June 2008 Archives
A while ago I did an article entitled Debt Consolidation Refinance - Pros and Cons. It's a good article, if I do say so myself. Nonetheless, I think there's more to say on the subject, not just from a point of view of cranking some numbers, but on a meta level as well.
The most concrete lure of debt consolidation refinance is cash flow. Specifically, lower payments. The trap is that you are spreading principal payments over a much longer time. You refinance your home to pay off your car loan. Instead of paying the car off over three or five years, now you're paying it off over thirty. Instead of having it paid off when you go to buy another car, you still owe most of what you borrowed, and unless you saved the cash in the meantime, now you're layering more debt on top of what you already owe. So instead of having a paid off $25,000 automobile that's still worth $10,000 and no debt, you now have the forgoing plus $20,000 of debt that you still owe, and you are still paying interest on, on a car that you aren't going to get any more use out of. The fact that the security is your home rather than the vehicle changes nothing except the exact terms of the loan. You added $25,000 to your balance and $20,000 of it is still there, you're still making payments on it, and you are still paying interest on it.
Low payment is one of the best ways to sucker people into doing stupid things that I know of. Maybe that explains why I'm not rich; I want to figure out whether I'm actually helping the situation, and by the time I've worked it through, the folks are off calling the guy who's selling them the Option ARM who doesn't mention downsides or what is really important. As far as I can tell, low payment is the entire advantage of renting, for crying out loud. People think in terms of cash flow while flushing their financial future down the toilet in the name of lower payments.
There is a reason why that Statement of Cash Flow is the least important of the financial statements corporations are required to file, and Wall Street only discusses cash flow when there's something wrong. Unless they've got a large proportion of clients that don't pay their bills, the Income Statement is a lot more important. Corporations don't think of their facilities only in terms of the payments on their loans. Neither should you.
When you pay off a loan, of whatever nature, you are essentially transferring money from one pocket to another. Furthermore, once you have paid it off, you are no longer paying interest - the real cost of the money - on the balance. It's only the interest charge that you are really paying and that is costing you money. Paying off principal is paying yourself. Stretching the loan term from three years to thirty does not alter the amount of principal you pay, but it does greatly increase the amount of interest you pay. Even if you cut the interest rate from 10% to 6% and get a tax deduction to boot. Paying attention to payments is for suckers. You have to be able to make your payment, as I've said before, but so long as the payment is one you can make, concentrate on the real cost of the money - interest rate - and the cost of the loan, or how much you have to spend in order to get the loan funded. Weigh this against the benefits and how long those benefits last.
If all you are paying attention to is cash flow, and you consolidate your debt because it lowers your payment so that you can spend more money, don't be surprised if you find yourself in the same situation a little while down the line. This is a real world illustration of the law of diminishing returns. Each time you do it, you dig yourself in deeper, and there is less additional spending needed to get you to the point where you have to consolidate again. You consolidate your $1500 house payment and $40,000 in debt, and your new payment is $1800. Then you consolidate that and $30,000 in debt, and your new payment is $2100. Then you consolidate that and $20,000, and your new payment is $2400. What do you do when you can't consolidate any more, and you can't afford the payments, either?
If, on the other hand, you consolidate because it lowers your cost of interest and gets you a tax break and you still keep making the same payments as before, then you're miles ahead. If you're using debt consolidation to lower your payment, you are doing it wrong. If your choices are bankruptcy or debt consolidation, well, if you've got a nice stable home loan that you're not going to need to refinance for a couple of years, I might actually consider bankruptcy, particularly if I only need to shed one or two lines of credit. Obviously, talk to bankruptcy attorney first, but once you've rolled it into your home loan, those higher costs are a part of your life for as long as you own the property and haven't paid the loan off. If you can't afford them and you're a serial consolidator, eventually you're going to get to point where you lose the property.
If you consolidate in order to cut your interest costs, and you don't roll excessive loan fees in to your balance, and you keep making the same payment as before and don't take on any more debt until the balance on your home loan is at least as low as it was before you consolidated, then you come out ahead. Way ahead. You're a little bit ahead due to the lowered costs of interest, and you're a little bit further ahead due to the tax break from interest on home loans, and after you get to the point where you were before, every payment you make without adding new debt pays off much more of your balance. In my original Debt Consolidation Refinance article, I used the example of rolling $75,000 debt into a preexisting $300,000 mortgage. It raised the minimum payment by about $400 and cut the overall minimum payment by $1100. If that minimum payment is the reason you did it, you just hosed yourself. But if you cut your overall cost of interest, and kept making the same payments, you've accelerated your payoff schedule. Make the same payments as before, and you're even in less time than it would have taken to pay the consumer credit down. Keep making those same payments after you've brought yourself even, and it can pay the entire debt load off in half the time or less that your home loan would have taken. Even if you don't make it all the way to zero before you need another car, debt consolidation can set you years ahead in just a few short months - but only after you've paid your balance down to where it was before.
In short, debt consolidation refinance is not some magic wand to get out of debt free. There are pitfalls into which the overwhelming majority of people fall, because they do it for the wrong reasons, and afterwards, they keep doing it again and again until some disaster happens and they lose the property. However, correctly handled, it can significantly enhance your financial situation.
Caveat Emptor
A few days ago, another agent in my office got an offer and brought it to me for feedback. The listing was range priced over a $30k range, and priced correctly, so there was a lot of activity on it. The offer was for $30k beneath the bottom of the range, with a note saying that this was for a single dad with three kids, and that was all they could afford, but they really loved the property, and were so excited that that they were each going to get their own room, and so on, gushing for several paragraphs.
In logic circles, this is called the appeal to pity. "Please take pity on me." However, we had every reason to believe that we would be seeing better offers on the property very soon - it hadn't even hit its first weekend on the market, and there had been roughly 15 viewings and six phone calls from agents whose clients had seen the property.
I advised them to counter hard at the high end of the range pricing. It's no concern of current owners what that buyer can and cannot afford. The first two things that ran through my mind were the large amount of activity at an early date, and the likelihood that this was a low-ball flipper's offer. It's not like there's any criminal penalties for creative fiction accompanying an offer. The next two thoughts were if they like the property that much, come talk to me about ways to stretch what you can afford. Two ideas: Mortgage Credit Certificate and Municipality based assistance programs, and both could have been applied to this property, as in it was eligible, there was available money in the program budgets, and each of them stretched the buyer's ability to pay by at least enough, let alone if applied for together. If both were already accounted for, bid on something less expensive; it's not like there is any shortage of properties for sale. Maybe somebody has to share a room; maybe there are fewer amenities, maybe they just don't love it quite as much. None of these is the owner's problem.
Yes, I'm always looking for hidden bargains, but this time I was on the side of the owner, or rather, the owner's agent, and furthermore, the property was correctly priced and seeing strong activity. Neither of those are characteristic of hidden bargains. Furthermore, appeal to pity is a bad negotiating tool.
So here's the situation: Somebody comes up to you and asks you to sell your property for far less than you can get, because they are so deserving, and you want this underdog to succeed against the odds. "Help me, I'm really in need." The appeal is no different at the root than a pan-handler's pitch.
I've given money to panhandlers in my time, too, and doubtless will again. I'm a complete sucker for the ones with kids. But that's maybe $5 or $10, possibly even $20 at the most. Panhandlers are not effectively asking for $40,000 or so out of my pocket, much less my client's pocket. My client has neither a Red Cross nor a Salvation Army Shield on their door. They are not obligated to settle for much less than they could get for a valuable property. In this case, the difference was for something like 70% of their actual net equity, and it is a violation of the fiduciary trust that my client has placed in me, and I have accepted, not to point this out. If it were several months on, and this was looking like it might be the best offer the property would get, that would be one thing. But it was a brand new listing with strong enough activity that there was even hope of a little bit of a bidding war. It's not like the prospective buyer was homeless, and even if they were, there are more logical things to do first than buy a four bedroom detached home, not to mention it would be tough getting verification of rent, which all lenders are going to want.
But I also counseled the other agent not to reject the offer completely, and not to counter until the third day. The high counter signals, in no uncertain terms, that the owner's bargaining position is very strong. It's even a good idea to explain why it's very strong. But in this market, especially, you get buyers looking for a bargain because they might be able to get one. My buyers do it. Why not others? By the third day, there might be another offer on the table. Not that the absence of other offers stops some agents from pretending that there are other offers, but I've always found that the best policy is not to lie when the truth will do, and the truth will always do, because you should tailor your response to what the truth is. This may sound strange coming from a member of the profession that describes condemned buildings as "needing a little TLC", but if you want to do well in negotiations, never overplay your hand (and tell the buyer that the building is condemned. Condemnation is a recorded instrument, so it's not like you can plead ignorance). Real estate is almost entirely public information. If there is a dissonance between how you act, what you say, and what the public information says, good agents will pick up on it. This is not poker. The other side can see most of your cards, and has the option of getting up and walking away from the table at any time, and good agents will counsel their clients to do exactly that if the situation calls for it. The idea is a willing buyer and a willing seller coming to a mutually beneficial arrangement.
So the other agent took the offer to the client, and jointly they decided to mostly follow my advice. The prospective buyer walked away, they got two more offers before the third day. And a couple days later, well, remember that first group of two thoughts I had? Well, we found out that that particular prospective buyer was buying with intent to flip; he had flipped at least four properties in the previous year or so. His low offer and all the histrionics surrounding it was simply a ploy for more profit.
Caveat Emptor
A couple of weeks ago, I got an email asking Save For A Down Payment or Buy Now?, and I wrote a two part article on the subject. Part 2 of Save For A Down Payment or Buy Now? Gave an alternative strategy to make affordability accelerate faster. But there was an obvious, related concern that I let go because it was a very complex calculation, and that was, "What's the effect of waiting to buy on my financial situation down the line?"
This wasn't an easy problem to program, even in a spreadsheet. I'm decent with spreadsheets, but for a lot of the calculations I had to do it by brute force repetition. Had I been able to do certain functions on spreadsheets that I used to do with matrices back in the really dim times, it would have been far easier, but the area I ended up using was three sheets totaling about 60,000 cells. Most of it was change one thing, copy and paste a row or column segment, then change another. It wasn't that hard mentally, but the finished product certainly makes a microprocessor work for a living!
I also had to make some simplifications to the problem. In order to make the problem manageable, I had to assume that you hold onto your home, once you have bought, at least until the end of the scenario, and also that you never refinance. I had to program it with smooth inflation, smooth appreciation, smooth increases in federal income tax standard deductions, and smooth increases in auxiliary prices. Anyone over the age of thirty ought to know how dangerous that is. But adding those random elements made the problem beyond the scope of what I could realistically do. I also had to postulate no major changes in income or property tax law, and I had to ignore the effects of state income taxes. Besides, the idea was to isolate the effects of the variable under consideration, how waiting to buy a home influences your financial situation down the line. I also had to choose a set period to terminate at, and arbitrarily chose 30 years.
Actually, this is two discrete problems when you really look at it, and they really are disjoint, and no matter how much the folks who sell Reverse Annuity Mortgages might try to link them, they are separate cases. What happens if you keep living there, versus what happens if you decide to sell and move somewhere else when you retire.
Nonetheless, the following simulations are all as representative as I can make them. Except for the effects of state income tax, they are in line with current California computations.
Example 1: Suppose you're talking about a San Diego Condo. $300,000 present purchase price, no down payment but you can save $500 per month for a down payment in the future if you don't buy now, and this amount increases proportional to salary increases. The property continues to appreciate at 4.5% whether you buy or not, association dues are $250 per month and general inflation is 4%, and you can get 7.2% return, net of taxes (10% minus an assumed marginal tax rate of 28%), on the money you save for a down payment. Whenever you buy, you can get a 6% first mortgage, and a 9% second if you need it. I'm also going to assume that in order to see any financial benefit, you're going to have to sell at a cost of seven percent of value. Furthermore, you're stable in your profession, seeing a 3% compounded annual raise in income, and equivalent rent is $1400 per month currently.
| Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 | purchase price $300,000.00 $313,500.00 $327,607.50 $342,349.84 $357,755.58 $373,854.58 $390,678.04 $408,258.55 $426,630.18 $445,828.54 $465,890.83 $486,855.91 $508,764.43 $531,658.83 $555,583.48 $580,584.73 $606,711.05 $634,013.04 $662,543.63 $692,358.09 $723,514.21 $756,072.35 $790,095.60 $825,649.90 $862,804.15 $901,630.34 $942,203.70 $984,602.87 $1,028,910.00 $1,075,210.95 $1,123,595.44 | still owe * $24,489.73 $46,429.89 $67,745.37 $88,445.34 $108,534.07 $128,010.82 $146,869.63 $165,099.15 $182,682.37 $200,029.06 $217,296.63 $233,893.12 $249,747.93 $264,783.31 $278,913.68 $292,045.12 $304,074.62 $314,889.39 $324,366.10 $332,370.01 $338,754.10 $343,358.06 $346,007.30 $346,511.78 $344,664.85 $340,241.87 $332,998.90 $322,671.15 $308,971.35 $291,299.48 | housing* $1,354.26 $1,514.40 $1,659.59 $1,801.37 $1,939.80 $2,074.91 $2,206.72 $2,335.19 $2,460.26 $2,581.85 $2,702.41 $2,822.91 $2,939.80 $3,052.67 $3,161.06 $3,264.47 $3,362.35 $3,454.09 $3,539.04 $3,616.45 $3,685.54 $3,745.43 $3,795.18 $3,833.75 $3,860.02 $3,872.76 $3,870.64 $3,852.21 $3,815.90 $3,760.00 $3,680.93 | waiting $0.00 $160.15 $305.33 $447.11 $585.54 $720.66 $852.46 $980.93 $1,106.01 $1,227.59 $1,348.16 $1,468.65 $1,585.54 $1,698.41 $1,806.80 $1,910.21 $2,008.09 $2,099.84 $2,184.78 $2,262.19 $2,331.28 $2,391.17 $2,440.92 $2,479.49 $2,505.76 $2,518.50 $2,516.39 $2,497.96 $2,461.65 $2,405.75 $2,326.67 | savings* $3,186.50 $3,026.35 $2,881.16 $2,739.39 $2,600.96 $2,465.84 $2,334.04 $2,205.57 $2,080.49 $1,958.91 $1,838.34 $1,717.85 $1,600.96 $1,488.09 $1,379.70 $1,276.29 $1,178.41 $1,086.66 $1,001.72 $924.31 $855.22 $795.33 $745.58 $707.01 $680.74 $667.99 $670.11 $688.54 $724.85 $780.75 $859.82 |
*Still owe 1 final payment after thirty years if you buy today. "Housing" is how much your costs of housing will be in 30 years if you bought at the indicated time is, and assumes you refinance for zero cost into the same rate you have now. Waiting cost is as opposed to buying now. Finally, the savings column has to do with how much you are saving per month over what the equivalent rent will be in 30 years, namely $4540.76 in this case.
Please keep in mind that the table is the net result 30 years out; the only time variable in the equation is precisely when you bought the exact same condo. Now there is some mildly strange stuff that goes on. For instance, starting 25 years out, there's a period where, under the stated assumptions, your saving for a down payment actually starts to increase in value faster than the property. But by that point, you've missed the optimum time to buy by, well, 25 years. Keep in mind that money will be worth less than a third of what it is today in thirty years ($1 then will be worth 30.8 cents now), but you are still saving significant amounts of money on your future housing payments by buying as soon as practical.
Now let's look at the situation if you decide to sell your home and go live somewhere else:
| Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 | purchase price $300,000.00 $313,500.00 $327,607.50 $342,349.84 $357,755.58 $373,854.58 $390,678.04 $408,258.55 $426,630.18 $445,828.54 $465,890.83 $486,855.91 $508,764.43 $531,658.83 $555,583.48 $580,584.73 $606,711.05 $634,013.04 $662,543.63 $692,358.09 $723,514.21 $756,072.35 $790,095.60 $825,649.90 $862,804.15 $901,630.34 $942,203.70 $984,602.87 $1,028,910.00 $1,075,210.95 $1,123,595.44 | net equity $1,043,032.82 $1,020,454.03 $998,513.87 $977,198.39 $956,498.42 $936,409.69 $916,932.94 $898,074.13 $879,844.61 $862,261.39 $844,914.70 $827,647.13 $811,050.64 $795,195.83 $780,160.45 $766,030.08 $752,898.64 $740,869.14 $730,054.37 $720,577.66 $712,573.75 $706,189.66 $701,585.70 $698,936.46 $698,431.98 $700,278.91 $704,701.89 $711,944.85 $722,272.61 $735,972.41 $753,644.28 | liquidation $7,079.98 $6,926.72 $6,777.79 $6,633.11 $6,492.60 $6,356.24 $6,224.03 $6,096.02 $5,972.28 $5,852.93 $5,735.18 $5,617.97 $5,505.32 $5,397.70 $5,295.64 $5,199.72 $5,110.59 $5,028.93 $4,955.52 $4,891.20 $4,836.87 $4,793.53 $4,762.28 $4,744.30 $4,740.87 $4,753.41 $4,783.43 $4,832.60 $4,902.70 $4,995.69 $5,115.65 | net benefit $594,459.84 $531,782.24 $526,736.25 $495,140.59 $448,046.96 $435,547.19 $407,644.83 $380,733.08 $354,624.01 $329,944.53 $301,836.93 $269,957.25 $239,420.18 $210,196.49 $182,428.96 $155,944.29 $130,741.38 $106,921.94 $84,296.01 $63,087.55 $43,073.74 $24,442.68 $7,100.56 ($8,932.23) ($23,548.85) ($36,736.02) ($48,455.14) ($58,627.44) ($67,101.14) ($73,746.48) ($78,651.68) | waiting cost $0.00 $22,578.79 $44,518.95 $65,834.43 $86,534.39 $106,623.13 $126,099.88 $144,958.69 $163,188.21 $180,771.43 $198,118.12 $215,385.69 $231,982.17 $247,836.99 $262,872.36 $277,002.74 $290,134.18 $302,163.67 $312,978.45 $322,455.16 $330,459.07 $336,843.15 $341,447.12 $344,096.36 $344,600.84 $342,753.90 $338,330.93 $331,087.96 $320,760.21 $307,060.41 $289,388.54 |
Net equity is what you have left after 7% costs of selling, liquidation assumes that you are taking out 360 equal monthly payments based upon the same return I assumed your money could earn before you bought. Net benefit is the number of dollars difference it makes to your financial position in the future 30 years from now if you buy at the indicated time. Notice that starting 25 years out, it actually hurts you to buy from then on out, as opposed to just letting the investments you were saving for a down payment run. Waiting cost is how much it hurt your future financial position to delay purchase by that much, so if you wait five years, you end up with over $100,000 less in your pocket.
Now let's do a second example: Still in San Diego, but you're going to buy a starter single family residence that would cost $450,000 today. Nudge assumed appreciation up to 5.5%, cut association dues out but raise property taxes and insurance costs appropriately. Oh, and the equivalent rent now starts at $2000, and general inflation I'm going to assume to be 3.5%. Actually, based upon the past seventy years, everything that has happened has been, over time, more favorable to home ownership than this.
Once again, let's look at the situation if you keep living in the property after 30 years first.
| Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 | purchase price $450,000.00 $474,750.00 $500,861.25 $528,408.62 $557,471.09 $588,132.00 $620,479.26 $654,605.62 $690,608.93 $728,592.42 $768,665.01 $810,941.58 $855,543.37 $902,598.25 $952,241.16 $1,004,614.42 $1,059,868.21 $1,118,160.97 $1,179,659.82 $1,244,541.11 $1,312,990.87 $1,385,205.37 $1,461,391.66 $1,541,768.21 $1,626,565.46 $1,716,026.56 $1,810,408.02 $1,909,980.46 $2,015,029.38 $2,125,856.00 $2,242,778.08 | still owe * $37,403.63 $72,247.27 $107,464.64 $143,121.84 $179,283.73 $216,014.10 $253,375.62 $291,429.94 $330,237.68 $369,858.41 $410,350.66 $451,771.89 $494,178.40 $537,625.32 $582,166.43 $627,908.86 $675,787.71 $724,872.44 $775,183.89 $826,740.19 $879,556.33 $933,643.75 $989,009.82 $1,045,657.39 $1,103,584.13 $1,162,781.95 $1,223,236.28 $1,284,925.33 $1,347,819.27 $1,410,482.12 | monthly $1,151.93 $1,404.15 $1,641.99 $1,883.05 $2,127.79 $2,376.60 $2,629.93 $2,888.18 $3,151.75 $3,421.06 $3,696.50 $3,978.46 $4,267.34 $4,563.52 $4,867.37 $5,179.28 $5,499.92 $5,834.96 $6,178.89 $6,531.86 $6,894.07 $7,265.65 $7,646.73 $8,037.44 $8,437.84 $8,847.99 $9,267.92 $9,697.62 $10,137.03 $10,586.05 $11,036.15 | Wait cost $0.00 $252.22 $490.06 $731.13 $975.86 $1,224.68 $1,478.00 $1,736.25 $1,973.99 $2,178.71 $2,388.07 $2,602.37 $2,821.91 $3,046.98 $3,277.86 $3,514.85 $3,758.46 $4,013.04 $4,274.35 $4,542.51 $4,817.67 $5,099.93 $5,389.39 $5,686.13 $5,990.21 $6,301.66 $6,620.52 $6,946.75 $7,280.32 $7,621.14 $7,962.68 | savings $4,461.66 $4,209.44 $3,971.60 $3,730.53 $3,485.80 $3,236.98 $2,983.66 $2,725.41 $2,461.84 $2,192.53 $1,917.09 $1,635.12 $1,346.24 $1,050.07 $746.21 $434.31 $113.67 ($221.38) ($565.30) ($918.28) ($1,280.48) ($1,652.06) ($2,033.15) ($2,423.85) ($2,824.25) ($3,234.40) ($3,654.34) ($4,084.03) ($4,523.44) ($4,972.46) ($5,422.56) |
Equivalent rent would be $5613.59. Once again, the last three columns are all monthly streams, and they do have a steady worsening the entire time, mostly because your saving for a down payment does not start to catch up to the increase in property values during the simulation period. In other words, the longer you wait, the worse it gets. Indeed, affordability is monotonically decreasing the entire time. That's math geek for "Quit waiting, it only gets worse." Even though a dollar then is only worth 35.6 cents now, wouldn't you like as many 35.6 cents in your pocket as possible?
Now let's examine if you decide to sell this starter home in retirement, and go live somewhere else.
| Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 | purchase price $450,000.00 $474,750.00 $500,861.25 $528,408.62 $557,471.09 $588,132.00 $620,479.26 $654,605.62 $690,608.93 $728,592.42 $768,665.01 $810,941.58 $855,543.37 $902,598.25 $952,241.16 $1,004,614.42 $1,059,868.21 $1,118,160.97 $1,179,659.82 $1,244,541.11 $1,312,990.87 $1,385,205.37 $1,461,391.66 $1,541,768.21 $1,626,565.46 $1,716,026.56 $1,810,408.02 $1,909,980.46 $2,015,029.38 $2,125,856.00 $2,242,778.08 | net equity $2,082,917.20 $2,048,379.98 $2,013,536.35 $1,978,318.97 $1,942,661.78 $1,906,499.88 $1,869,769.52 $1,832,407.99 $1,794,353.67 $1,755,545.93 $1,715,925.21 $1,675,432.96 $1,634,011.73 $1,591,605.21 $1,548,158.29 $1,503,617.18 $1,457,874.75 $1,409,995.90 $1,360,911.17 $1,310,599.72 $1,259,043.42 $1,206,227.28 $1,152,139.87 $1,096,773.79 $1,040,126.22 $982,199.48 $923,001.67 $862,547.34 $800,858.28 $737,964.35 $675,301.50 | liquidation $14,138.60 $13,904.16 $13,667.65 $13,428.60 $13,186.56 $12,941.10 $12,691.78 $12,438.17 $12,179.86 $11,916.44 $11,647.50 $11,372.64 $11,091.48 $10,803.63 $10,508.72 $10,206.38 $9,895.88 $9,570.89 $9,237.70 $8,896.20 $8,546.24 $8,187.73 $7,820.59 $7,444.77 $7,060.25 $6,667.05 $6,265.23 $5,854.87 $5,436.13 $5,009.21 $4,583.87 | net benefit $1,681,408.70 $1,527,603.06 $1,482,514.85 $1,390,228.98 $1,262,990.98 $1,218,788.65 $1,139,516.49 $1,064,002.28 $991,242.90 $921,953.98 $854,914.46 $790,327.87 $728,045.15 $667,919.78 $609,807.59 $553,566.46 $498,733.07 $440,202.91 $383,770.99 $329,344.94 $276,837.21 $226,165.09 $177,250.78 $130,021.48 $84,409.45 $40,352.17 ($2,207.48) ($43,321.12) ($83,034.61) ($121,387.80) ($156,994.47) | wait cost $0.00 $34,537.22 $69,380.85 $104,598.23 $140,255.42 $176,417.32 $213,147.68 $250,509.21 $288,563.53 $327,371.27 $366,991.99 $407,484.25 $448,905.47 $491,311.99 $534,758.91 $579,300.02 $625,042.45 $672,921.30 $722,006.03 $772,317.48 $823,873.78 $876,689.92 $930,777.33 $986,143.41 $1,042,790.98 $1,100,717.72 $1,159,915.53 $1,220,369.86 $1,282,058.92 $1,344,952.85 $1,407,615.70 |
Now it is to be noted, as you may have seen under the first table, a point in time exists starting 26 years out where you will be better off just keeping your down payment money socked away in alternative investments, as opposed to actually using it to buy your home.
I'm planning to start using this sheet with prospects, under assumptions they can set - If they think inflation is going to average 7%, or appreciation only 3%, the sheet can accommodate that. I've played with the sheet over a few dozen simulations, and due to leverage, the numbers appear quite powerfully in favor of buying the best home that you can actually afford, right now. Interestingly enough, however, these number also strongly suggest that as close to 100% financing as you can manage initially will outperform larger down payments, and that's something that seems quite counter-intuitive to the usual run of financial planning. Instead of using it for your down payment, financing 100% of your purchase if you can seems to make your money work harder. Well, I can put a lot of caveats on that, because metaphorical bumps in the road happen, and nobody knows exactly when or how these disasters will strike. If you do, you can plan for it, and could you please drop me an email in warning? When you're just looking at the raw numbers, however, the advice they give is quite strongly to buy the best property you can afford as soon as you can, putting down as little of a down payment as you can, and making the minimum payments while salting away the rest for a rainy day. But be very careful not to stretch too far, because one thing you can count on, even in Southern California, is that it will rain sometimes.
Caveat Emptor
I just went out doing some general market scouting. Looked at ten properties, and at least three were of a sort that I've started calling "vampire properties." One more reason you want a good buyer's agent.
Like a mythical vampire, these properties are very charming on the surface, luring in the innocent victims with brand new flooring, new roof tiles, and new paint. All the relatively cheap stuff that inexperienced buyers love. There might even be a new spa in the back yard. They call the listing agent and fall in love with the property. They put in an offer, which is quickly accepted, buy the property and move in.
Then the troubles start. Those brand new roofing tiles get ripped off the rotten substructure the first time a good wind comes up. The new owners notice that the travertine floor tiles are separating, and eventually, when one comes loose, find that there's a two inch wide crack in the foundation that runs the width of the house. That beautiful new tile in the bathroom has to come out because they discover the green board is rotten, and the framing boards as well.
It'd be better if the property was sucking your blood. At least that's covered by health insurance if you've got it. But it's got its fangs permanently embedded in your bank account, instead. None of this stuff is covered by home owner's insurance, new home warranties, or anything else. Your home owner's insurance might replace the roof tiles (pulled off by wind, which is usually a covered peril), but the rotten structure underneath is your problem, caused by the normal wear of time.
In most cases, I find it hard to believe that the previous owners didn't know about this stuff. That's what the brand new facade is about. They figured a quick surface fix - the home owner's equivalent of a cheap paint job over a rusted car body - and they unload the lemon on some unsuspecting chump and walk away. Quickly.
For any of those sort of people reading this, I've got to tell you that the lawyers will find you. But for the buyers in the situation, the lawsuit - which will take years, even assuming that they win and if the judgment is paid - is a poor substitute for not getting into the property in the first place. Particularly if, as seems to be the usual case, they stretched to the extreme limit of their budget or beyond in order to afford the property.
It is far preferable, to all parties, to have the issues dealt with before the sale is consummated.
Now most buyer's agents aren't licensed inspectors, and I'm not one of the few. You still want an full-on building inspection. That doesn't mean agents can't spot stuff before you have a purchase contract, come up with a deposit, and spend hundreds for an inspection. All of this is called "buy in," and works off of a phenomenon psychologists call cognitive dissonance. You've said you want it, you work really hard and jump through all of these hoops to get it, and when you find out how bad it really is, you keep going because you are so mentally committed, because you've done all this stuff. If it's something I can spot, wouldn't you rather find out before you do all of that work?
The listing agent certainly won't tell you. They'll have you sign a standard disclaimer advising you to get an inspection. Yes, they have to help fill out the disclosures, but if they're not licensed inspectors, they can't be blamed for not knowing, can they? Their responsibility is to get the best possible deal for the sellers. They have very little responsibility to the buyer. You can't blame listing agents for doing their job (You can blame them for lying).
It's almost inevitable that the owners of vampire properties price the property like something out of Big Al's Discount Used Car Lot. "Cream puff, baby! One owner, a little old lady who only lived in it on Sundays." They want top dollar and then some. I understand, but I'm not going along and neither are my clients if I can help it. I saw one today where the list price was $40,000 more than it should have been if it wasn't a vampire. The agents should know better, assuming they are not deliberately "buying a listing." Price it to market if you want to move, and that includes a hefty discount for not being the one who has to hassle with fixing it. If you want that money in your pocket yourself, fix the problem yourself. You'll also interest a better grade of potential buyer, not to mention more buyers than just the simpleton who happened to win the lottery.
I'd rather deal with a property where the issues are out in the open. I also found one property today that has a crack across the living room floor, out in the open due the aftermath of an obvious flood, but I can find buyers who know how to deal with that (If the lot is level, it's not such a big deal, and can often be fixed surprisingly cheap). You don't have a listing agent pretending to drool over beautiful flooring that is going to have to be replaced anyway. Furthermore, it indicates that the listing agent, at least, doesn't have their head stuck in the Land of Wishful Thinking, so if I take a client who is interested despite the flaws out to the view the property, we're all pretty much on the same page as to what's going on with the property, and we have the makings of a reasonable negotiation. If the listing agent is in the Land of Wishful Thinking, I'm wasting my time to look and the client's also if I show it to them.
Vampire properties are out there. In markets such as this one, they are both increasingly common and deadly to your financial future. You want somebody whose job it is to look past the beautiful surface to the very real issues beneath. If you buy a vampire, it's worse than a disastrous marriage, because the financial consequences are likely to follow you long after your abusive partner is history.
Caveat Emptor
Loans are declined, or actually, the next thing to it, all the time. It is pretty rare for a loan to be outright rejected; I do not recall ever having had a loan outright rejected. That's a sign of a loan officer who wasn't paying attention to guidelines when the loan was submitted. What happens is that the underwriter puts conditions on it which cannot realistically be met. Documentation for more income than you make is probably the classic example of this. What usually causes this is that the underwriter finds a debt that didn't show up on the credit report and that you didn't tell your loan officer about, and so a loan with a marginal but acceptable Debt to Income Ratio became unacceptable. Or the appraisal comes in low, raising the cost or lowering the cash out due to a higher Loan to Value Ratio than the loan was priced for. Sometimes there is something that can be done about it; sometimes there isn't. If your loan officer can't think of anything to do about it, he'll tell you the loan was rejected. Sometimes they'll tell you that the quote that got you to sign up was rejected, also, but they have this other loan over here "that isn't much more expensive" that you do qualify for. Telling you that a loan was rejected is one of the best ways there is for a loan officer to do bait and switch.
Unfortunately, there really isn't anything you can do to verify that your loan was rejected, as opposed to bait and switched, or just couldn't meet underwriting guidelines. (Whether it had any chance of meeting underwriting guidelines is a subject for many more essays).
The first thing to do is realize that the fact you cannot meet guidelines for the loan that got you to sign up means that it is time to start shopping around again. That loan that got you to sign up does not exist as far as you are concerned. It's not like they are suddenly going to discover that the guidelines allow 5% higher debt to income ratio. If your loan officer is not a complete bozo, they will have gone over alternatives with the underwriter before telling you about the difficulty. If there's something they can do with a little bit more paperwork or a little more income, they're going to ask you if maybe you have the paperwork, or if you make $500 per year in some other fashion. A good loan officer told you about the loan because he believed you would qualify, but you don't. A bad loan officer told you about the loan because he thought he could use it to get you to sign up, and then pull a switcheroo on you once he had the originals of all your paperwork and control of the appraisal that you've already paid for. There really is no good way to tell for sure. In either case, you are back to square one - shopping your loan. I would also think twice about staying with the same loan provider. He's told you about one loan he couldn't do to get you to sign up. Why not two? At a minimum, I'd want a good back up loan.
So being told you don't qualify for the loan you thought you were going to get is always a sign that you need to start shopping your loan around again. That's why you don't ever give a loan officer your originals of anything. Even if somebody brings me an original, a copy is just fine and I can hand the original back. The only paperwork I need the originals of is the loan paperwork - the application I fill out and have you sign, and the disclosures associated with it.
Now I mentioned the appraisal, and you need to be careful here too, so that you don't end up paying for two appraisals. Now every time I write something about controlling the appraisal, some appraisers who want you to pay for two appraisals come on to the site and start defending their interests (i.e. $ in their pocket). Well, a good loan provider who fully intends to deliver the loan he talks about has no problem promising in writing to release the appraisal if he can't do the exact loan he talked about. Once the appraisal is released, it only costs a re-typing fee (about $100), not a whole new appraisal fee, to take your loan somewhere else. Without a release, you have to pay for a whole new appraisal - so you're out the money for two appraisals. But don't choose an loan provider because they will front money for an appraisal. I've dealt with Loan Providers Who Will Pay For Your Appraisal before. One way or another, you are paying for that appraisal. Not only are you paying for that appraisal, you are paying for the appraisal of everyone who canceled their loan, too, and a good margin on top of that.
Caveat Emptor
My general rule of thumb is "Remodel for your own enjoyment. If you're lucky, you'll get some of your money back when your sell." The remodeling industry has made a very large amount of money seducing people into believing they will recoup their investment, or more than their investment. But as you can see here, it's a rare remodeling project that returns more than the cost. Therefore, don't remodel with the idea of making a profit, because you won't. Not a single one of those multipliers is greater than 1.
But there are times when remodeling to sell makes dollars and sense.
Mostly, it's when the existing stuff is so outdated that Ms. Newlywed takes one look and flees in terror from the Uranium Yellow or Art Deco Pink and Blue that's been out of favor since before her mother was born. Maybe it was fine thirty years ago when you bought it, and you've gotten used to it, but now it's fifty years old and you've just never motivated yourself to do anything about it. If the kitchen is straight out of 1955, and the bathrooms look like they were last decorated when Hawaiian kitsch was the hot new fad (memo to the young: Eisenhower was President), it's probably a good idea to do something about that before you try to sell - "Try" being the important word. Because people looking for their dream home aren't interested, and these properties sit on the market. If they eventually sell, they will sell for way below everything else on the market, first because of the visible age, second because it sat on the market and you had to reduce the price further and further while paying carrying costs for months. These are the sorts of homes rehabbers and flippers look for, because they can make a profit on them. If you have the money, why wouldn't you want that profit for yourself?
For buyers, if you're willing to buy something that's solid but older, you can get one heck of a deal as well as being able to remodel at whatever pace you're comfortable with. Truthfully, most folks I talk to have at least some plans for as soon as they buy, anyway. If you're planning to install new kitchen cabinets and granite counters anyway, what does it matter if what's there is ancient or poorly laid out?
The first level of remodeling is to clean, shine, and repair any surfaces that need it. This is a straightforward extension of the "carpet and paint" principle. New paint and carpet are cheap, and have a great return on investment. If the formica is burned or chipped, if the tile is broken, if it's dull and dingy, make it shine. It always amazes me that people with hardwood floors will leave them looking like they haven't been polished since they were laid down in 1932. Strip them, sand them, polish them - before you put the property on the market. It's a lot cheaper than replacing or laying new carpet. They will look beautiful. They will make people want your house. Not everyone, of course, but how many buyers do you need? If you've got something lots of people see as desirable, flaunt it.
Sometimes, there just isn't any choice but to take it to the next level. Stoves built in to the countertop and cooking ovens in the cabinets are so 1958. If there aren't any good matches for marred, gouged, or broken surfaces, you probably want to re-do the whole surface. Keep in mind that labor costs are pretty much a constant, and the largest expense of most jobs. You want to spend $4500 resurfacing the bathroom in plastic and linoleum, or $5800 resurfacing it in Travertine and nice tile? Add a moderately upscale toilet for a couple hundred bucks, and you've got a bathroom that looks like it comes out of Sunset magazine rather than an episode of the Flintstones. Somebody who flees in terror from the latter is likely to be attracted to the former. Even if they don't flee in terror from the Flintstones bathroom, most folks are going to be much more attracted to the Sunset magazine bathroom.
Keep in mind, also, that the new stuff you put in has to go with whatever you're keeping. If you've got a Mediterranean paint scheme, Art Deco counters are not going to work for most prospective buyers, and they're the ones you're trying to please at this point. Just sayin'. The more vanilla you keep it, the fewer prospective buyers you will alienate.
Don't go overboard. It can be a real temptation to spend $25,000 or more on new kitchen appliances, but you're not going to get your money back. Keep in mind that most appliances are personal property, so (in the absence of the contract specifying otherwise) you can take them with you when you go. However, in cases like that it's more common than not that those appliances remaining will be written into any purchase offer, and if you agree to leave them, you have to. If you don't want to leave them, away goes the purchase offer to no beneficial effect. If two-thirds of the gourmet kitchen that attracted a buyer is going away when you move out, it's not likely to do you much good in selling your property. I always ask my buyers why they're willing to pay more for the kitchen when most of it is going away. There are idiots who insist they don't want a buyer's agent, but betting on that is a bet you don't need to make - and quite often lose.
Poor lighting can kill a sale without the buyers ever realizing why. It's dark, it's cavelike, it feels old - they don't want it. Just leaving the drapes open makes a huge difference. Replacing the lighting - particularly if you use CFL so you don't have to necessarily have to rewire for a bigger load - can be very cost effective.
If you're going to remodel anyway, clean up your lines of sight and floor plan if you can. The longer the uninterrupted lines of sight, the bigger the property "feels". The less complex the floor plan, the more open and larger it will feel. If you have to go through three switchbacks to get through the kitchen, that's a bad thing. Separate but connected "areas" are better than room dividers which are in turn better than walls, at least in the public areas of your property. If you're remodeling anyway, fix it.
One of the overlooked and relatively cheap remodels is the closet. Basic closets from fifty years ago are tiny by modern standards. People today have more stuff, and they want places to put it. People who get very interested in modern new kitchens and beautiful new bathrooms can just as easily get turned off by small closets. If they see a standard post-war closet arrangement (a three foot space between walls of two bedrooms, with half going to one bedroom and half to the other), they'll quite likely think that isn't enough closet space. "Next property! These closets are too small." Put a modern closet design in, with shoe holders drawers and cabinets and half size hanging spaces that efficiently use the space, and for most people, that's a horse of a different color. Closets are a bigger concern with more people than most folks give credence to, and they're way cheaper than most other remodels.
In some cases, remodeling may not get your money back, but it may be the difference between selling quickly and not selling for months, if at all. It's very hard to track this sort of information, and harder still to assign a dollar value to it. Keep in mind that a $200,000 mortgage at 6% costs $1000 per month, and property taxes and homeowner's insurance add to that. Not to mention that the longer it's on the market, the more you have to mark the property down in order to sell. At these prices, four months make a difference of about $6000 in carrying costs alone, never mind what you have to mark the property down to interest people in it with over a hundred days on the market!
Remodeling isn't the license to print money it's been portrayed as - except for the remodeling industry. Small budgets are more likely to recover large fractions of what you spend than larger ones. Unless the property is significantly behind the times, remodel for your own enjoyment, because you won't get as much back as you spend.
Caveat Emptor
More Lenders are removing declining market notation for San Diego.
Since 95% loans are now readily available without a government program, demand is up and unfortunately, so are rates.
The Best Loans Right NOW
6.25% 30 Year fixed rate loan, with one total point to the consumer and NO PREPAYMENT PENALTIES!. Assuming a $400,000 loan, Payment $2462, APR 6.389! 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 5.375 percent!
5/1 Rates will save you a lot of money!
Best 5/1 ARM: 5.625% with 1 total point to the consumer, and NO PREPAYMENT PENALTIES! Assuming a $400,000 loan, Payment $2302 APR 5.759. This is a fully amortized loan with a fixed rate for the first five years. 5/1 ARM rates as low as 5 percent!
10 year interest only payments available on 30 year fixed rate loans!
Great Rates on temporary conforming, 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
About a month ago, I wrote Top Ten Reasons Your Home Isn't Selling. It was well received so I thought I'd take it from the buyer's perspective. Once again, I'll try to inject as much humor as I can.
Number 10: The Commute: It never ceases to amaze me the number of people who will commit themselves to living in a neighborhood they've never lived in before without a real evaluation of how to get from there to everywhere else they need to be. Don't just drive from the house to work once when there's no traffic. Try to drive back and forth at the times you'll be driving it every day. Or if you're a public transportation person, figure out what that's going to be like before you're stuck doing it. Take into consideration that the commute is going to get less and less enjoyable as time goes on. Be certain in your own mind that you're going to be okay doing this as often as you have to. If the commute is intolerable, then as certain as gravity you're not going to be living there or not going to be working there. For genius IQ points (or at least subgenius), try the paths you're going to have to take to your other common destinations. Grocery stores, the mall, your Tuesday night class in whatever, the kids' scout meetings. If you have to travel or work in different locations, do those trips also. An good agent should ask about all this, and be aware of the effects. An Evil Agent, will, of course, induce you to buy property where you'll have to sell it - generating more commissions.
Number 9 Beautiful Surfaces: They've just put Travertine and Italian Marble all through the room you want for the nursery! Too bad about that six inch wide crack in the foundation they covered up! Still, it's obviously the house you've got to have! At least until the first time your toddler breaks multiple bones falling on those tiles. Unfortunately, by then it's too late. And just wait until the old cast iron plumbing fully closes up or springs a leak, but at least it puts out the fire caused by plugging too much into eighty year old wiring! Yes, beautiful surfaces are nice - and one of the best ways to get novice buyers to pay too much.
Number 8 Insufficient shopping: You looked at one house and fell in love. Unfortunately, it was the crummiest most overpriced house in the neighborhood. Other people trying to get out before the new needle exchange program opens down the street are going to be praising you for paying so much that their house will appraise for whatever value they need it to! Seriously, if you don't look at ten to fifteen properties, you're definitely short of market information, even with the best agent in the world ;-). I have seen people shop more for $20 toaster ovens than half-million dollar real estate. Scary.
Number 7: Skimping on Services: Trying to do without title insurance or inspection is a recipe for disaster. I've said this before, but title issues really do happen, and it's not always with the person who may appear to be the current owner. Ditto the inspection. I don't think I've ever had a property where the inspection didn't reveal anything I didn't know about the property. I've had the stuff the inspector found be trivial, but never non-existent. Here's one thing that seems to be a rule: if you're getting a good bargain, there will be something you want an inspector's opinion on before the sale is final. People understand cash, and many don't understand the concept of insurable risk. By the time you join the ranks of those folks out half a million dollars worth of property and still on the hook for the loan, you may have a different opinion.
Number 6: Location: Backing out of your driveway onto the high-speed expressway, your spouse's vehicle is flattened by the bus returning this week's escapees to the maximum security prison a quarter mile down the road - past the explosives factory, the toxic waste dump, and the chemical plant. She's taken to the emergency room at the hospital for the violently insane across the street, and neither you nor your lawyer ever do come up with conclusive proof of what happened after that when the airliner landed short of the runway. Seriously, there are many things that can rule out a location, from the above through several milder forms of ambient environmental issues, down to misplaced improvements. You might be able to move a building. Nobody has ever figured out how to move the land it came on.
Number 5 The Loan: The only way to qualify for the dollar amount you need is to take an unsustainable loan or a loan that is guaranteed to self-destruct. I'd like to be humorous here, but this is somewhat less funny than the most politically incorrect joke I've ever heard, let alone what I'm willing to print here. Betting on rising values and falling rates to enable you to refinance more favorably is literally putting your home and your future on a craps table. This leads into-
Number 4 Didn't Adhere To Budget, and not having a known budget in the first place is the ultimate case of this. I've written at least one two three articles directly upon the point of figuring how much you can afford. Figure out your budgetary limit first, and shop by purchase price, not payment. This isn't to say you have to spend the maximum, but the worst ways people shoot themselves in the head (not the foot) is by falling in love with the property that's too expensive for what they can really afford. In How to Effectively Shop for a Buyer's Agent, I tell you to immediately fire any agent who wants you to look at a property that cannot be obtained within the budget you tell them about. The asking price can be a little higher than your limit, with the understanding that if you can't get the price down that far via negotiation, you're not interested.
Number 3 Assuming Something That Isn't True: Josh Billings was correct. It's not what you don't know that gets you - it's what you know that ain't so. I've been the unwitting victim to this, and I've seen enough other transactions to have come to the conclusion that people who deal in real estate without an expert fall into two categories: Those who know they got taken, and those who don't realize it yet. There are so many tricks and traps that get played upon the unwary that there is literally no way to write about all of them because new ones are invented continuously. You have to be someone who deals with these issues every day to have a prayer of realizing the pitfalls of some of them. Consider that if some trick motivates a buyer to pay 10% extra for a $500,000 property, that's $50,000 extra in the seller's pocket and out of yours. I've learned to question everything, and to ask, "What are the possible explanations for this?" Unless you're an agent yourself, you probably wouldn't believe the grief this saves my clients.
Number 2 Failure to Plan: A good agent has contingency planning in effect for everything, and those plans don't include permanent vacations in countries without extradition. If you're seeing all this stuff for the first time, how likely is that to happen? Even the second or the third? The reason I do so well for my clients is that I've got a solid plan from the time they contact me for the first time, and I have plans to deal with everything I don't control. This includes everything from if they get their hearts set on exactly the wrong property to negotiations before and after the contract to what happens if the inspection reveals something major, and how to lay the groundwork in case stubborn negotiating partners don't see it may way, or the universe decides to jump in with an unpleasant surprise . If you don't have this sort of plan, may I suggest you hire someone who does. Because failure to have a plan in place will cost you large amounts of money.
Number 1 Not Having a Strong Buyer's Agent. This is the first thing you need to shop for, before you so much as look at online listings. Have at least one in place before you look at any property, even new development. You want one who's going to go digging for both good and bad. There is no such thing as a perfect property, because if everything else is perfect, the price certainly won't be, and if you're only willing to settle for the perfect deal, you're either wasting your time or asking someone to take advantage of your ignorance. If you use the seller's agent, they have a fiduciary duty to present that property in the most favorable light. Given the choice between an agent pretending problems don't exist until the small print disclosures and an agent who fails to do their legal and contractual duty, which would you choose? If you don't like this choice, then you want to apply the information in How to Effectively Shop for a Buyer's Agent. Having a good buyer's agent will make more difference than anything else in your real estate experience.
Caveat Emptor
Over five hundred years ago in Europe, there was a con game that was more practiced than any other con game in the history of the world. It was simply the thing to try on the new rube in town. Someone would claim to be selling a suckling pig in a sack ("poche", from which we get "pocket" as the diminutive, as well as "pouch"). You have to understand the situation back then to appreciate what was going on. Suckling pig was tender, delicious meat, the sort that the average person of the time might only eat a few times in their life. Perhaps never, if they were poorer than average. It was highly sought after, and commanded quite a price, in terms of the average person's wages.
In reality, of course, what was in the pouch wasn't a pig at all, but rather a cat. Most modern Americans don't realize this, but "roof rabbit" was eaten back then, because the alternative was often starvation. Before potatoes were brought back from the New World, Europe did not find it easy to feed its population. Nonetheless, I'm given to understand cat meat is nasty disgusting stuff, a food of last resort, because cats are almost 100% carnivores. However, the victim of this scam didn't usually get to eat the cat, either, because they were expecting a pig, which was not nearly so nimble. As a result of this, when they opened the sack, the cat would escape. This con gave us three phrases that are very popular today: "Let the cat out of the bag," and "left holding the sack," as well as "Buy a pig in a poke."
So what if prospective buyers have a hard time viewing a property?
This isn't 500 years ago. People that have the financial resources to buy real estate in the United States today aren't likely to be that trusting. If they were, some alleged Nigerian millionaire would have relieved them of those resources. In fact, in advice given since at least 1530, people have been advised ""When ye proffer the pigge open the poke."
Why? Because if you don't, people are going to presume it's a cat (at best), and they're only going to offer what cat meat would be worth to them, which may not be anything. But if you show them that there really is a delicious suckling pig in the sack, they may be willing to pay the premium prices that suckling pig - or beautiful turnkey property - commands.
I don't know how many times I've gone over this with clients. People aren't looking for reasons to buy your property, they're looking for reasons not to buy your property, and, "They don't want to let me look at it," is more than sufficient reason to lose interest.
Does that have anything in common with the educated pig buyer? You bet it does. They wanted to see the pig, otherwise it was only worth the cat price (i.e. nothing unless they were starving, and then not much).
The entire process of real estate has evolved with inspections, appraisals, etcetera is precisely because the information possessed by the parties at the time of the contract is asymmetrical. That's fancy talk for the seller knows more than the buyer. The entire viewing and inspection idea has evolved from this basic fact, and the need to remedy most of the imbalance of information.
But if prospective buyers have a hard time being allowed to see the property, they are not going to make good offers. The idea is that there's probably a reason that seller won't let them look at the property, and they're most often right in that presumption.
Every time I start looking through MLS for property that might suit my buyer clients, I run across several of the stupidest ideas in real estate. I can handle one and usually two hour notices, but when someone asks for four, they're not likely to get it. I've got someone who wants to go look at property now, or wants me to go look at property now and get back to them on it, and I'm usually trying to shoehorn a few extras in while I'm in the neighborhood. If I can see your property, I might think it's worth my clients attention. If I can't, I definitely won't.
But four hour notices aren't anywhere near the worst: 24 hour notices are at least as common. In a way, I understand. Tenants can legally require 24 hour notice, but it's to my listing clients advantage to come up with some reason to cut that as far as possible. What are the tenants paying, $2000 per month or so? Offer to rent a storage locker for them and rebate some rent money, and your average tenant is going to agree so fast your head will spin. This kills the "I'm worried about them stealing my stuff!" angle as well. Always be ready and willing to show, and since every day the property doesn't sell not only adds carrying costs but means a (statistically) lower sales price, the money you spend generating cooperative tenants is a fantastic short term investment, better than anything short of a jackpot lottery win, and a lot more dependable.
That's not the worst, though. That dishonor goes to "property shown with accepted offer." Here we go with the cat thing again. The question that goes through my mind when one of my buyers asks about one of those is, "How bad could it be?" Why that question? Because the worst case scenario is precisely what the property is worth until the seller opens the "poke" and shows us the "pigge" instead of the cat or worse. Contingencies aren't going to cut it. Contingencies are for when you know a little bit and want to know more. In this instance, the buyer doesn't know anything, because they haven't seen it. The fact is that in the absence of any observational evidence, I figure there's a reason why the seller doesn't want us to know, and negotiate accordingly. Mind you, if you're willing to take a blind risk this can generate a fantastic bargain at the right time, with a seller who's ready to listen to reason about the effects of this upon value. But most aren't.
I can't blame the seller who doesn't understand this. The fact that they're clueless on this point is evidence of agent failure. This is one more way that agents "buy" listings and hurt their clients. Failing to make the client understand that showing restrictions lower perceptions of value as well as sales price is a major agent failure. Because the agent does not make certain the client understands the way that buyers approach properties, that agent is failing in their fiduciary duty, and their client will end up paying more money in carrying costs as well as getting a lower sales price because of it.
A while ago, I wrote an article on Top Ten Reasons Your Home Isn't Selling. It's no coincidence that talking about real estate in this context explicitly hits the three biggest reasons why real estate doesn't sell. Not only is it a direct instance of problem number three ("Showing Restrictions"), but by restricting showings the property becomes less valuable ("Price") and highlights a major shortcoming of the listing agent. And since these folks have won gold, silver and bronze medals in the "shooting yourself in the foot" event, may I suggest that after some appropriate time has passed, this may become a very lucrative desperation mine?
Caveat Emptor
"what happens to your equity when the bank forecloses" was a question I got.
The answer is that most, if not all, will be dissipated by the foreclosure.
Let's say you own a home currently valued at $500,000, that you owe $200,000 on it, and that you have a 6% loan. Now, for whatever reason, you can't make the payments, and for whatever reason, you don't sell while you have the opportunity before the trustee's auction.
In California, you are going to be four months behind before the Notice of Default happens. So that is four payments of $1200. Furthermore, when you are fifteen days late you owe a 4% penalty, or $48, and when you are thirty days late, the missed payments start accruing interest. So at the point that the Notice of Default is possible, you owe $204,777.83.
From Notice of Default to Notice of Trustee's Sale is another 60 days, but before that happens, the bank is going to hit you with $10,000 to $15,000 in administrative fees for going into default. Check your contract; it's in there. Let's say $12,000, and now you owe $216,777.
Add another two months of delinquent payments, and penalties as of 15 days after. So as of the time the Auction actually happens, you owe $219,447. Furthermore, to make the auction happen, they will charge you about another $15,000. This covers the expenses of making the auction happen, of which the most noteworthy is the appraisal. At this point, you owe $234,447.
The appraisal bears special mention. Not only is there zero pressure to get a good value, the bank wants that appraisal to come in nice and low. They want the property to sell at auction, and if nobody bids 90% of the appraisal price, then they own it and have to go through the rigamarole of hiring an agent and selling it. So that appraisal is going to come in as low as is reasonable, to maximize the chance of it selling at auction. Every once in a while questions about low appraisals at trustee sales hit the site. The short answer is Microsoft Standard: "It's not a bug, it's a feature!" and from the bank's point of view, it is. So even though the property might sell for $500,000 in the normal course of things, the appraisal might come in at $440,000, meaning that someone has to bid $396,000 in order to buy the property at auction. The appraisal might be even lower, but let's say $440,000.
If someone bids $396,000 at auction (assuming they actually are able to consummate the transaction), they own the property. Less transfer costs, the bank gets maybe $380,000, of which the note is now for $234,000, and $300,000 of equity has dropped to $146,000.
But that's not usually what happens. What's usually happened is that the owners have financed it out to at least $375,000, hoping to be able to stave off foreclosure, and by similar math, they now owe roughly $425,000. How much do they get when the bank only got $380,000?
If the property doesn't sell at auction, the bank now owns it. Now they have to hire a listing agent, and offer a cooperating buyer's broker percentage, and while the listing agent looks for a buyer, the money owed keeps earning interest. Let's say the property eventually sells for $410,000, and the bank spends 7 to 8 percent of that getting it sold, so that their net is maybe $380,000. Even if you originally owed $200,000, by the time everything is said and done, you might owe $250,000 or more, leaving perhaps $120,000 coming back to the original owner.
Now, if the owners were to short-circuit the whole process by selling successfully for that same $410,000 (almost 20% less than comparable properties might sell for) before the trustee's sale happens, and if they spend that same 7.5% to get it sold, they get about $380,000, of which they'll get to keep approximately $160,000, more than it is likely they will keep under the best possible outcome if the property went to trustee's sale.
So if you cannot afford your payments, and you're looking down the road at a trustee's sale, it is usually in your best interests to get the property sold before that happens. The lenders will generally be as accommodating as they reasonably can if you ask them and keep them in touch with what is going on. They don't make money on foreclosures; they don't want to foreclose. No Thanks to California's Home Equity Sales Contract Act, once the Notice of Default hits, you are unlikely to be able to do business with investors except on an "emergency sale for 60% of value" basis (that being about what the those "Cash for houses" folks offer), so the sooner you act, the more money you will likely come away with.
Caveat Emptor
(click for Part 1 of Save For A Down Payment or Buy Now?, which deals with the basic question of how well saving for a down payment increases affordability)
But suppose, instead of waiting because you can't afford the payments now, you buy a $250,000 condo now - and then sell it for your down payment later. In other words, you buy what you can afford right now instead of waiting and saving until you can have the home of your dreams. Then at some later time you sell the condo for the down payment on the home you really want.
Let's look at the trade-offs for the condo. I'm going to assume that the condo's equity is the sum total of the saving you are doing, and I'm going to manipulate rents until I get $833 per month cash flow difference (you $10,000 per year savings). This yields a monthly rent of $977.46. You can't rent $250,000 condos around here for $1000 per month, but we'll stick with the situation I figured even though the argument in favor of buying the condo is far stronger. Let's also assume it costs 7% of the value to sell the property, make allowances for property taxes, HOA fees, etcetera. It'd be a bear if I didn't already have the spreadsheet done, but here are the results:
| Year 0 1 2 3 4 5 6 7 8 9 10 | Value $250,000.00 $262,500.00 $275,625.00 $289,406.25 $303,876.56 $319,070.39 $335,023.91 $351,775.11 $369,363.86 $387,832.05 $407,223.66 | Monthly Rent $977.46 $1,016.56 $1,057.22 $1,099.51 $1,143.49 $1,189.23 $1,236.80 $1,286.27 $1,337.72 $1,391.23 $1,446.88 | Equity 0.00 15,431.56 31,674.53 48,772.18 66,770.15 85,716.58 105,662.21 126,660.56 148,768.08 172,044.30 196,552.03 | Net Benefit -17,500.00 -13,443.41 -9,518.73 -5,769.20 -2,244.10 1,000.56 3,901.27 6,386.11 8,373.86 9,772.91 10,480.08 |
Now, I have to admit this seems marginal. You've only got an extra $10,000 in your pocket after 10 years. So you sell the condo and buy your house, and plugging these numbers into the affordability spreadsheet improves the affordability of the house you really want by 8% in only 8 years. Nonetheless, this is 2.5 times the affordability increase afforded by investing the money.
Now let's consider the situation as it really exists. That $250,000 condo rents for about $1300, which makes a big difference to what you save. It's like taking the previous situation, and adding $322 per month to your investments as well. Here's the numbers for the condo, adding the investment, and coming up with a total.
| Year 0 1 2 3 4 5 6 7 8 9 10 | Value $250,000.00 $262,500.00 $275,625.00 $289,406.25 $303,876.56 $319,070.39 $335,023.91 $351,775.11 $369,363.86 $387,832.05 $407,223.66 | Rent $1,300.00 $1,352.00 $1,406.08 $1,462.32 $1,520.82 $1,581.65 $1,644.91 $1,710.71 $1,779.14 $1,850.31 $1,924.32 | Equity 0.00 15,431.56 31,674.53 48,772.18 66,770.15 85,716.58 105,662.21 126,660.56 148,768.08 172,044.30 196,552.03 | Savings $0 $4046.11 $8515.91 $13453.74 $18908.64 $24934.73 $31591.84 $38946.03 $47070.31 $56045.30 $65,960.08 | eq+sav $0.00 $19,477.67 $40,190.44 $62,225.92 $85,678.79 $110,651.31 $137,254.05 $165,606.59 $195,838.39 $228,089.60 $262,512.11 |
Now let's paste these last numbers into the affordability sheet and see what we get:
| Year 0 1 2 3 4 5 6 7 8 9 10 | available $0.00 $19,477.67 $40,190.44 $62,225.92 $85,678.79 $110,651.31 $137,254.05 $165,606.59 $195,838.39 $228,089.60 $262,512.11 | price of house $500,000.00 $525,000.00 $551,250.00 $578,812.50 $607,753.13 $638,140.78 $670,047.82 $703,550.21 $738,727.72 $775,664.11 $814,447.31 | payments $3,631.97 $3,670.64 $3,709.34 $3,747.86 $3,786.00 $3,823.49 $3,864.42 $3,928.79 $3,993.62 $4,058.65 $4,123.58 | affordability 1.00 1.02 1.04 1.06 1.08 1.10 1.12 1.14 1.15 1.17 1.18 |
So we see that this strategy has increased the affordability of the house you really want by 12% over only 6 years, holding background assumptions constant. This is twice again the affordability increase rate from the last example (2%/year as opposed to 1), and so almost five times the affordability increase rate of just saving for a down payment. Furthermore, those payments on your condo are mandatory, and the increases in value happen of their own accord, whereas most saving programs run by individuals falter a bit over time, nor is there any such thing as a 10% return per year tax free. In short, I'm comparing a real world real estate investment with a hopelessly idealized other investment. Saving for a down payment makes comparatively little sense unless you are not yet in a position to buy, either due to stability, insufficient income to buy anything, or because your situation does not permit 100% financing.
Taken all together, this forms a powerful argument for not waiting until you can afford your dream house, but buying what you can afford as soon as you are in a position to do so with the intention of trading up later. Delaying means you cut the later years off of the results, not the earlier. The benefits to real estate don't start until you put your foot on the ladder. If I had known this when I was in my twenties, I'd be millions of dollars better off today. So plan ahead, and start working towards your goals now. You can never go back in time with what your figure out later, or with the effort you expend later.
Caveat Emptor
An email asked a question I should have thought to answer a long time ago, and the answer may surprise a lot of folks. I've been vaguely aware of this for a couple of years, but I was amazed how strongly the numbers solidified my views!
My wife and I aren't ready to buy a property yet, but we are trying to plan how much to save for our down payment. You've mentioned that there's a spectrum from nothing down to 20+% down broken down by 5% increments, but how do you choose where to be on that spectrum? I can see that there are tradeoffs between the amount you have to save, the cost of your mortgage and the like, but I don't have a good way of thinking about those tradeoffs. And, since we're in the DELETED area, 20% down could easily get into the six figures, so it can be quite intimidating.
Given the way leverage works in even a slightly appreciating market, it is generally to your advantage to buy as soon as 1) You are sufficiently stable in your employment and expect that you're going to be in the area at least another three to five years, 2) You have enough of a reserve that the first minor bump in the road will not lead to disaster, and 3) You make enough to afford the payments. However, what usually happens is that people get a raise, a promotion, or a new job, or more often, they get married or have a baby and that is what sets their thinking on the road to buying a home.
Let's consider a $500,000 property and an 80% first trust deed with an appropriate piggyback 30 due in 15 second if needed, since that was generally returning more favorable rates than a Home Equity Line of Credit when I wrote this. Upon most recent revision, second mortgages weren't going above 90%, and 100% financing is difficult unless you're a veteran. Picking a random lender from a couple days ago and thirty year fixed rate loans, when I originally wrote this, I had 5.875 for about 9/10 of a point plus closing costs, or about $7100 total cost. But there are potential adjusters - and relevant to this situation, having subordinate financing for 100% CLTV adds one full discount point ($4000 in this case) to the first mortgage, or you can drop down to 6.25 for the same cost. 95% financing only adds 1/4 of a point in the same situation, or you can get a 6% even for the same cost. At or below 90% CLTV, there is no add to the first mortgage. If we're at 80% with a $100,000 (20%) down payment, the 5.875 first is all there is. Taking dead average credit scores (720) with this same lender, the closing costs are $500 (flat) when you do the second concurrently. 85% CLTV would be an 8% second on $25,000 for a down payment of $75,000 (15%) plus closing costs. 90%CLTV would be $50,000 down payment (10%) and leave you with a $50,000 second at 7.375%, benefiting from a bump down in rate for hitting a certain dollar value. 95% CLTV requires a $25,000 down payment and leaves you with a $75,000 second at 7.75%. 100% CLTV (no down payment) leaves you with a $100,000 second at 8%. It would be 8.25, but you've hit another economy of scale break point.
Here's a table:
| CLTV 80 85 90 95 95 100 100 | 1st TD 5.875 5.875 5.875 5.875 6.000 5.875 6.25 | 2nd TD n/a 8.00 7.375 7.75 7.75 8.00 8.00 | Cost $7100 $7600 $7600 $8600 $7600 $11600 $7600 | 1st pay $2366.16 $2366.16 $2366.16 $2366.16 $2398.21 $2366.16 $2462.87 | 2nd pay $0 $183.45 $345.34 $537.31 $537.31 $733.77 $733.77 | interest $1958.33 $2125.00 $2265.63 $2442.71 $2484.38 $2625.00 $2750.00 |
So you see that having a down payment is a very good thing. Now this is for a fairly ideal situation. If you are in a stated income situation, the rates are slightly higher and step somewhat more steeply, and currently, 80% loan ot value for stated income is the highest anyone is going. If your credit is significantly below average, the rates start higher and step up more steeply still. It gets rough if both apply.
However, this doesn't take place in a vacuum. Let's say you can save $10,000 per year, and earn 10% tax free on what you save. But while you do, housing prices are still going up. Let's assume 5% per year on average. We will also assume that you can get a 6% for the first and 8% for the second whenever you buy, and that taxes at 1.2% of value per year, here's the projected situation:
| Year 0 1 2 3 4 5 6 7 8 9 10 | down $0.00 $10,500.00 $22,050.00 $34,755.00 $48,730.50 $64,103.55 $81,013.91 $99,615.30 $120,076.83 $142,584.51 $167,342.96 | price $500,000.00 $525,000.00 $551,250.00 $578,812.50 $607,753.13 $638,140.78 $670,047.82 $703,550.21 $738,727.72 $775,664.11 $814,447.31 | CLTV 100.00% 100.00% 100.00% 95.00% 95.00% 90.00% 90.00% 90.00% 85.00% 85.00% 80.00% | payments $3,631.97 $3,736.52 $3,842.45 $3,949.44 $4,057.11 $4,165.04 $4,272.73 $4,379.60 $4,484.99 $4,588.14 $4,694.16 |
Where payments is the total of mortgage and monthly tax payment pro-rated when you buy. Examining that column, we see that this is an argument against waiting. In fact, assuming a 3% (compounded) raise per year, the property is only 4% more affordable in year 10 with a $167,000 down payment! This neglects rises in rents and other costs of living!
(Here is Part 2 of Save For A Down Payment or Buy Now?, which tells one way to increase affordability more and faster)
For at least the last thirty years, I've been hearing "affordable housing" advocates yammer about the high cost of housing, and how working families can no longer afford "decent" housing, which they apparently consider to be the three or four bedroom, two bathroom detached home. They go on and on about what is necessary to create more of this type of housing and our "moral obligation" to create more of it. Against this, we have their actual actions, politically allying with forces that make housing more expensive by constricting the supply.
Newsflash: Making business difficult for suppliers of a good does not lower the price nor improve the availability of that good.
Who does artificial constriction of the housing supply hurt?
Certainly not developers. The price of the actual permits, last I checked was in the $20,000 per unit range. But the decreases and constrictions and delays in supply add something like $160,000 to the price tag of that same unit. The people who want housing are here. If the demand is there and the supply isn't, what does that do to price? Oh, those poor developers! They're being hurt to the tune of $140,000 additional profit for each unit they build. Please, Brer Fox, don't throw me into that briar patch! To stay within the genre, trying to harm developers in this sort of fashion is a tar baby for those trying to do it.
It sure as heck doesn't hurt the wealthy, either. They can afford housing. Matter of fact, the constriction of supply makes their real estate investments appreciate more rapidly. Increasing demand and regulatory brakes on the ability to furnish supply is pretty much the recipe for rising prices. Furthermore, this encourages speculation, driving bubbles like the ones that we just went through. It wasn't the wealthy that got hurt by that bubble. It was the folks who could just barely qualify and the people who stretched more than they should have or told fibs in order to qualify. Who was that? It certainly wasn't the wealthy. High end housing was the first to start sitting longer, because the wealthy weren't worried about getting priced out.
It certainly doesn't hurt current owners, who ride the price wave in the same manner as the wealthy investors, if not quite to the same level of profit. Anytime the ratio of demand to supply rises, so does price, and anyone who already owns benefits. These are folks well-established in life for the most part, along with high income individuals and those who inherited wealth. Sound like anyone who needs to be getting what is effectively a public subsidy?
So who does keeping the supply of housing low hurt the worst?
The young. People just getting started out. People who won't get started for another fifteen years, by which time current housing prices will seem like the Golden Age. Every time there's a new household but no new housing, the price goes up. We're going to keep gaining new households, and I don't see enough new housing on the horizon. You do the math.
Transplants coming from where housing is cheaper. Even if they own a $100,000 house free and clear, that's only a 20% down payment on $500,000. Lots of San Diegans seem to have an attitude about transplants - but most of them are themselves transplants. The question of "who is a transplant?" is very much a question of where you draw the line. Speaking as a second generation native, my take is let's just trash the whole transplant prejudice thing. People want to live here. Providing they're in the country legally, they have the same rights to do so that my family and I do. We can create the housing for them, or we can create shortages, which lead to higher prices and unaffordable housing for everyone.
The working poor. Yes, the very people the affordable housing folks claim they want to help. But keeping the supply low, delaying the arrival of more units onto the market while keeping others from happening at all, is a recipe for rising prices. A couple making $15 per hour each makes just over $5000 per month, which translates to about $2300 they can afford for housing and all their debts. Assuming they have no other payments, that's a purchase price of a little over $300,000. That might buy a severe fixer detached home or a condo in decent shape. What happens the next time they need to buy a car? Unless they're one of the rare folks who still manage to put money aside every month, they have to consolidate the car loan with their mortgage in order to afford it. Ditto any other sudden expenses. This is the opening movement to a symphony of financial disaster.
I know that the political alliances in this country have gotten completely nonsensical, but it's past time for affordable housing advocates to break away from the same party that houses the anti-development and anti-business activists. Yes, ACORN, I'm looking at you (among many others), with your "retain voter registrations of your favorite party, trash registrations of their opposition" drives (blatantly illegal, by the way, and this isn't the only such story by any means). Never mind what's the matter with Kansas, I want to know what's the matter with affordable housing activists. By any reasonable measure, they're making the problem worse with their political alliances, by supporting the agenda of their natural antithesis. If their game is to actually make housing more affordable, most of them are miserable failures at what they say they're working towards.
Of course, if the game is to make the problem worse, so that people have no choice but to deal with these organizations as supposedly the only hope of the working poor, thereby increasing their own power, these organizations are doing just fine. Trojan horses for empire building are one of the classic recipes for political success.
Caveat Emptor
A while ago a reader gave me a heads up that Illinois HB 4050 was hurting residents of certain poverty stricken Illinois Zip Codes. Now I have to pick on our own state:
California law generally requires special handling of sales transactions to protect homeowners in foreclosure. This law, called the Home Equity Sales Contract Act, generally applies to transactions that meet all of the following four conditions: the property is one-to-four family dwelling units; the owner occupies one of the units as his or her principal place of residence; there is an outstanding notice of default recorded; and the buyer will not use the property as a personal residence. The Home Equity Sales Contract Act does not apply if one of these four conditions is unmet. If, for example, a seller occupies a property in foreclosure, but the buyer will be occupying the property as his or her personal residence, the home equity sales law does not apply.If all four conditions are met, however, the buyer must use a home equity sales contract, such as the C.A.R. standard form "Notice of Default Purchase Agreement" and attachments. This agreement gives the seller, among other things, a five-day right to rescind the contract. Furthermore, the home equity purchaser cannot be represented by an agent. More accurately stated, the law requires a buyer's agent to be bonded by an admitted surety insurer, but C.A.R. is unaware of any insurer currently offering the bond.
This is so brain damaged it has to be the idea of some clueless person out to save the world without first stopping to consider the Hippocratic Injunction to "First, do no harm."
Now, in the business, the term "equity sale" or "equity purchase" is most commonly used in conjunction with a sale subject to existing trust deeds. So this is a significantly different meaning to a similar phrase. Keep in mind that there are four conditions that need to be met:
1. Residential property (1-4 units)
2. Owner occupies one unit
3. Notice of default recorded
4. Buyer does not intend to occupy.
But what happens with such properties? Who buys them? Investors, that's who. Guess what? The owners want them sold! What happens if they don't sell? They go to auction, and the owner basically gets nothing, whether the property sells at auction or it doesn't, in which case the lender now owns it.
Furthermore, they're requiring that the buyer's agent have a bond that is not available, and has not been for ten years. So if whether they're working with a shark or with an investor who is actually going to give the people a decent price, the buyer's agent cannot be compensated. So what are most buyer's agents going to do? Answer: Wait until after the trustee's sale! As the buyer's agent, they have no fiduciary responsibility to that seller, and no ability to get paid. But the owner wants to sell before the trustee's sale. The chances of them getting anything from a trustee's sale or afterwards are about equal to one my grandfathers giving birth to triplets.
Now, this does theoretically create an opportunity for certain people who might be willing to live in the property to buy for lower prices, since investors are (mostly) out of the picture. So we are robbing Peter (the current owners) to pay Paul (in search of new housing). There are also some truly outstanding issues. What happens if my buyer client is lying to me about whether they intend to live there? The contract is already written, the terms of the transaction set, and the buyer's agent can't back out at the last minute when they change their mind about whether they're going to live there. Also, what happens if everything is fine when the contract is written, but the lender drops a Notice of Default on the sellers the day we're set to close?
In the current market, most of the folks in default