May 2008 Archives

This email exchange is worth another article on a different subject. Everything down to "Afterwards" is a straight out of the email except that I deleted any information that might identify a particular individual or company. The context was that he wanted my ability to locate and recognize bargain properties.

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.

I do have lower cost packages for when you do part of the work, starting with finding the property.

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

Yes, getting half the commission back is cool with most folks. But consider: Did your current agent find you something like this? Does she spend enough time shopping the market that she even knows what is and is not a bargain, or does she just say "Here is the living room."? What value is she 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, by all means keep doing what you are doing. 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.

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. 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 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.

Now, I've got some bargains I've found. If you'd like to work with me and get shown these bargains, or have me go looking for bargains specifically for you, give me a call and let's make an appointment to meet and get my contract signed. It's non-exclusive, so if you don't like what I find for you, you're free to stop at any time and go work with someone else. If I don't perform, as in find the property you want, I get nothing. I put a lot of work into every client or prospect I work with, with the idea of getting them a better bargain. I'm confident enough of my abilities that I don't need to tie you to me exclusively. But you do get what you pay for. 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.

Consider 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 same reason is why I am worthy of my pay.

By those characteristics, you are a very qualified buyer. You should be working with someone who knows how to use that as leverage to get you a better bargain.

Or you can pay full price for a mediocre property, and console yourself with 1.25%.

If you decide you would rather have the real bargain, here I am, ready to go to work for you.

It may be true of what you are saying, however, if you want to win over prospects....you are going to have to change the tone of your communication. You come across very demeaning. Even if you were giving your services away free...I wouldn't be interested.

I took the time to explain the situation to you, rather than a flat answer. That's just a small taste of the value I provide. I am paid to be the expert, and I earn my pay. If you are an expert, you don't need me. If you don't know about all the stuff you don't know about and are stuck in denial about "Agents don't even need a college degree!", you won't see the value of a real expert - which is part of the point of what I wrote. Believe it or not, there are clients a good agent does not want, and you appear to be one of them by your response.

If all you're interested in is that rebate, that's fine with me - I am not looking for penny-wise and pound-foolish clients. I am looking for people who understand and are willing to pay for value when they find it, in order to save more money in the long term. But if you won't pay for value, don't be surprised when you don't get it. If you don't believe skill makes a difference, by all means go with the commission rebater.

Good bye and good luck.

You are an idiot. And I am going to report to the board.

There are plenty of agents that want my business. I haven't even tried to contact any agents yet.

You are the one that needs the good luck.

NOW GET LOST!

Afterwards: This guy is working with a weekend agent who isn't good enough or confident enough to quit her real job on the largest transaction of his life. No wonder he doesn't realize what a difference a good buyer's agent can make! Furthermore, it's highly unlikely that working forty hours per week somewhere else, she has the time, energy, and inclination to keep up with the market and its changes, let alone screen out properties that aren't worth the client's time. Value provided? Letting him into the property and saying, "Here is the kitchen. Here is the living room." Most people really can figure that out for themselves. Improvement in outcome over just doing something incredibly stupid and calling the listing agents? I can't see that there is likely to be any.

Now this guy was hoping I'd reduce my commission, and it's okay to ask. It's not okay to get upset when someone won't. It's counterproductive to get upset and claim I'm being "demeaning," by explaining to him what he plainly had not considered, that the value provided by a good agent far exceeds the commission rebate. He probably thought that that was "hard negotiating," not understanding that he had marked himself as someone that cannot be dealt with on the basis of mutual profitability, both of us coming out of the exchange better than we otherwise would have. If you don't understand that there is a problem or challenge, you are unlikely to understand the solution. On paper, the Yugo looks like a good idea. But once you deal with one, you know it's no bargain. Maintenance, reliability, performance, noise, lack of room, etcetera, etcetera, etcetera. I see a lot more original VWs on the road, marketed to the same demographic over twenty years earlier, than I do Yugos. Problems in real estate transactions happen, and they're often much better buried than anything purely mechanical. Furthermore, there's no real "lemon law" equivalent in real estate, and if you fail to deal with the issue at the proper time - most preferably, before it's a problem at all - it's far more costly to go back and fix. You saved $4000 on agent commission! Yay! You bought the wrong property, paid too much, can't afford necessary repairs, and have to sell at a huge loss and pay bigger commissions out of that than the person who sold you the property did? Not so good. Definitely not so good. Not to mention that with the prices of real estate being what they are, anything you "saved" in compensating the person who is supposed to be the expert on your side is likely to be lost several times over because the person who will work cheaper isn't worth as much.

In certain quarters, it's practically an offense against humanity to claim that you provide more value than another agent might, but it is nonetheless true that some agents provide more value than others. Get offended if you want. It makes zero difference to the facts. It is more constructive to employ techniques to find those agents who provide more value. Agents need to know the market segment they are serving, and this person is not part of mine. My business model does not permit me to do business with this sort of client and stay in business. You want cheap service with a commission rebate? The weekend agent is the way to go, not me, however much it might anger you to be told so. You want someone who is actually going to find you a better property at a better price, and provide more leverage in negotiations? You may be the client I'm looking for, and the discounter with the commission rebate is as inappropriate for you as an agent as I am for his ideal client. The discounter might want my clients, but they are not set up to serve the needs of those clients. I occasionally do business with one of the discounters preferred clients, but I have no interest in seeking them out, and I cannot stay in business spending as much time and effort on them as someone where I make the full commission. Truth be told, the existence of such clients dilutes the value of my reputation, when somebody who has persuaded me to offer them a discounted package for lesser services tells someone who might otherwise be a good prospect that I did a good job, but nothing special. My target client is someone who's not only looking for excellent value, but recognizes it when they see it.

Caveat Emptor.

Many people think that mortgage interest works like rent: paid in advance before you live in the property for the month.

This is not the case.

Mortgage interest is paid in arrears. As you begin the month, interest begins accruing. It accrues throughout the month, and the payment is due at the beginning of the following month. The reason for this is that the interest is unearned until you have actually borrowed the money throughout the month. You could win the lottery, write a best seller, sign a contract a with professional sports team, or any number of other farfetched but real possibilities for suddenly acquiring a windfall of cash enabling you to pay that loan off. You could also refinance, in which case that lender is only entitled to the interest from the days you had their loan.

When you refinance, however, or even when you take out an initial purchase money loan, you will generally be required to pay the interest for the remainder of the month on that new loan in advance. The reason for this is quite simple administrative - it gives the lender some time to set all the bookkeeping on that account up, gives them a full month at least between initializing the loan and the time any money should be hitting their account in payment of that debt.

So when you refinance, you make an upfront payment to the old lender for the part of the month they held your loan during the month, and to the new lender for the time they held your loan. Say the new loan funds and pays off the old loan on June 15th. You will pay the interest from June 1st to 15th to the old lender, and from June 15th though the 30th to the new lender. You never, ever, get a free month, because interest never stops, at least so long as you owe the money. In point of fact, I tell people to think of it as making their normal payment early, as in this case they're writing the check they normally would have written July 1st two weeks early on June 15th. It's really just the interest owed, but since most folks don't keep their loan more than a few years, there usually isn't a large proportion of principal in their regular payment anyway. Therefore, if you think of it as your regular payment, paid early, it'll usually be a little bit less. There are usually one or two days of overlapping interest, which is why most escrow officers won't request funds on a Friday. You don't want to be paying interest on two loans over the weekend to no good purpose.

So why do lenders use the "skip a month of payments!" come on? Some will even use, "Skip two payments!" Because a new loan is being originated, they can (generally) roll that money into the balance on your new loan where you not only pay the money, but you pay interest on it for as long as you owe that money. Make you feel all warm and cuddly? Didn't think so. Anyone who uses the "skip a payment!" promise to get you to refinance has just told you point blank that they're a dishonest crook. However, since most people don't know how to translate loan officer speak into English, they get away with it disgustingly often. The state of financial education in this country is a national disgrace. Of course, it's to the benefit of certain political groups to have voters believing that there is such a thing as a free lunch.

You never really skip a loan payment when you refinance. If you try, all you're really doing is adding it to your balance. You can decide to pay your balance down at loan inception and pay closing costs out of pocket, and while an accountant or financial planner will generally tell you there are better uses for the money, it can be a very smart thing to do if your circumstances are right for it.

Caveat Emptor

That was a question that brought someone to the site and the answer is very simple: they don't give you the loan. You haven't agreed to pay them, so why should they?

There are two major cases of this, one of which has two sub-cases. The first case is that if it's a purchase money loan. Because you don't get the loan when you don't sign mortgage documents, there may be issues with whether or not the seller is entitled to keep your good faith deposit. Now, if you can come up with the cash to pay the seller from somewhere else, for instance, if you have it sitting around and just would have preferred to get a loan, no worries. You still have the option of hauling out your checkbook, and you can get a loan later, although it will be "cash out" loan which generally has a rate and term trade-off a little bit higher than "purchase money". If you applied for a back-up loan, you can sign the other loan papers. But since most people don't fall into either of these two categories - people with the cash lying around and people who applied for more than one mortgage - you are probably looking at the unpleasant reality of not having the money to purchase the property. In most cases, the loan contingency has expired, assuming there was one to start with. Matter of fact, usually all of the contingencies have expired, leaving you without anything to excuse not consummating the transaction. Therefore, any good faith deposit is at risk, not to mention that the transaction may well be dead. The seller only agreed to give you that exclusive shot to buy the property for so may days. If you want to extend escrow, most sellers will require some additional consideration in the form of cash in order to allow the extension. In fact, many agents and loan officers have gotten very lazy and lackadaisical about deadlines, with potentially severe repercussions to you, their client. Once those contingencies have expired, usually on day seventeen, you typically are stuck. Consult a lawyer for the exceptions, but there really aren't very many. This is one of the many reasons why being successful in real estate is about anticipating possible problems and taking precautions. If you wait until the problem crops up, it's usually too late, and often, the best thing to do is sign the loan documents even though they are nothing like the loan quote that got you to sign up with that company, because otherwise the consequences of not signing are even worse than signing. Many loan companies target the purchase money market with this in mind.

The second major case is if you are refinancing, which leaves you in pretty much the same boat you were in before you started the transaction. You own the property already. You have a loan now. Unless you have a balloon loan coming due, you just continue on with what you were doing before you started the process of refinancing.

There are two major reasons why people refinance: Better terms, or cash out. If you are doing it for better terms, and the new loan doesn't deliver, there pretty much is no reason to sign those documents. This includes if they are actually willing and able to deliver the rate, just not at the cost they indicated when you sign up. There is always a trade-off between rate and cost in mortgage loans. Usually, the lowest rate will not be worth the costs you have to pay to get it, but if they lie about what it really costs to get you to sign up, those final loan documents are going to have a rude surprise if you look at them carefully. All but the worst scamsters will usually deliver that rate and type of loan they talk about. Where they fall short, or actually, go over, is in the costs department, because a loan with $5000 more in costs will likely have a lower payment than the loan where they don't hit you for those extra $5000 in costs, but do give you the rate that the costs they talked about really buys. Most people shop and compare loans by payment. It may be short-sighted and the best way there is to end up with a bad loan, but they do it anyway. They are more likely to bail out of a loan where the monthly payment is $60 more than they were initially told but has the same costs, then they are to back out of a loan where the payment is $25 more, never mind that the former is probably a better loan for them.

Refinancing for cash out is a more nebulous area. Since it's a refinance loan, you probably don't have a deadline, so you can go back to the beginning and start all over if you want to. Sometimes, however, rates have shifted upwards since you started the process, and so it can be to your advantage to go ahead and reward the company that lied to you in order to get you to sign up. If they haven't done so, however, dump that problem provider and see if you can go find someone honest! Furthermore, sometimes people have absolute deadlines as to when they need that cash, or it saves them so much money that they are better off signing those documents anyway, or the improved cash flow means they don't have to declare bankruptcy. Most often, there is plenty of time to go back to the beginning and try again, but there are exceptions. In this situation, I'd be particularly careful to sign up for a back up loan, or require a written loan quote guarantee, but people don't always understand the problem until they have been bitten.

Now when you don't sign loan documents, if you have put down a deposit with the lender, you are going to lose it. Low cost ethical loan providers who really can deliver what they talk about, and whose rates really are competitive, do not typically ask for deposits, and are willing to work without them if they do ask. They know their rates are competitive, that they intend to deliver what they talked about and that there are any rates significantly better out there. It's only when the company fails one of these tests that they have a real need for a deposit, in order to commit you to their loan.

One more item needs to be covered: Irrelevant documents aren't needed. I don't need anybody except those folks who are getting a negative amortization loan to sign a negative amortization disclosure. The same thing applies to pre-payment penalties. If they don't apply to your loan, they shouldn't be required. If they can't fund your loan without it, there is a reason, so don't sign disclosures you aren't willing to accept the implications of. If you sign a negative amortization disclosure, the legal presumption is going to be that you realized it was a negative amortization loan and accepted it on those terms. Ditto a pre-payment rider. Of late, unscrupulous companies seem to be asking people to sign these after loan funding "for compliance". Consult with your lawyer, but I wouldn't sign them at all. If they were able to fund your loan without them, they are obviously not a necessary part of the loan structure. If not, why did they fund your loan without them? The only "compliance" aspect is to this is complying with them getting paid more money. Admittedly, it's small-minded to refuse to sign the pre-payment rider when you were informed at sign up that the loan had a pre-payment penalty, but bottom line, they shouldn't fund your loan if they aren't willing to accept it as it sits, and that's not the situation most folks are running into. They are asking the questions and being told the answer is "no," only to discover later that the answer was really "yes," but by lying to their prospective customers, some loan providers can get paid large amounts of money and pawn bad loans off on most of their customers.

Caveat Emptor

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: 5.25% with 1 total point to the consumer, and NO PREPAYMENT PENALTIES! Assuming a $400,000 loan, Payment $2208 APR 5.381. This is a fully amortized loan with a fixed rate for the first five years. 5/1 ARM rates as low as 4.625 percent!

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

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

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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

Many agents seem to answer this question differently depending upon whether their client is the prospective buyer or seller. When their client is making an offer, "No, your deposit could never possibly be at risk," while when their client is evaluating an offer, "And besides, if they renege or can't bring it off, you get to keep the deposit." Both of these are false, misleading, and practicing law without a license.

The cold hard fact is that the deposit is always at risk, but there is absolutely no guarantee that a jilted seller will get it, either. The answer to "Is the deposit at risk?" from a real estate agent can never honestly be anything other than "Yes."

For buyers, the deposit is "at risk." Otherwise, what would be the point of having it? If it couldn't be lost, why would it need to go into escrow? Just to prove the buyer has a couple thousand dollars to their name? I can do that with a Verification of Deposit. The only reason to make a deposit on a purchase offer is that it is at risk, and no listing agent in their right mind is going to accept any purchase offer where there is no deposit - even if the buyer is doing a "one dollar down" VA loan. That seller is risking a minimum of a full month of all carrying costs (usually much more) upon your representation that you want the property, and they are entitled to keep your deposit if certain conditions are met. For sellers, no you don't automatically get the deposit if the buyer flakes out. There are burdens upon you and your agent, and contingencies, or escape clauses for the buyer, built right into the purchase contract. You don't want to allow those clauses, that's your choice, but you'll severely restrict the number of people willing to make offers as well as the price you will actually get. Even if the seller negotiates the payment of the deposit to them as part of the contract, the buyers can still sue to get it back. This is the real world and an offer is being made with real money and real consequences to that money. If you're unable to come to terms with that fact, stay a renter, because that fact is not going to change. For agents, if the only way you can make a sale is to misrepresent the deposit, it doesn't take a great fortune teller to see a courtroom in your future.

For buyer clients, I can do a lot to keep a deposit from being forfeit - any agent and loan officer can. Get out in front of all the contingency issues and any other reason that my client might decide they don't want to purchase the property, and get them dealt with right away, during the contingency period. Loan, appraisal, inspection, I want them all done before their contingency expires, or at the absolute minimum, a loan commitment with contingencies I'm certain we can meet. As of this writing, I have not yet lost any buyer deposit money. Nonetheless, since no agent can honestly guarantee the deposit will not be lost, I cannot and will not pretend that I'm some kind of exception to the law. The only way I could make such a guarantee is by putting up my own money as a surety, and if my client lost a deposit for a reason that was in any way my fault, I hope I would reimburse them (Until it happens and I'm facing an actual choice, there's no way to be certain). But it's not my investment, and if the investment succeeds, I'm not going to share in the proceeds (I'm given to understand that's illegal, at least in California), and one of the essential, unchangeable facts about investment is that there is no such thing as a risk free investment. If you don't understand this, any money or assets you may have can be considered a temporary thing, and you have no business in a profession with responsibility for other people's money. Anyone willing to say that there is no risk is either a fool or a crook. Nor is it likely your agent or anyone will reimburse you, especially for situations beyond their control, or if you misrepresent your situation or miss deadlines.

For listing clients, the same thing applies: Get what I need to done right away, and keep after that buyer's agent to remove contingencies in a timely fashion. If they won't remove contingencies when they are supposed to be removed, it tells me all I need to know. It's my client's call, but I know what my recommendation is going to be. I want the transaction to work, but I also want my client to get that money if it doesn't. Incidentally, Deposit issues are one reason of many that nobody should ever be willing to accept dual agency.

The bottom line is like something out of quantum physics: Schrodinger's Cat. Ideally, you want the sale to go through and record and for everybody to be happy because it all turned out exactly as agreed. Unfortunately, that's not perfectly predictable or knowable in advance. If it was, no real estate transaction would ever blow up, and the deposit would not be an issue. There are laws and procedures, and things agreed to in the purchase contract, that you have to be a real estate lawyer to offer an informed opinion about, and the judge, arbitrator, or whatever making the decision to make a definitive ruling. Escrow has custody of the money, but they're not going to do anything without mutual agreement of the buyer and seller. Either side can potentially decide to be stubborn and force the matter to arbitration, court, or whatever is appropriate, and all the consequent expenses of the legal system (which additional money is also at risk as the usual agreement is that prevailing party is entitled to legal expenses). And the legal system runs in incomprehensible ways for unpredictable reasons - the one thing that seems to be a constant is that if the judge wants the ruling to go a certain way, they can probably find a precedent to justify it if they try.

The point is this: The deposit is at risk. It is not "safe", and it does not necessarily belong to the seller either. Since this is cash, people understand that it is real money, because they had to scrimp, save, and set every single dollar in it aside from other uses, so they get understandably nervous about it. It represents a great vacation, a down payment on a new car, or something else very desirable that they're giving up, and they're putting at risk of forfeiture. Against this, the seller wants it if the transaction fails. There are ways to protect it, and ways to endanger it, and you've got both agents working to their client's advantage. As with any other competitive or potentially competitive situation, that makes the result indefinite until the game is complete. It isn't common in my experience that the deposit is forfeit, but it does happen. And anybody who tells you otherwise is either lying or hopelessly incompetent. Nonetheless, real estate is such a powerful investment that you are well advised to come to terms with the risk, because it's a necessary risk in order to buy real estate.

Caveat Emptor

A few days ago I wrote an article explaining why borrowers should consider a 5/1 ARM, because the tradeoff between rate and cost is lower for that loan, and most people don't keep their loans 5 years anyway, so having a likely need to refinance 5 years out is not an additional cost for most people with mortgages.

There are two sorts of cost for loans: The cost to get the loan done ("closing costs"). This pays for everything that needs to happen so that the loan gets done. These costs may vary from place to place, but they are absolutely mandatory - they are going to get paid. For instance, on a $400,000 refinance with full escrow, my clients are going to pay $2945 in closing costs, when you really include everything. Many lenders will try to pretend some or all of the closing costs don't exist in order to get people to sign up, but they do. I can save some money with virtual escrow in some cases, but $2945 is real. The proof is that I can put it in writing and guarantee in writing not to go over. Lenders don't want to do this, but if they're not willing to put it in writing that they'll pay anything over that, the reason is because they know it's going to be more when it comes down to it at the end of the loan.

The other cost is the cost for the rate. There is always a tradeoff between rate and cost. If you want the lower rate, it is going to cost you more money. If you are willing to accept a higher rate, you can save money on the cost for the rate, to the point where it can reduce or eliminate the closing costs you're going to have to pay. Zero Cost Real Estate Loans exist - I've done dozens. I love them because they save my clients money.

You can lump the loan provider's profit in with the costs for the rate, as origination points, or in with the cost of the loan, as an origination fee, pay it via Yield spread (if you're a broker) or even (in the case of a direct lender) hide it in the fact that you're going to make a huge profit selling that loan on the secondary market, but I guarantee you it's going to get paid somehow. Nobody does loans for free, for the same reason you wouldn't work if you didn't get paid.

These costs are going to get paid. End of discussion. The costs are slightly different in states with different laws, but necessary costs are going to get paid. They can get paid out of pocket or they can get paid by rolling them into your loan balance but they are going to get paid. Most people don't understand loan costs which aren't paid by cash, and think that they are somehow "free", but that is not the case. Not only did you pay it, but it increases the dollar cost of any points you may pay, you're going to pay interest on it, and (less importantly) it's going to increase your payment amount.

The genesis of this whole thing was a guy I thought I had talked into a 5/1 ARM a few days ago. I went through this whole process of explaining why the rate/cost tradeoff for a 30 year fixed rate loan was not going to help him, and then a couple days ago, he called me saying he'd found a thirty year fixed rate loan at 5.5, saving him three quarters of a percent on the interest rate and almost $400 on the payment. Remember that at the time, I had 5.5 available as well (I still do - but the rate is so expensive I wouldn't counsel anybody who wasn't certain they were going to keep it 15 years to buy it). So I'm going to keep that exact same table:

The problem with the rate of 5.5% is that for a $600,000 loan, those closing costs are going up to $3475 (lender and third party costs are higher above the conforming limit) in order to get the loan done, and at the time, based upon current loan amount, 2.6 points would cost $16,100 and change. But he had gone to a loan officer who did his math as if that $19,585 (my loan - I suspect the competitor's was higher) was going to magically disappear like one of a David Copperfield's illusions. He calculated payments and savings as if there were no costs - based upon the current balance and new interest rate and amortization period. Of course, this makes it look like the client was saving a lot of money $382 off the payment and three quarters of a percent off the rate, give him a whole new thirty years to pay off the loan, and pretend the costs of the loan aren't going to happen to get the guy to sign up. You'd think that somebody who reads this website every day would know better, but that does not appear to have been the case. In point of fact, the competing loan officer still has not told the guy how much his closing costs are or how much that 5.5% rate is going to cost him through him. I'll bet it's more than I would charge, but I don't know.

Psychologically speaking, what the competing loan officer is doing is smart. Because there's incomplete information available to the prospect, and I'm straightforwardly admitting how much it's going to cost (which is a lot, as most people who aren't billionaires or politicians think about money), an indefinite, uncertain number sounds like it might be less, even though it won't end up that way. Furthermore, by pretending costs don't exist, he has raised the possibility in the client's mind that there won't be any, because most people don't know how much lenders can legally lowball. There will be costs,and I'm willing to put my money where my mouth is that they'll be higher than mine. If this other loan officer could really deliver that loan at a cost lower than I can, there would be no reason for him to prevaricate, obfuscate, or attempt to confuse the issue. I've written before about how you can't compare loans without specific numbers, and there is no doubt in my mind that this other loan officer knows what those numbers really are - he just doesn't want to share that information, and the way our public consciousness about loans works, he can most often get away with it. It's still scummy behavior, and takes advantages of loopholes in the disclosure laws to practice bait and switch, knowing that when the deception comes to light (at closing) most people won't notice, and most of those who do notice will want to be done so badly they'll sign on the dotted line anyway.

Now what's really going to happen in 99% plus of all cases is that the costs are going to get rolled into the balance of the loan. The client certainly isn't going to be prepared to pay them "out of pocket" if they're not expecting those costs. So here's what happens: The client ends up with a new loan balance of $619,585 (Probably higher, because they're likely to roll the prepaid interest in as well, and quite likely the money to seed the impound account, but I'll limit myself to actual costs). In fact, the difference in payment drops to $290 when you consider cost, and $115 of that difference is directly attributable to starting over on the loan period, stretching out the repayment period to an entirely new thirty year schedule of payments (even though he was only two years in), completely debunking any serious consideration of payment as a reason to refinance. But lets compare cost of money, in the form upfront costs ($19,585 to get the new loan, versus zero to keep the loan he's got) and ongoing interest charges ($3125 per month on the existing loan, versus $2840 per month on the new loan). In this case, you're essentially spending nearly $20,000 in order to save $285 per month on interest. Straight line division has that taking sixty-nine months to break even. Actual computation of the progress of the respective loans cuts a month off that, to sixty eight months. As compared to a national mean time between refinances of 28 months, and this particular prospect is currently looking to refinance after less than that. In good conscience, I cannot recommend a loan where it's going to take him almost six years to break even, and by not considering the costs involved in getting that rate, he's setting himself up to waste probably half or more of the nearly $20,000 it's going to cost him to get that loan.

In fact, if this prospect were to refinance again in 28 months (once again, national median time), he would have spent $19,585 in order to save himself $7847. That doesn't sound like a good deal to me, and it shouldn't sound like a good deal to you. But here's the real kicker: The balance of the loan he refinances in two years is $19,250 higher. Let's assume it takes a low rate, rather than a cash out refinance to lure him into refinancing again, so he gets a 5% loan to refinance again. The extra $19,250 he owes will continue to cost him money, even thought the benefits of the refinance he is considering end when he refinances again or sells the property. At 5% for a putative future loan, that $19,250 extra he owes will cost him $962.50 per year extra on the new loan. Even if he sells in order to buy something else, that's $19,250 the client needs to borrow, and pay interest on, that he otherwise would not. Even if the client waits a full five years to refinance again, he's only saved roughly $16,400 in interest, and the additional balance owed on the new loan has actually increased slightly, to $19,280 (Remember, he's two years into the existing loan, hence $115 of phantom payment savings which keeps reducing his balance if he keeps paying it)

Failing to consider the fact that most people are not going to keep their new loan as long as they think they will is the gift that keeps on giving - to lenders. I run across people in their forties and fifties who have done this, all unsuspecting, half a dozen times or more, running up eighty to a hundred thousand dollars in debt for nothing but the cost of refinancing, and at 6% interest, that's $4800 to $6000 per year they're spending in interest on that debt. A more careful analysis says that the calculus of refinancing should emphasize finding a rate that helps you for a lower cost, but that's not the way lenders get paid the secondary market premium, and that's not the way that loan officers get paid to do lots of loans. Therefore, if you find someone who will go over these numbers with you and tell you it's not a good idea to refinance when it isn't, that loan officer is quite a valuable treasure because they're going to keep you from wasting all that money to no good purpose. (Here's one guy who will for my California readers)

A good rule of thumb is that if a zero cost loan won't put you into a better situation, it is unlikely that paying costs and points to get the rate down is really going to help you either. You are unlikely to recover those costs and points before you sell or refinance your property. If a loan that's free doesn't buy you a better loan than you've got, then the current tradeoff between rate and cost isn't favorable to refinance. There may be reasons to do so anyway - cash out, ARM adjustment, etcetera, but chances are against you getting a rate that is enough better to justify the cost. When you consider how often most people refinance or even actually sell and move, it's hard to make a case for anything other than low cost loans and hybrid ARMs. I understand the people who want the security of a fixed rate loan, and a low fixed rate. But that rate, especially, is likely to come with a cost that they will never recover before they voluntarily let the lender off the hook. Good mortgage advice takes this into account, with the net result that the folks don't end up in debt to the tune of $80,000 to $100,000 extra, and spending thousands of dollars per year just on interest for money they shouldn't owe in the first place. No, they never wrote a check for it, but it's money they spent, and if they had needed to write a check for it, they probably wouldn't have spent the money in the first place. Kind of like having a credit card with a balance owing of $80,000 or more, just for the unrecovered costs of refinancing, but people don't realize it because it's not broken out of the total cost and balance of their mortgage, and nobody educates them as to where they would be if they hadn't made these mistakes. I try to teach my clients what they need to know to avoid that situation, so they don't find themselves victimized by it.

Caveat Emptor

Cheap Lender Owned Remodeler's Project in Great Neighborhood!

General: La Mesa, 3 Bedroom 1.75 Bathroom

Con:

What's Wrong With It: Yards are down to bare soil - need sod. Pool in backyard needs refinishing. Kitchen has been torn apart, and is not currently usable. Everything in the property is thirty years old, at least.

Why It Hasn't Sold: Currently unsightly, to say the least. Also, it may be an issue getting a conventional residential loan before the kitchen is fixed.

Who it's Not Appropriate For: Anyone who wants a turnkey place to live in. If you live in it, you're going to have to "rough it" for a while.

Pro:

Selling Points: Good light, seems basically solid structurally.

Who Should be Interested: People willing to but some sweat into the property that will be repaid when it's finished.

Why it's a Bargain: Lender owned, and most people can't see that the property is in a state you'd have to take it to in order to remodel.

Financial:

What I think I can get it for: $270,000.

Monthly Payment examples: I'm going to leave those off, this time, because we might not be able to get a residential loan at first.

Investment potential: If you keep it ten years and it averages only 5% annual average appreciation per year: Based upon a purchase price of $270,000 the property would be worth approximately $440,000.

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

Drew over at zillow asked me to do a short little Q & A piece for them. It went up a few days ago, and I thought I'd post my original piece here as well.

What are some online resources consumers should be using to find loan rate information?

None that are any good, as in the sense of providing good relevant information that's applicable to specific cases. There are many loan quote forums that will quote you a rate. They quote you a low rate or a low payment to get you to contact them - and that's all that it is, a teaser. I have literally gone right down the line in two different comparative quote forums, contacting every company and asking for quotes that comply with the standards they are supposed to quote to. Not one company was even prepared to quote me what they were advertising. Nor did the forums themselves do anything when I complained - they are not interested in policing the quotes, as to do so risks losing some hefty income when the companies quit subscribing to their service. The few companies that advertise honest rates that are really available have given up on those forums in disgust - they attract clients in other ways.

Unpopular as this truth may be, you need to shop live loan officers and have real conversations and ask a lot of hard-nosed questions. Here is a list of Questions You Should Ask Prospective Loan Providers. If you want to suggest any additions to this list, I'd love to know.

What should a 1st time home buyer look for when comparing and contrasting loans?

1) Make certain you are really comparing the same type of loan. Asking about the industry standard name for the type of loan contemplated helps. Even if you don't know what it means, the other loan officers you talk to will. 2) There is always a trade off between rate and cost for the same type of loan. One lender's trade offs will be different than another lender's, but you always have a range of choices, even with the same lender. Just because one loan has a lower rate or lower payment doesn't make it a better loan. Find out the total cost of getting that rate, and figure out how long it will take you to recover costs via the lower interest rate. Given how often most people refinance, a higher rate with a higher payment but lower costs is often the better bargain. There is no sense in paying four points for a loan you are only likely to keep for two years.

What is the biggest mistake you see 1st time home buyers make?

Three most common disasters: 1) Buying or wanting a more expensive property than they can afford. Any competent loan officer can get you a loan that you can not afford, but you still have to face the consequences later, and these consequences can be well buried. Find out what you can really afford with a sustainable loan, and stick to it. Settling for a lesser property is much smarter than buying something you cannot afford. 2) Not shopping around for services. Even if you trust your brother in law the real estate agent, or your sister in law the loan officer, shopping around gives them concrete reason to stay honest. The worst mess I ever cleaned up was caused by someone's favorite uncle trying to make too much money, and the niece was blissfully unaware until her husband brought me into it - six weeks after it should have closed. 3) Believing that because someone puts some numbers onto a Good Faith Estimate (Mortgage Loan Disclosure Statement in California) that they intend to deliver that loan on those terms. This is, unfortunately, not the case in the industry at large. If they do not guarantee their quote in writing, the Good Faith Estimate (or Mortgage Loan Disclosure Statement) is garbage, along with all of the other standard forms that you get with it. The only form that the law requires to be accurate is the HUD-1, which you do not get, even in preliminary form, until the loan is closing. Big national lending institution everyone has heard of? Doesn't mean a thing. Ask the hard questions, and do not permit yourself to be distracted.

When do 50 year mortgages make sense?

Perversely, rates on 40 year amortizations are usually comparable to interest only, and fifty year amortization rates are usually higher. Nor are any of the these usually a good choice for a purchase money loan. All three are strong indicators that you are trying to buy too expensive a property for your budget. See Common Mistake Number One above.

What do you think about Adjustable Rate Mortgages (ARMs)?

I am a big fan of certain ARMs in most markets. Most of the time, a fully amortized 5/1 ARM will be at least one full percent lower on the rate than a comparably expensive thirty year fixed, and the vast majority of people refinance within five years anyway. Why pay for thirty years worth of insurance that your rate won't change when you're likely to let the lender off the hook within a few years anyway? With that said, however, right now (late November 2006) the spread in rate is only about a quarter of a percent or less between a 5/1 ARM and a thirty year fixed - and at the low cost end of the spectrum, the thirty year fixed may actually be less expensive for the same rate, so I'm recommending thirty year fixed rate loans quite a bit right now.

Is there a certain number people should be looking at when determining if they should refinance?

Forget payment. With no other information to go on, I would bet that someone trying to get you to refinance based upon a low payment was pushing a bad loan, and probably low-balling the payment as well.

Once again, you've got to have a good conversation with the loan officer. Look at the the money you will save from the lower interest rate - the interest charges to a loan. If you're saving half a percent on a $400,000 loan, that's $2000 per year. Compare this to the cost, and how long the rate is good for - or how long you're likely to keep it, whichever is less. If the cost is zero - and true zero cost loans do exist - you're ahead from day one. However, if it costs you $12,000, it's going to take you six years to break even, and most folks will never keep the same loan six years in their lives. Since there is no way to know for sure unless your prospective lender will guarantee the quote as to rate, total cost, and type of loan, you need to go in to final signing with the idea firmly in your mind that unless they can show both the cost and the benefit, you're going to walk out without signing. Indeed, many companies are very adept at pretending costs don't exist, and hiding costs at closing. Industry statistics: over half of all potential borrowers won't even notice discrepancies at closing, and of the ones who do, eight to nine out of ten will just sign anyway. This rewards people who lie to get you to sign up. Haul out the HUD-1 form at closing and make certain it conforms to what you were told when you applied. Most don't, and the loan officer knew it wouldn't when you signed up. Read the Note carefully also, before you sign.

More questions? I'd love to answer them! Contact me and ask!

Lender Owned Beautiful Comfortable Family Home Close to Everything!

General: La Mesa, 3 Bedroom 1.75 Bathroom

Con:

What's Wrong With It: Gets some traffic noise, and the garage was converted to the 3rd bedroom.

Why It Hasn't Sold: People aren't looking for this kind of property in this area.

Who it's Not Appropriate For: Someone looking for a quick profit. This is not a flipper house.

Pro:

Selling Points: Hardwood floors in the main part of the house, tile in the newer part. Kitchen is recently remodeled. Living room is original mid-century, but family room with lots of open light is a more recent addition. Back yard is lush and green.

Who Should be Interested: People looking for a good place to live at a reasonable price. This is a neighborhood that's starting to come up.

Why it's a Bargain: Lender owned, and the work has been done.

Financial:

What I think I can get it for: $370,000.

Monthly Payment examples: I've currently got a thirty year fixed rate loan available for qualified buyers at 5.75% with 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 $2159, (APR 5.935)

With 20% down: Fully amortized payment of $1727 (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 $370,000 the property would be worth approximately $600,000. If you held it those ten years before selling, you would net about $290,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $1700 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $170,000 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

Cold Hard Fact for today: The average Real Estate Agent or Loan Officer is not motivated to tell you that you can't afford your property.

For the agent you are trying to talk people out of a property after they have already fallen in love with it. Let's face it, if it's higher in price, it should have features that lower priced properties do not, and it should have fewer things that consumers do not want. Indeed, one of the easiest and most common ways unethical real estate agents sell properties is by showing you several lower priced properties, fixers which lack those attractive extras, then show you the blinged out immaculate property while whispering sweet nothings like, "I can show you how you can afford the payments!" (which is not the same as being able to afford the property!)

All agents learn that by telling the client "no," or anything that sounds like "no," they are likely to lose that business. Good ones know that putting a client into something beyond their budget is a good way to have the transaction come back to haunt them. But for most, the temptation of the easy sale that made itself if too strong. They want that commission check. Nothing wrong with commission checks. If they provide real value to the client, they are a way of showing the world that you have done something valuable, same as a doctor, carpenter, or computer programmer. It's when you use your position of trust to sabotage them that problems start - and you should experience problems. Many agents have not been around long enough to understand flat or declining markets. In truth, I wasn't in the business the last time we had one, either. But I am old enough to remember, and careful enough by nature that I refuse to assume that a rapidly rising market will save my bacon, as many agents have become used to.

And for the foreseeable future, rapidly rising markets are unlikely to save anybody's bacon, because the market isn't going to be rising rapidly. Inventory is high, long term rates are set to rise, and we're just seeing the leading edge of a wave of problems caused by over-the-top practices of the last few years. I think we're past most of the price decline locally, but conditions aren't there for a return to the market we had most of the last decade.

Lest you be wondering, the loan officer is even more unlikely to counsel you on whether you can really afford the property. Between Stated Income, Negative Amortization Loans, and loans that are both of these, you can get anybody with an income and a not too putrid credit score into the property. In fact, I heard some real howls of outrage from certain brokers when lenders tightened their recourse on brokers this last year. Even so, the paycheck is now and certain, the risk of default vague and indefinite, and for most loan officers, there's another concern as well.

You see, most loan officers cultivate some friends who are real estate agents, and that's how they get their business. That agent brings them business because they have a history of getting the loan through, so that agent gets paid. Sometimes they may have their hand out for a referral fee as well, but the important thing for you to know as a consumer is that referral you get from an agent to a loan officer has nothing to do with how great their rates are, and everything to do with how creative they are in getting some sort of loan approved so that agent gets paid for the house they sold. Tell just one prospect who has made an offer on their dream house that there is an issue with being able to really afford that loan, and the word will get around the real estate community in no time. Result: For causing one agent to not get paid, Joe Loan Officer not only will not get any referrals from them in the future, if the client does find Joe Loan Officer on their own, the agents are going to do their best to talk them away from Joe, who, from their point of view, "stole their paycheck" by telling the client that they really could not afford the loan that was necessary to make the transaction work! Even if they took that transaction to some other loan officer who got it closed, Jane Realtor doesn't want her clients to have anything to do with Joe, lest she lose another potential commission check!

So what can you, the consumer, do about this? Well, I can't tell you all about the special cases, and I lack the programming capability to embed a spreadsheet and loan calculator. But I can give you some good general rules of comparison, and guidelines laid down by lenders as to whether or not you can actually afford that loan.

Start with your total monthly gross income. Assuming you printed this out, write that number here:

*DTI: Debt to Income Ratio

Notes:
A: use fully indexed rate for qualification purposes. This means the underlying index plus the margin after it adjusts, assuming current values.
B: If interest only, use fully amortized rate for qualification purposes.

Any four function calculator will do this much. Now this is the largest number you will qualify with. As you should be able to see, it's more difficult to qualify for A paper, even though that is where you want to be. But we're not done. This is total housing and debt service, the so-called "back end ratio." So from that number, you need to subtract your monthly debt service: Car payments and other installments, and minimum credit card payments. You pay this much already. You obviously cannot afford to pay it out for housing also!

So add up your credit card, car payment, and other monthly debt obligations. Subtract it from your numbers for back end ratios, computed above. This will give you a set of five numbers that tells what you can afford for housing costs, depending upon how far you want to go. But we're not done! This is total cost of housing; the so-called "PITI payment." It includes not only principal and interest on the loan, but also property taxes, homeowner's insurance, Condominium Association dues, and Mello-Roos assessment districts (or their equivalent outside of California, if applicable). So from this, you need to subtract all of the known stuff or stuff you can make a close approximation on, like Association dues and insurance and taxes, to arrive at how much of a loan you can afford. Please note that for Negative Amortization Loans, loan officers may use the minimum payment for qualification, but you are still being charged the real interest rate! Still, it should become obvious as to why Negative Amortization loans are so popular in high priced areas right now. Not only will the lenders pay between 3.5 to 4 percent commission for them, not only do they allow lower payments to be quoted, but they make it look like you qualify for a bigger loan than you can afford, which means the real estate agent gets a bigger commission from selling you a more expensive property, and the loan officer gets paid more, also, because now you have applied for a larger loan! I have heard every rationalization under the sun from loan officers and real estate agents on this score, but they are still inappropriate for the vast majority of people who have them. I can get a better interest rate on a better loan for less cost, every time, but then I have to tell the client about the full amount they are really being charged every month, and they might have to content themselves with a less expensive property, meaning that real estate agent is going to have to do some real work. Go out onto the web and look for some loan calculators (Auto loans use slightly different assumptions, so don't use those calculators), or if you have a financial calculator, use it! Use the real interest rates that are available, and if the number you get comes out much higher than your quoted payment, they are trying to snooker you with a negative amortization loan. There is no magic about loans, and a healthy skepticism will help you prevent problems from happening in the first place.

Now add the down payment you intend to make to the loan you can afford, and that tells you whether or not you can afford the property.

Caveat Emptor

Great Entertainment Property - Partial Fixer in Highly Desired Area!

General: Unincorporated area (La Mesa Zip), 2 Bedroom 1.75 Bathroom 1 extra room

Con:

What's Wrong With It: Outside needs paint. One door needs replacing, as does carpet in both bedrooms. Some tile needs repair. One bathroom is straight out of 1965.

Why It Hasn't Sold: Most people can't see past what it needs to what it's got.

Who it's Not Appropriate For: It is going to take some work for most folks to be happy here.

Pro:

Selling Points: Combination living room family room with great light and great visibility. Kitchen is freshly redone, and the front bathroom is in attractive as well. Outside has sparkling pool and nice brick courtyard for outdoor gatherings, and a large lot with plenty of room left to do whatever you like. Lots of parking in front of the house, and everything you see around it is more expensive, some of it much more expensive.

Who Should be Interested: This is what opportunity looks like, whether for a fix up profit or for a place to live for ever and ever.

Why it's a Bargain: Worst house in the best neighborhood is the classic recipe for bargains and it's not that bad.

Financial:

What I think I can get it for: $375,000.

Monthly Payment examples: I've currently got a thirty year fixed rate loan available for qualified buyers at 5.75% with 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 $2188, (APR 5.935)

With 20% down: Fully amortized payment of $1751 (APR 5.899).

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 $375,000 the property would be worth approximately $610,000. If you held it those ten years before selling, you would net about $300,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $2100 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $260,000 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

Short answer: It almost certainly won't sell!

The first thing that happens is that when it goes onto the Multiple Listing Service, all the agents who see it know that it's overpriced. Even on the public part of MLS, the members of the public who see it wonder, "Are the walls gold-plated or something?"

The first thing you want when you put a property on the market is for everybody who is looking for a property of that nature to come and see it. Overpricing it is the best way I know of to cut down drastically on the level of interest. If they don't come see it, most people are not going to make offers. Most particularly, they will not make good offers if they don't come see it. If they do come see it, they are going to be expecting something better, and disappointed people don't make good offers, if they make one at all. That high asking price communicates that this property has something above and beyond the competition. If it doesn't, they're going to wonder what in the heck you and your agent were thinking. They're going to go away shaking their heads at the waste of their time. If they make an offer, it will be a desperation check.

The agents in the area are going to avoid the property, also. They know what similar properties are going for. Why should they try to sell yours for $10,000, $25,000, $50,000 above market comparables? Yes, they'll make a little more if they do sell it, but it's much easier to sell a property that is a real bargain. I'd rather sell a real bargain at $400,000 than an over-priced turkey for $450,000. The difference in compensation isn't that much, and I'll work much harder to try to make the sale, and I'll lose most prospects by trying. I try to sell them an over-priced turkey looking for the sucker of the year, and a large proportion of clients won't want to work with me any more. I can make the commission off of a $400,000 sale, or I can lose the client by trying for $450,000. If they can afford $450,000, I can find them a better property at the same price. Happy clients bring me more clients for free, and as any real estate agent or loan officer can tell you, getting potential clients in the door is the hardest and most expensive part of the business. I assure you that every real estate agent who has been in the business more than about three hours knows this. If you were priced right, I might have shown that client your property, but you weren't, and so I didn't. Either you have placed yourself beyond their budget, or I can find something better for the same price.

Furthermore, overpriced real estate tells me that not only does the listing agent not know what they are doing and does not know what appropriate pricing is, but also that the seller likely does not have their head in the right place as to what the property is worth. Six months or a year down the line, it's time to make a low-ball offer and see if you're desperate yet. And if you needed to sell in ninety days, you will be. Right now, if I bring in a client who offers what the property is really worth, that's so much wasted time on my part and that of my buyer prospect, because I'm fighting two people with their heads stuck in the Land of Wishful Thinking, and I cannot force either one of you to listen to reason.

If people do come see your property, most of them won't make an offer. Most people don't look at just one property, even if they like yours. They may not look at enough properties, but they will look at more than one before they write an offer for anything. And since they have seen at least one other property, unless it's as overpriced as yours is, they're not going to make a good offer on yours. Many times, it may falsely communicate to them that the other property is a heck of a good bargain, and you just sold that other property, for which that other property's owner and listing agent surely thank you.

By over-pricing the property, not only do you set yourself up for all of this, but you miss the period of highest interest in your property, which is right after it hits the market, tapering off after about a month. One of the hardest, most pernicious ideas for a good agent to fight is the idea of putting it on the market over-priced "just to see" if they can get thousands of dollars more than comparable properties are selling for. The other is the concept of "bargaining room." Not only are you unlikely to get more than the market comps, but by over-pricing the property during the period of initial interest, the owners have almost certainly frightened away potential buyers who might well have offered market value if the property was priced correctly. Nor do these people come back later. They're looking at the stuff that hit the market this week, not four, six, or ten months ago. The agents in the area remember that it sat on the market for six months even if you somehow manage to get the days on market counter reset. Foot. Bullet. No assembly required, because you did it to yourself. If you had a need to sell by a certain time, or for the best price, it's not going to happen.

Indeed, several months out, you'll start getting those low-ballers I talked about earlier. They really do want to buy your property, but they won't offer anything like what you might have gotten earlier, because your property isn't worth that much to them. It's no secret that just waiting a little while on over-priced property is one of the best ways to get a bargain that there is. Most people put the property up for sale because they have a reason they want it sold. Most of those reasons are time-sensitive, and many are time critical. Wait until the deadline looms, or has passed, and the seller has no bargaining strength. I don't care how much "bargaining room" you gave yourself. Bargaining room is nothing. Bargaining strength is everything. When your best alternative is losing the property to foreclosure, you have no strength. If you won't deal, these folks will wait until the lender owns it. It's all the same to them, but it isn't to you.

Now right now, with prices having fallen, the appraisal isn't quite the problem it usually is for over-priced real estate. But usually, if you actually do win the lottery - and the odds you are facing really are in that league - and your listing agent sells it to the Sucker of the Year for more than the comparables, the appraisal isn't going to support the sales price. This means they can't finance the full sales price, and the Suckers of the Year are even less likely than other people to have the money for a down payment. I've said this more than once, but I don't remember the last time a first time buyer had a significant down payment. Even people who aren't first time buyers usually want to buy with as little down as possible, and you've just boosted the amount they have to come up with out of their pocket if they want your property - not to mention that most purchase contracts these days have appraisal contingencies built in. Even with prices falling, many appraisals are falling short. A couple of nitwits just put the house I grew up in on the market for 630,000! I took a look for grins and giggles. The owners have gussied up the back yard a little, but other than that it's the same as I remember. No way is that appraisal coming in even if they do find the Sucker of the Year to make an offer, so the Suckers of the Year have to front all those thousands of dollars to make the transaction work, and Suckers of the Year are just that - suckers. The chances of them having that kind of money sitting around where nobody else has conned them out of it are miniscule, to say the least. The only alternative I'm aware of is a seller carryback, and there are some real issues and problems with those. Meanwhile, of course, you are stuck in escrow with them and the clock is ticking and they may have grounds for a lawsuit if you are not careful. Even if they don't, they may sue you anyway, and tie up the title until the court gets around to ruling, or until the arbitration hearing and all of the appeals are over.

In short, over-pricing your property is the best way I know of to get yourself very frustrated, waste time, and end up forced to accept an offer that's less than you could have gotten if you had simply priced the property correctly in the first place.

Caveat Emptor

Nicely Maintained Property on Quiet Street!

General: La Mesa, 4 Bedroom 1.75 Bathroom 1 extra room

Con:

What's Wrong With It: Living room is on the small side, and kitchen layout is a little unusual.

Why It Hasn't Sold: It was placed on the market over-priced. Now that they've cut the price, people aren't interested because it's been on the market too long.

Who it's Not Appropriate For: That's a good question. I can't think of anyone who couldn't be happy here.

Pro:

Selling Points: Wrap around side to back yard that's pretty much all usable, with a decent view. Nice light throughout. Extra room would be a good office, and might even be a legal fifth bedroom. Everything is clean and well-maintained.

Who Should be Interested: Nice house at a reasonable price on a quiet street in a desirable neighborhood with above average public schools. What's not to like?.

Why it's a Bargain: As I said, the owners basically shot themselves in the foot by over-pricing it initially. Once buyers have decided they're not interested, it's hard to get them back.

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 5.75% with 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 $2393, (APR 5.931)

With 20% down: Fully amortized payment of $1914 (APR 5.894).

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 $2100 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $250,000 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 get people asking me about how much their mortgage loan providers make, usually with an idea towards negotiating it down but often with the idea of choosing one loan or the other based upon the loan officer's compensation. This is a bad idea.

First off, there are several forms loan officer compensation takes. There is so-called "front end" compensation paid directly by borrowers. There is "back end" compensation paid by lenders, also known as yield spread. There are also volume incentives given by most lenders, and promotional give backs and offsets. Then there are times when the loan officers is holding out their hand for kickbacks behind your back or by "marking up" third party services that they order on your behalf. This is illegal, but it still happens. Trying to judge a loan by loan officer compensation is actually fairly difficult if they are trying to hide it.

Furthermore, it's actually a distraction from what is most important, namely, the best possible loan for you. For instance, a couple of weeks ago I was shopping a loan for a decidedly sub-prime prospect. The lowest quote I got enabled me to give a quote of a 7.25% retail rate at par, which is to say no points to the borrower. But that lender was better than half a percent better than their nearest competition because he fit neatly into one of their targeted niches. Had I merely not shopped that loan with that lender, the best I could have done would have been 7.8 percent at par, and one full point from the borrower would only have driven it down to 7.3 percent. Now suppose I didn't shop that one lender who gave me the best price, and my competition had found something even better, say a 7.00 percent par rate loan. For that particular loan, they could have made a full percent and a half of that loan amount more than I did, and still delivered a better loan for the client.

Now in point of fact, I actually beat my competition by quite a bit, and I was willing to guarantee my quote where they were not willing to guarantee theirs. But the point I was making is still valid. Judge the loan by the best loan for you: Type of loan, rate, and total cost in order to get that rate.

Furthermore, brokers and people who work at brokerages legally must disclose their company's compensation from other sources, while direct lenders do not. Direct lenders are making, if anything, more for the average loan than the brokerages, but because they do not have to disclose compensation not paid by the borrower, if you try to use loan officer compensation as a way of judging the value of the loan, the direct lender will look better than the broker for most loans. Until you go and compare the loans they actually were prepared to deliver from the most important perspective: What it means to you, the consumer. A 6 percent thirty year fixed rate loan with no pre-payment penalty that cost you a grand total of $3500 is a better loan than a 3/27 that has a pre-payment penalty, cost you $8700, and is at a rate of 6.25%, regardless of how much the respective loan officers or their companies made, or would have made. Loan Officer compensation is a distraction. Much more important is the loan they are willing and able to deliver, it's type, rate, costs, and whether or not there is a pre-payment penalty.

Caveat Emptor

Cheap Fixer with WOW! Potential!

General: La Mesa, 2 Bedroom 1.75 Bathroom 3 Optional rooms

Con:

What's Wrong With It: Floor plan all Chopped up to allow two families to live here. Pretty much all the fixtures are 1970s vintage. Original hallway walled off. Addition was probably unpermitted.

Why It Hasn't Sold: Very uncomfortable to live in either half - but restore the original hallway and it would become a spacious house for a large family!

Who it's Not Appropriate For: Someone not willing to take the risk of unpermitted additions. Someone who needs a "turnkey" property.

Pro:

Selling Points: Large back yard with decent sized pool. Fenced are could be separate dog run. Restore the hallway, and you've got a very comfortable home for a larger than average family, and it's extremely close to very desirable schools. It would be relatively easy to make the extra rooms legal bedrooms, if desired. Kitchen has good light and plenty of room to cook. Back yard has place to park RV if desired, and garage has direct access to kitchen

Who Should be Interested: If you're looking to house a large family in a great neighborhood for a reasonable price, this is it!

Why it's a Bargain: It looks a lot worse than it really is. Re-connecting the two halves would be as simple as removing one non-structural wall, and everything else is cosmetic. I don't see major issues with getting the addition a retroactive permit.

Financial:

What I think I can get it for: $300,000.

Monthly Payment examples: I've currently got a thirty year fixed rate loan available for qualified buyers at 5.75% with 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 $1750, (APR 5.946)

With 20% down: Fully amortized payment of $1401 (APR 5.913).

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 $300,000 the property would be worth approximately $490,000. If you held it those ten years before selling, you would net about $240,000 in your pocket (not including increased value from updates!), assuming zero down payment. As opposed to renting the $1700 per month most comparable currently available rental and investing the difference at 10% per year tax free, you would be approximately $200,000 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 had better rates than this until just a few minutes ago. I quoted a 30 year fixed at 5.625% for 0.9 points earlier today. Unfortunately, there was a wave of secondary market price deteriorations, causing the available rates to rise. I do expect those to continue, due to increased confidence in the economy)

The Best Loans Right NOW

5.75% 30 Year fixed rate loan, with one total point to the consumer and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2334, APR 5.885! 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 5.00 percent!

5/1 Rates are becoming attractive!

Best 5/1 ARM: 4.875% with 1.5 total points to the consumer, and NO PREPAYMENT PENALTIES! Assuming a $400,000 loan, Payment $2117 APR 5.048. This is a fully amortized loan with a fixed rate for the first five years. 5/1 ARM rates as low as 4.375 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

The most recent hot thing in mortgage circles is a mortgage accelerator program. Now I've heard other things, most notably biweekly payment programs, called mortgage accelerators in the past, so let me take a moment to define exactly what I'm talking about.

A mortgage accelerator is essentially a combined mortgage and checking account, where every month you deposit your entire pay, and then write checks out of it as the month goes on to pay for your living expenses, and the mortgage interest of course accrues on a daily basis. The good things about it for consumers (and it is a good thing, as far as this goes) is that the entire paycheck is applied against your mortgage balance on day one, when your pay is deposited. This means that instead of just the minimum monthly payment, your entire pay goes towards the mortgage, lessening the amount of interest you pay in any given month. The bank, for its part, gets your entire paycheck and a significantly lower incidence of default.

This isn't a new concept. Several banks had somewhat different versions back in the late eighties. It went away. Why?

Several reasons, some administrative, some financial. First, the administrative. This bank has basically your entire financial activity. Let's say someone gives you a better deal. Now you either have to stick with a mortgage accelerator program, or go through the hassle of coming up with enough cash to start a new checking account if you go back to having a standard mortgage. Furthermore, when you do refinance, what happens to outstanding checks? That payoff is as of a specific day at a specific time. Your escrow officer comes in and gets the payoff demand, and then more checks clear and everything has to be re-figured. The alternative to this is freezing the account as is done with Home Equity Lines of Credit. So all of a sudden while you are going through this refinance, you have to come up with the seed cash for a new checking account, get new checks rushed through, and then pay your bills with the new checks. May the Universe Help You if you normally pay by automatic debit or any of the primary variants, because you have to set that up as well.

So what else does the bank get out of it, looking at the above? Increased opportunity costs for refinancing. In short, it makes it more difficult for you to take your business elsewhere. Cha-Ching! as the bank officer's eyes light up with dollar signs.

Now obviously, this mortgage accelerator saves you money, if you assume it's just a matter of math, and that math shows how much interest you save as opposed to the same loan at the same interest rate, providing you keep money in your checking account, of course. But how many people do? Not that many, these days.

Furthermore, it assumes you get the same loan at the same interest rate that you normally would. I haven't comparison shopped many of these yet, but my general impression is that the rates, and costs to get them, are higher than you might otherwise get. The assumption that it is the same rate and the same costs on the same type of loan is just that, an assumption, made for modeling purposes. I have used the metaphor of the matador in the past. The bull (consumer) wears himself out on the obvious large red cape, namely the cool service and the fact that all your pay is applied to your mortgage, and never sees the sword, which is the fact that your interest rate is half a percent higher than you might have gotten, you paid an extra point of origination as well, and you're being dinged $10 per month administrative tracking charges for this cool new toy you just got, the accelerator mortgage. Let's say your mortgage is $400,000. Half a percent of $400,000 is $2000 extra interest per year. An extra point of origination is $4000. And $10 per month is about what the average person might save on their mortgage interest if they weren't paying a higher rate, which they are.

($6000 per month deposited, instead of maybe $2500, leaves $3500. You save an average of one half months interest per month on this difference. $3500 at 6% divided by 24 is $8.75. If they bill you $10 per month for the service, you are out $1.25 per month net, on top of the additional interest charges and the one time fee of several thousand dollars of origination)

So lenders with mortgage accelerators charge you more money, charge you more up front costs, and you pay higher interest charges, as well as making it more difficult for the consumer to refinance into a better deal somewhere else. The banks love this one. Only the fact that your parents figured out what a rotten deal most of these are kept them from becoming a permanent fixture of the mortgage landscape nearly twenty years ago.

Now if you can find a mortgage accelerator at the same interest rate, for the same costs, and without the monthly fees that you don't have to pay for your other mortgage, then YES it makes a huge amount of sense to have one of these programs. But that's not what most of the lenders are offering. They are hoping that you are so distracted by the mathematics of how much you will save if you keep your mortgage until it's paid off, that you will never see how much extra you are really paying. Nor do most people keep any given mortgage longer than a few years. In fact, the median time living in a particular piece of real estate is only nine years - less than one third of the time until payoff. The metaphor of the matador is extremely apt. This is precisely what the matador does with the bull. Distracts them and wears them out with the cape so that they never see the sword. The banks dangle this wonderful mathematical concept of what might happen thirty years down the line for that one tenth of one percent of people who actually keep the loan that long, while hoping you are so fascinated by it that you never notice that they're charging you more up-front fees and a higher interest rate than you would have gotten with a traditional mortgage, and often, more in monthly maintenance fees that you save by depositing all of your pay. In short, the lender is making more money off of you by pretending to do you a favor.

So shop loans by interest rate and cost, and then if they'll let you put a mortgage accelerator on it for free, great! If not, they're just trying to distract you from what is really important by offering you a convenience and a cool-looking trick, while charging you hefty amounts of money and tricking you into thinking you are getting something beneficial. I have literally never seen a mortgage accelerator where the benefits outweighed the cost of setting it up, so if you take the money it costs to set the thing up, and instead use it for direct paydown of your mortgage (i.e. write check for the extra direct to the lender), you'll quite predictably come out ahead.

Caveat Emptor

I got a question about what I think about those online quote services.

The answer is that they vary from okay to putrid.

There are two sorts of online quote sources. The first is where mortgage companies have their rates online, and people come along and browse. Those are pretty much a waste of your time. Here's why: Those companies have absolutely no hold and no real tracking on the people who come to browse. They might put a cookie on your machine, but it's hard to parlay those into contact information, which is their whole entire goal: Getting loans out of it. Unless they have some way of contacting you, which they don't, they need to use that forum to get you to contact them. They do this by low-balling their quotes, making it look like they are offering something nobody else has. Unfortunately for consumers, that's not even an estimate. Here in California, the one caveat is that the rate must exist, but the real costs of getting that rate can be many times the costs they quote. This suffers from all of the limitations that a Good Faith Estimate does, plus more. They can say that they've got a 3.625% rate, and as long as they have a 3.625% loan, they are in the clear. Never mind that it costs a full six points and adjusts every month, that sounds like a great loan to the uninformed. Furthermore, many places will quote the nominal ("in name only") as opposed to real interest rate on the negative amortization loan. When there are people apparently offering you 0.5%, that's who most consumers will call, ignoring the people who have and can really do 5.5% thirty year fixed rate loans, more so on those forums where they include a payment quote as well. I've got the same 0.5% nominal rate forty year amortization loan available to me, but it will always be a putrid loan, as the real rate is a little over 8% and the rate is subject to change every month. I should note that lenders pay a lot of yield spread to brokers who do those loans: How often do people sign on the dotted lines for mortgage rates in excess of 8% (with a three year prepayment penalty!) when 5.5% is available on a thirty year fixed rate mortgage with no prepayment penalty at all? I'll tell you how often: Whenever people aren't smart enough to realize that that $960 payment on a $417,000 loan isn't the real cost of money. Indeed, they'd have to pay $2794 per month just to pay the interest - while the fully amortized payment on a thirty year fixed rate loan is only $2368. But there are an awful lot of people who aren't smart enough right now.

Furthermore, those online forums are supposed to enforce their quotations policies. I've never heard of one that enforces real concrete penalties for violators. On two separate forums, I went straight down the line contacting every listed company, using a loan scenario that was close enough to what they were supposed to be quoting to that I should have gotten the same quote or a little bit better, if they could really do those loans. Not once did I get a rate that was within half a percent of the rate listed online, and most of them were over a full percent off, and with negative amortization loans, most are not even in the correct ballpark. When I contacted the forums themselves, neither of them was interested in enforcement.

In short, those online quote forums tend very strongly to get business for the company that tells the biggest, most boldfaced lie. Often, the consumers are lulled by the existence of the forums into thinking they're getting a deal, and they don't bother going through the necessary steps to shop their loan around. Meanwhile, the companies that will advertise honest rates quit those forums in disgust. Since there are a lot more companies playing games with their quotes than honest ones, the forum wins by not enforcing their rules. However, since the consumer wants to find companies that really will deliver the loans they advertise, consumers lose. Matter of fact, I don't think I've ever seen a real rate on a loan I would be willing to sign up for advertised in any forum: online, newspaper, or otherwise.

The second type of online quote forum work like the advertisements plastered all over the internet. "$510,000 loan for $1698 per month!" (to use the first I found just now). They show a couple dancing happily, having a party because their mortgage payments are reduced, or so they think. Another shows a guy jumping for joy. What they don't show is those same people when they figure out all of the downsides to the negative amortization loan that they signed up for. "This is Jack calling his lawyer again, only to be told there's nothing the lawyer can do again. This is John and Jane losing their home to foreclosure."

Their come on is that you're supposed to get four competitive loan quotes. The company advertises negative amortization loan payments because more people will click on them and sign up for the service if they think they might get something so great that anyone would want it. Unfortunately, just like every other negative amortization loan out there, the payment or interest rate they quote to get you to click their ad and complete their form online is not the real payment and it is not the real rate. Yes, they will accept that as a monthly payment. But the interest you are being charged is based upon a rate of 7.87%, and you have to pay $3345 per month just to break even on the interest - that other $1647 gets added to your loan, so that next month you owe $511,647. Doesn't seem like a lot of extra, but go along for three years until the pre-payment penalty expires, and even if your rate doesn't adjust upwards, your balance is now $576,600. If you go the full five years that the minimum payments last, you owe $630,000, and now your payment jumps to $4813, and you can't refinance because you are upside-down on your mortgage, and your credit score is 100 points lower!

The games don't stop here, by any means. You'll be told that there are "no costs out of your pocket," and even though they'll be rolling $23,000 in costs and points into your loan, they give you a quote based upon the amount of money you tell them you need. No, $23,000 doesn't make that much difference at half a percent forty year amortization, but it lets them quote that payment just a few dollars lower, even though they know that you want the $23,000 rolled into your loan. Nor is what they're telling you about a good loan in any way shape or form, but most people shop mortgage loans based upon payment.

Furthermore, they aren't telling the truth about four mortgage providers calling you. They may sell the lead to four different places, but those four places turn around and sell them to four others each, and each of those sells them to four more. There may be as many as six levels of this going on, and the average p