per year in funding markup, plus four percent or so for interest actually received from borrowers, netting maybe sixteen to seventeen percent. Needless to say, this model has largely fallen out of favor by most lenders because it doesn't put as much money into the firm's bottom line, but they still get over twice what the lender who actually holds the loan makes per year.

Now this phenomenon has been part of what has driven rates down from their rates of years previous, as lenders face increased competition from other lenders who "want in" on that twenty-four to thirty percent per year from turning the loans, and are pressured to deliver lower rates by the fact that most of their money actually comes from selling the loan, as opposed to servicing loans they do make. Many lenders actually retain servicing rights when they sell the loan, as this gives them continuing income. Indeed, many people out there whose loans have been sold multiple times are blissfully unaware of the fact, as they are still sending the check to the original servicing company.

Another thing that this has driven is the increased use of pre-payment penalties, as the entities buying the loans, which are mostly large Wall Street entities, are very attracted by the consequences of buying loans with prepayment penalties, and thus, pay more for them. If you know that you're going to get that 7% for at least three years, or get a one time stroke of three percent if you don't, you are willing to pay more for those bonds than if the people involved could just hand you your money at any time. Many times the sub-prime market will offer the same people a better rate with a prepayment penalty than the A paper market will without a pre-payment penalty. It's all well and good to save half a percent on a half million dollar mortgage, which is $2500 per year, but if you don't last the three years you are out $15,000, twice the maximum you possibly could save! Pre-payment penalties are to make the aggregated mortgages more attractive to Wall Street.

Caveat Emptor

The Best Loans Right NOW

5.5% 30 Year fixed rate loan, with one total point to the consumer and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2271, APR 5.633! 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 4.875 percent!

Best 5/1 ARM: Currently, thirty year fixed rate pricing is better. However, 5/1 loans as low as 4.25% are available if you want to buy the rate down.

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


Here's the real issue about commissions: They need to be structured to incentivize good results - rewarding those agents who do good work, penalizing those who don't. The current structure, where the brokerage gets a flat percentage of official sales price - doesn't really motivate agents to perform. It really doesn't make a huge difference to the brokerage whether a property sells for $500,000 or $400,000. Assuming a 3% commission, they get $15,000 in the first case, while getting $12,000 in the second, despite that any monkey should be able to sell a $500k property for $400k. Basically, they get 80% of the reward for doing nothing, but that failure makes a huge difference for the property owners. If they owe $400,000, that's the difference between going on to their next property with about $60,000 in their pocket or coming up short about $30,000 and having to do a Short Payoff, with all of the resultant consequences to that family's future. Nonetheless, at 3% commission, all this means is the difference between $12,000 to the brokerage and $15,000. There is a dissonance between the interests of the owner, who this makes a $90,000 plus difference to, versus the agent who will still get 80% of the same paycheck if they do nothing but persuade the owner to accept the first lowball offer that comes along.

This dichotomy of interests encourages all sorts of games, from "buying a listing" (leading a homeowner to believe the property will sell for more than it will in order to secure the listing) to failing to negotiate hard to accepting too many listings to be properly serviced. If I can really service six listings, and I take ten, the individual selling prices will suffer while I make more money - ten times $12,000 is more than six times $15,000. Most agents - just like most people - will do what aligns with their interests.

The major alternatives - "net listing", where the consumer "nets" a certain amount and money over that goes to the brokerage, and "Flat fee listing" don't really float my boat either. The first has the advantage of pay for performance and severely discourages agents from over-promising on price; nonetheless the homeowner isn't motivated to maintain the property, and the agent is a little too motivated to wait for a better offer that isn't likely to come. As for the "flat fee listing", all that motivates the listing agent to do is get it sold - never mind the price. Whether the owner makes $60,000 by selling for a great price, or loses $30,000 by not getting so great of a price, that's all the same to the agent. But the owner wants it to make a difference to the agent, because they want that agent to get the best possible price, not just the first offer. As for the "flat fee in advance" listing, why should that brokerage want the property to sell at all? They've made their money already! If the property sells, now they have to do all that work and assume all that additional liability!

What we really want is a fee structure where the agent is motivated to get the highest possible price as soon as possible, the latter being more important than is generally recognized, as carrying costs eat profits very quickly, especially if the family vacates so as to show the property to best advantage and get the best price, or if they've already moved to their new home for whatever reason.

There should be several terms in this equation. It should take the form a+b+c+... For every factor the owner and the agent can agree upon having an effect upon consumer benefit, there should be a term in the compensation equation. Note that if the agent doesn't measure up in some way, any of these terms (except the one for doing the base paperwork) should be able to go negative. It's likely that good agents should be making more for listings than they are, while ineffective bozos quickly go bankrupt.

I'm not concerned with getting paid for a listing that fails to sell. In fact, I consider the concept anathema to a good agent - or any other business. If I do not get the job done, I do not deserve to be paid. Nor does any other agent or any other business. The world doesn't pay off on a good try, and my experience is that listings that don't sell aren't likely to have been a good try. I just visited a listing yesterday, a preview for a prospective client. Showing instructions said "vacant -go" Got there, it's a combo lockbox, but no combo anywhere. Spend half an hour in the front yard on the cellphone trying to get a combo from agent, listing office, number listing office referred me to, the number I was referred to from that, and so on. Finally gave up. How many others like me have there done that? Sounds like an agent who wants both halves of the commission to me, discouraging prospective buyers represented by other agents. Sound like someone you want to work with? Sound like someone you want to reward if you do inadvertently sign up with them?

This doesn't change the fact that if it does sell, there's a given amount of work no matter what the price is, and a given amount of liability. That's just part of being in this business. No matter how careful you are, no matter how good you are, eventually something is going to bite you. It's just a fact of life, and is the reason for E&O insurance. The commission structure needs to recognize this fact of life, or it will fail. But this is not how agents should earn most of their money, and most agents don't do this paperwork themselves, but have assistants paid as little as they can get away with to do it. A flat fee of $1000 is probably about right in California. Enough to pay the rent, the utilities, and the receptionist who actually generates the paperwork off WinForms.

Performance pay is a separate issue, and should be a separate term in the equation. I'll happily pay $20 to make $100 ("here's another $20 if you bring me another $100!"). The most central idea of engaging an agent is to get a better price for the property. My client shouldn't be expected to pay me if I'm not performing services of value - enabling them to get higher price for a quicker sale and less. Any twit should be able to get $300,000 for a property that's worth $400,000. That's not a valuable service, and that's not something an agent should get paid for. If the agent can't get a good enough sale price to meet even a minimum test of benefit for the client, they should lose money. If the sale price is low enough, it should eat up even the base transaction fee, or even send the commission negative - the agent pays the consumer for so badly bungling the transaction. This is nothing unusual in other businesses. Even doing mortgages, I'm perfectly prepared to pay money out of my own pocket if I can't deliver a loan on the terms I quote (for reasons other than client not telling me the whole truth, that is!). The goal is complete consumer satisfaction, and taking money when my client doesn't benefit doesn't help my business in the long term either.

This performance pay should be steeper than current standards. Between ten and twenty percent is about what I think will do the most good. Give the agent a good solid incentive to want a higher price if they think its coming, while still reserving the lion's share of the benefit to the client. If I get Joe a price $20,000 higher than he would have gotten without me, Joe should be quite happy paying me a portion of that money by prior negotiated agreement. I would be ecstatically happy to do so in the reverse situation. And if you wouldn't happily pay it, I suggest you need to be confined because you're not sane. You want the agent to have a personal incentive to make that money for you. But it should be 10-20% of the excess or shortage relative to a base amount - whatever the seller and their listing agent think it could be sold without the agent benefit. It should also be based upon the sale price net of all negotiated "seller givebacks" not related to specific later discoveries (i.e. inspections and requests for repairs based upon them). It an inspection shows unsuspected repairs costing $20,000 are needed, the seller would have to pay that anyway, and it's not the agent's fault that need exists. But the idea is that client benefit should translate into agent commission, and client detriment should translate into money out of that agent's pocket.

There should also be a healthy term built into the equation to reward or penalize the agent for a quicker sale or a slower one. This can be based upon a flat duration, or upon average days on market for properties in the same class. More expensive properties take longer to move - that's just a fact. But this component term should be based upon date of sale, and should be based upon a very high percentage of carrying costs for the property - about thirty to fifty percent, maybe even sixty. I'll happily pay fifty bucks if it means I don't have to pay a hundred! Say average days on market in a given market are roughly 120 from listing to close of escrow, and it costs $4000 per month to carry the property. So for every month above or below four months, at fifty percent carrying costs, the agent gets $2000 more or pays $2000. If it's a six month listing with no offers, the agent pays $4000 at the conclusion. This would force agents to learn what are and are not qualified offers, and force agents to live with the same kinds of tradeoffs that our clients do. No more, "Sorry that escrow didn't close. It happens," when it should be part of our business to know that that offer was pie in the sky in the first place. When it's their own pay being docked, agents will do real investigation.

So far, the structure the ideal listing commission formula looks like this. $X basic commission, plus or minus $Y price performance (based upon 10-20% commission for over- or under-performing a certain price mark, plus or minus $Z time performance. Note that all of these are based upon demonstrable good for the client, and the client ends up with more money in their pocket as a result of every penny that agent is paid in incentive.

There should be one more flat component built in, contingent upon events. You don't want agents discouraging other offers, but you don't want them turning away foolish buyers who don't want a buyer's agent either. If someone is foolish enough to come in unrepresented by an agent, you don't want to shoo them away. So a fee for handling the buyer's end of the transaction is in order if there's no buyer's agent is a good idea - roughly half a percent of the sales price seems about right. Not enough that your agent is turning away offers made through other agents or pretending they don't exist, but enough so that they won't shoo any unrepresented buyers away, either.

None of this has any bearing upon the buyer's agency commission. That's a completely separate issue, and a separate article. But there are two issues you don't want happening to you. You don't want the listing agent discouraging buyer's agents so they can get both halves of the commission, and you don't want them shooing away an unrepresented sucker because it's extra work and liability that they won't get paid for.

Here's the really fun part: all of these terms need to get negotiated with every listing. Furthermore, it would tell a consumer quite a bit about whether they can really expect to get that listing price. I certainly wouldn't take a listing on terms which I wouldn't expect to get paid for, and neither would most agents (unless it's a "Hail Mary" to save their business).

As I've said, good agents would probably make more on this scheme, while poor ones will make considerably less, if they don't end up actually paying the client. You'd have agents advertising their average commission - paying a higher commission would do clients demonstrable good, rather than the standard "statistical studies show" argument NAR wants us to make. "Yes, I happily paid Joe $16,000 because because we agreed anyone could sell it for $250,000 in six months, and he closed a sale for $300,000 in thirty-two days." That's an five percent plus listing commission if the agent can pull it off - far more than any percentage I've ever heard of - that the seller was happy to pay because they demonstrably made more money and spent about $10,000 less in carrying costs! If an agent is that good, they can make that kind of money on every listing, and the clients won't be asking "What do you do to earn that money?" They'll be lining up to pay it! But to earn it, the has to deliver something good for the client, and if he can't help the client, he's going to end up owing the client money. Performance becomes the reason why agents are paid, individual performance for individual clients. It completely kills "buying listings", it completely kills "do nothing" agents as well as clueless ones, it discourages accepting more listings than you can service, it discourages working with more clients than you can handle, and it rewards agents who can actually get the job done better by the only universal measures - more money actually in the client's pockets sooner, with fewer carrying costs. The client benefit always leads to the agent reward - and client detriment always leads to agent penalty.

I have no idea whether this is even legal at this point - but I do intend to investigate. If it is legal, I'm going to start offering it for my listings. It wouldn't require any systemic changes - it all can be written into the listing contract, and it has no effect upon anyone other than seller and listing agent, meaning that if it's legal, there are no other interested parties, and a rational consumer would be as happy as a good agent to sign that listing contract, and happy to pay that commission, because it means they made even more money!

Isn't that what clients want? Isn't that what we should get paid for?

Caveat Emptor.

I sold my house in (state) in august 2001 I hired a title attorney whose (local company X) acted as a agent for (national company Y). The facts are that there were errors and omissions which led to negligence in the performance at the closing of the property. The property taxes for the year 2000 were not paid. The title company did not do their duty and gave clear title to the buyer. Now, more than 5 years later Company Y is claiming I owe them these back taxes plus accrued costs. I would kindly appreciate some feedback

Yes, you owe the money.

The title insurance policy you bought insures the person who bought the property. Property taxes are part and parcel of all land ownership. A reasonable person should have paid those taxes. But they didn't get paid.

This doesn't mean that someone didn't screw up. Every title search needs to include a search for unpaid liens that includes property taxes. That's just the facts of the matter.

However, this does not relieve you of your duty to pay those taxes in full and on time. If it was an obscure mechanics lien recorded against your property erroneously for work that was never done, you'd have a great case. If it was for stuff that you paid, and had reason to think you paid in full even though you were short, you might have a case. But not stuff that every reasonable property owner knows has to be paid, and didn't get paid at all.

Let us consider what would have happened if you still owned the property. The county would be sending a law enforcement official around with delinquency notices, which would include interest and penalties for late payment. If those weren't paid, they'd send law enforcement around another time with a tax foreclosure sale notice. You would have to pay those taxes.

It's no different because you sold. Because it's a valid existing lien on the property, albeit one they missed during title search, they paid it to clear the buyer's title, as the policy requires them to do. On the other hand, when an insurance company pays a bill like this, and title insurance is insurance, they acquire the right to collect payment via subrogation. This fancy word just means they paid the damage on behalf of someone, and now they have the right to collect payment, just like auto insurers who pay for the damage to your vehicle and go sue the party at fault, for which that person's liability insurer usually pays. The person with the liability to pay that property tax bill is you. Now, I'm not an attorney, so I don't know, but there might be a case you can build against the person who did the title search for the interest and penalties that have accrued since the search. Before that, the bill was all yours, and given that it was for 2000, should have been paid before August 2001. On the other hand, that title company might not have had a duty of care to you, despite the fact that you were the one who paid the bill, as the insured was your buyer, not you. Furthermore, the cost of paying the attorney can often go to several times the cost of paying the taxes and penalties. You'd need to, you know, talk to an attorney for more information. You might want to call company Y and ask if they'll settle for the bill as of the sale date, because they don't want to pay for an attorney any more than you do, and they did screw up, and if they hadn't, you would have paid the bill back then, right? Company Y can then recover the balance from their agent, company X.

Any lien that exists before the sale, discovered or not, is your responsibility. The only time that I think you are going to get off the hook is if you are dead and your estate probated and distributed before the lien is discovered. Basically, you've got to die to get away with it. Perhaps intervening bankruptcy might do it as well. I don't think so, but I'm not a lawyer. If you had died, the title company would still have paid, as the policy requires to protect the buyer, but would have had no choice but to eat whatever amount they paid, because there would be nobody alive who they would have a valid claim against.

Caveat Emptor

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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 continually horrified how many people shop their loans by APR, just as I am by people shopping their loan based upon payment. Why? Because in either case, you're setting yourself up to spend a lot of money in closing costs that most people will never recover. But you shouldn't choose a loan based upon APR, just like you should never choose a loan based upon payment.

There is always a tradeoff between rate and cost in real estate loans. If you want a lower rate, you're going to spend more in up-front costs to get it. This is a law of finance on the same order as the law of gravity, or Newton's laws of movement. Some lenders and originators have different tradeoffs, for better or worse, but they are always present. The question of rate should never be asked or answered on its own, but always in conjunction with the costs it takes to get that rate. If you keep a loan long enough, yes, you will eventually get back your upfront investment, but most people don't keep their loans nearly long enough.

Let's illustrate by example. Picking a random rate sheet from one lender as I type this, I've got one thirty year fixed rate loan with a rate of 5.00 percent, and assuming an existing loan payoff of $350,000, and rolling costs only into the balance, an APR of 5.484, and payment of $1993. Looks better at first glance than a loan at 5.625%, with a payment of $2056 and an APR of 5.764. As other alternatives, 6.00 percent is available with a payment of $2119 and an APR of 6.048, or 6.375% with a payment of $2184 and APR of 6.375.

But here's what may not be apparent. As a matter of fact, it isn't apparent to most consumers. That 5.00 percent loan cost 4.8 points to get, and involved paying over $21,300 in total costs to buy the rate down that far. You're almost up against California rules limiting the total costs of a loan to 6% of total loan amount. The loan at 5.625% is done with a single point, and costs a grand total of $7070 to get done. The loan at 6.00% requires no points, and costs a grand total of $3500. Finally, the loan at 6.375% is a true zero cost loan.

What this means is that that getting that 5.00 percent rate is a $21,300 bet that you will keep that property and that loan long enough that the money you save in interest every month will be more than that upfront cost. It takes 141 months for that loan to do that as opposed to the 5.625% loan - almost twelve years - when you consider time value of money. It takes 108 months - nine years - before it pulls even with the no points loan at 6.00, and 92 months - over seven and a half years - before it pulls even with the zero cost loan at 6.375%. The 5.625% loan (a $7000 bet) doesn't start in first place either, but it does get there a lot more quickly. It takes 55 months - four and a half years to pull in front of the 6.00% loan, and 53 months to pull in front of the zero cost 6.375% loan. That poor 6.00 percent loan for no points is the only one that's never the absolute best choice - it takes the exact same 55 months to pull in front of the zero cost loan as the 5.625 takes to catch it, but since you're only betting $3500, at least you've lost less if you refinance or sell before break even, which most people do. Last time I checked (a few months ago), the median age of mortgages in the United States was 28 months - just about half the time that any of the other loans takes to pull even with the 6.375% loan that doesn't cost a penny, either out of pocket or rolled into the balance.

Let's consider how much money you'll be out if you refinance after 28 months with that 5.00 percent loan (or sell the property), like approximately half the population will. Your balance is $18,860 higher than the zero cost 6.375% loan, while on the plus side you have saved $1288 in payments. On the minus side, however, if you get another loan, you still have to pay interest on that $18,860. Whether it's because you sold that property and bought another, or a refinance loan comes along that you like better, it means a loan balance $18,860 higher even if you don't pay points on the new loan. You're still paying for your old loan, while all of your benefits stopped on the day you let your old lender off the hook by selling or refinancing. Admittedly, the chance of this happening is lower as you get to lower and lower rates, but it's still a bad bet, in my estimation. People not only sell, they want cash out, they want debt consolidation, the list goes on and on. If you get another 5% loan, you're paying $943 extra per year because of that higher balance. Alternatively, if you kept the extra in your pocket and invested it elsewhere, a 9% rate of return would mean it would cost you $1697 that first additional year. So far, I haven't worried about tax deductibility, but it works against the higher cost loan, making the picture even less favorable.

I need to note that these were honest calculations. The ones you encounter won't always be. Sometimes, they're based upon the payoff balance - in other words, calculate the payment for that 5% loan as if you were going to pay all of the costs in cash, even though the loan officer probably knows that's not going to happen. This would allow them to quote a payment of $1879. It also assumes they're giving you an honest quote on your MLDS (California) or GFE (the other 49 states) is accurate, as the APR is calculated given that information. If the underlying document is inaccurate, and I've covered how badly lenders can legally lowball, then the resulting payment and APR calculations will therefore be too low.

Now the difference between the two numbers, APR and APY, can give you a certain amount of information if you know how to use it, assuming that the loan officer tells you the truth, unlikely though that may be in some cases. I'm going to assume you've got a financial calculator or can do the calculations yourself, because none of the ones I've seen on the web are up to this task. Furthermore, this is only an approximation of the actual computation method, so there will be a small amount of slop in the calculations, but much smaller than the eighth of a percent fixed rate loans quotes are permitted to be erroneous. Using the term of the loan, the payment, and the contractual note rate (APY), tell your calculator to compute principal value of the loan - in other words, the new balance. This may not be accurate in and of itself, and that will tell you there's something funny going on with the numbers. Then repeat the calculation with APR substituted, which should give you the balance less the cost of loan, albeit with third party fees (appraisal, escrow, title) still in the amount as those are excludable from APR calculations under Federal Reserve Regulation Z. The difference in the two numbers tells you the fees the lender is charging - or the ones they're willing to tell you about, anyway. Without a Loan Quote Guarantee, these numbers have no more meaning than the lender wants them to have.

Note that the "spread" or difference between APY and APR gets larger as costs get higher or the term of the loan being contemplated gets shorter. The reason is that these costs have to be paid off over a shorter period of time. It also increases for smaller loans and decreases for larger ones. If you have to pay them off over fifteen years instead of thirty, the difference gets much larger. That 5.00 percent loan that had an APR of 5.484 with a thirty year loan term goes to 5.834 with a fifteen year loan term - not quite twice the difference, but nasty enough!

Despite the fact that the person refinances about every three years, APR is always calculated upon the consumer keeping the loan for the full term, which isn't likely. Ninety-five percent of everyone has sold or refinanced within about seven years, and this number climbs towards an effective 100% for loans that begin adjusting before that. Sure, you could theoretically keep a hybrid ARM (although not a Balloon) after the adjustment, but nobody does.

With that in mind, let's calculate APRs of each of these loans assuming you'll refinance after 36 months - significantly longer than the fifty percent mark where half of the country has refinanced or sold the property. The 6.375% zero cost loan still has an APR of 6.375 - because it has no costs to recover. The The APR on the 6.00 percent "no points" loan, which only has $1800 of non-excludable costs (see Regulation Z), doesn't go up much - to 6.391. The 5.625% loan you can have for one point jumps up to 6.643 APR, and the APR on that loan that the people shopping by APR or payment will choose - the one with a 5.00 percent contractual interest rate - skyrockets to 8.663%! If you only end up keeping it three years - beating out median age of loans in the country by better than 25% - this loan is the worst of the choices I have presented, not just by calculation of money spent, but even by calculating APR honestly.

If I had to pick a few things I could pack into a sixty second public service announcement to tell all 300 million people in this country about real estate loans, the fact that they're severely unlikely to keep the loan for anything like the full term would be one of those things. People just assume that they're going to keep a loan for the full term, but then they don't actually do it. Meanwhile, all of the calculations that are made presume that they will, even though that presumption is nonsense, and making those calculations on that basis will actually cause many consumers to make erroneous decisions, because they paint the facts as something other than what they are. If gravity was a tenth of what it is, we could all fly in the manner of Icarus as described by myth. But those pesky facts keep getting in the way, and over half the people who take out thirty year financing don't keep it for even one tenth of the full term. If you're wasting nearly nineteen thousand dollars of your money every three years, as the people here did once, those facts will have an ugly tendency to bite you just as hard as they will any modern day imitator of Icarus.

Caveat Emptor

Straw Buyer Fraud

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I've gotten several emails to articles recently having to do with straw buyers, and more search hits. Red flags preceded home-fraud lawsuit and Fraud case hits home seem to cover one of these weasels particularly well.

A "straw buyer" is someone whose credit is used to purchase a property and secure financing. Sometimes they cooperate willingly and sometimes they are victims of identity theft, but it's always illegal. It is also, as these two articles illustrate, hazardous to your financial health.

Person A wants to buy a property, but convinces person B to step in as a "straw buyer" to obtain terms that person A could not. Alternatively, person A steals person B's identity, and forges all of their information on the purchase and loan papers. In both cases, person B is not the person really purchasing the property, but their name is on the mortgage. In the first case, person B is fully responsible for the loan and everything else that goes on, as well as having committed FRAUD. In the second case, they've got a long hard row to hoe to convince everyone that they weren't involved, because with hundreds of thousands of dollars on the line, it is worth the lender's while to be as hard-nosed as possible. The lender does not particularly care about justice in this case; what they want is the money they loaned out to get repaid.

The closest thing to benign that happens in straw buyers is when one relative, let's call him Junior, convinces another relative, call her Mom, to use her good credit so that Junior can afford the payments on a house he really does want to live in. Please note that this is still fraud - you are deceiving the lender for the purpose of getting a better loan than you would otherwise be able to obtain. Good agents and good loan officers want no part of this, because it doesn't matter how benign the intent, the fact of the matter is that it is still fraud. The lender discovers it, or if payments get missed, that agent or loan officer is legally toast. Note that this is different from Mom buying Junior a property for Junior to live in, or helping Junior afford property Junior wants to buy. There is sometimes a thin but always bright line between legal and illegal activity, and starting to deceive people - telling anything less than the whole truth and nothing but the truth - is always a sign you have stepped over the line.

Now, once you get away from this most nearly benign straw buyer scenario, things degenerate quickly and there are many scams and frauds that can be pulled. Many of them involve appraisal fraud. Most common is that someone persuades you to allow them to apply for a loan on your behalf to buy a property for them, which has supposedly appraised for $700,000. You end up responsible for a $700,000 loan on a $400,000 property, and the people who pull this scam walk away with $300,000 (or more) free and clear.

There are also all kinds of scams involved with people that want someone else on the mortgage, but themselves on title. If you quitclaim off of title, this does not absolve you from the mortgage. In general, the only way to absolve yourself from the mortgage is for them to refinance in their own name, and since they are claiming they couldn't do this, that just isn't going to happen. It's one thing for one spouse to qualify for the mortgage on their own but legally quitclaim it themselves and their spouse, husband and wife as joint tenants with rights of survivorship. It is something else entirely to quitclaim it to Joe Blow (or Jane Blow), but allow yourself to remain on the mortgage. If Mr. or Mrs. Blow does not pay the mortgage, guess who is liable? I get hits on this site every day asking, "How do I remove myself from a mortgage?" The answer is that you don't. The lender has your signature on the dotted line that says "I agree to pay..." The only way they are going to let you off is if the people remaining qualify for the loan without you - by which I mean a refinance. Even most loan assumptions (for loans where assumption is possible and approved) are subject to recourse for at least two years, usually longer. This is one reason that for divorcing couples, it needs to be part of the dissolution agreement that the property will be sold or mortgage refinanced before the dissolution is final to protect the spouse that isn't keeping the property (they're often entitled to some cash from the equity, as well).

There are good and strong reasons why straw buyers are illegal, reasons that start at fraud and run through confidence games of all sorts, which are also fraud, albeit with a personal as opposed to corporate victim. The games that can be played on you when you cooperate with a straw buyer request start at major financial disaster, and often include felony jail time.

Caveat Emptor

Copyright 2005-2014 Dan Melson. All Rights Reserved

 



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Dan Melson's San Diego Real Estate and Mortgage Website

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About this Archive

This page is an archive of entries from April 2008 listed from newest to oldest.

March 2008 is the previous archive.

May 2008 is the next archive.

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



What I Do

Read My Promise To All My Clients

My Office Contact Information

There are no better agents in San Diego County!

There are no better loan officers in California!

Ask for your free consultation today!

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Favorite Loans Available Now

My Listings

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

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

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