Beginner's Information: April 2008 Archives

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

Here goes:

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

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

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

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

How's that?

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

From an e-mail

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

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

Agent: Backup loan? What for?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

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

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

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

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

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

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

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

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

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

Caveat Emptor


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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

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


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

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

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

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

How was that?

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


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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

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

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

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

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

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

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

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

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

Caveat Emptor

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

That was a question I saw.

The answer is YES there are problems!

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

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

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

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

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

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

Caveat Emptor

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Caveat Emptor

Straw Buyer Fraud

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

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

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

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

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

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

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

Caveat Emptor

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This page is a archive of entries in the Beginner's Information category from April 2008.

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