The answer is yes.
Consider the situation from the seller's point of view, and the answer becomes obvious. Here is someone who is proposing to not put any of their own money into the deal. What's their motivation to consummate the deal? Not much, when you come right down to it.
No listing agent in their right mind is ever going to counsel their clients to accept a "zero deposit" offer. It costs money to give this person the only shot at a property for thirty days (or however long the agreed escrow period). At an absolute minimum, that seller is risking the money to pay their mortgage, taxes, and insurance for thirty days. On a $400,000 property, that's well over $3000. This is money that is gone and they are not going to get back, all based upon the buyer's representation that they want the property. If the buyer isn't putting any cash at risk, there's no disincentive for them in trying to try for a property there's no way they'll qualify for. Meanwhile, the seller is out money on a daily basis from the time they agree to lock the property up in escrow.
Some of you are no doubt asking about pre-qualification or even pre-approval. The problem is that whatever the loan officer said, there's no real way to back it up. It is illegal to require that prospective buyers be pre-qualified or pre-approved with a given lender or loan officer - a strong case can be made that just the simple request is a RESPA violation. I have said repeatedly that the only pre-qualification or pre-approval that I trust is one that I did - but I can't require prospective buyers to do that, and any decent agent is going to learn to ignore the request.
The only thing that means anything to that seller in the way of a guarantee for buyer performance is cash - a cash deposit from the buyer that is at risk if they can not or do not consummate the deal in a timely fashion. This is even more the case than usual if the buyer isn't putting any of their own hard earned money into the deal itself. If a buyer is willing to put 5%, 10% or more into the deal, they ought to understand the effort that that money represents, whether it's through saving it or just through having it not earn 10 percent per year of thereabouts in the stock market. If you're putting up cash you've spent years saving, you understand what that money represents. If you haven't made the sacrifices to save such a down payment and you want to just waltz into a property without putting down a deposit, well, odds are that you've got a rude awakening coming. Because over forty percent of all purchase escrows end up falling apart. So if I'm acting on behalf of a seller, one of the first questions I'm going to ask is "What evidence is there that this person can consummate the sale in a timely fashion, and what are they putting up that they're willing to lose if they change their mind or can't qualify?"
Pretty much every agent who's ever had a listing has had offers come in that were rejected on the basis of "not enough deposit," or that were acceptable in every particular but that. The intelligent thing is counter for a higher deposit or fewer contingencies on it.
Some folks are going to ask about substituting a higher purchase price. The issue that you're going to run straight into is the appraisal. In most cases, offers that include 100% financing are a little inflated anyway. When you add still more money to that, a sufficiently high appraisal becomes difficult. Even if the appraisal comes in high enough, though, we come full circle to the obvious question, "What good is that higher purchase price if you never get it?" If the buyer can't qualify or changes their mind, you don't get that price, and since there is not much penalty for such an outcome, there is no reason for them not to tie the property up in escrow, where nobody else can buy it, either.
For these reasons and many others, nobody sane is going to accept an offer that doesn't include a deposit. Don't waste your time making one.
Caveat Emptor (and Vendor)
Original article here
When I checked my traffic on New Year's Day, it appears this site got its 3,000,000th visitor sometime early on December 14th.
Thank you all for stopping by.
Microsoft's Zune players freeze on New Year's Eve
Thousands of Microsoft's Zune media players -- the software company's answer to Apple Inc.'s iPod -- unexpectedly conked out Wednesday and showed users an error message, prompting references to "Y2K for Zunes." The problems appeared when people tried to start up their devices.
Good thing Microsoft doesn't make airplanes. Or hospital equipment.
And if Microsoft made my parachute, I'd think very hard about staying with the airplane that's going down in flames.
In the meantime, someone should ask Gov. Richardson exactly what tech jobs can't be outsourced. Moving skilled U.S. jobs offshore may be a trend that's already taken off, but why should Washington provide the airplanes? Perhaps that should be question No. 1.
I don't want often say this, but Michelle Malkin has this one absolutely correct: Jimmy Carter & Habitat for Humanity built shoddy homes
But now that it's striking a media darling charity, the legal environment that has raised the cost of housing for everyone substantially is suddenly something bad.
These defects are survivable. Given the benefit of a Habitat for Humanity home, I would happily deal with a cracked slab or settling or repair issues.
Those who have the same issues who bought their homes from a for-profit developer have some additional justice on their side - but they should still be required to come up with specific reasons why the developer is liable. If I want to sue my neighbor, I have to convince a jury that neighbor did something specific and actionable to me. But in the case of suing developers or the wealthy in general, the case that gets made is essentially, "They're wealthy and I'm not!"
via Instapundit, Howard Jarvis Taxpayer Association says we are facing a Pension Tsunami
Actually, he tells only part of the story of malfeasance. When California and municipal coffers were full with property taxes from the real estate bubble, the correct thing to do would have been to pay down debts and invest for the inevitable crash or at least slowdown. Instead, they not only spent all of the extra on new projects, but committed themselves to continuing to do so for the forseeable future, and borrowed even more money on the assumption that the good times would not only continue unabated, but accelerate. They invested less money than they were supposed to setting aside (per their own actuaries), but in highly speculative fashion which might have made up the shortfall if the good times had somehow continued. And when the inevitable collapse finally arrived, they were left in basically the classic Wile E. Coyote position by their own doing.
The financially prudent thing to do was obvious all along, but fiscal prudence doesn't translate well into buying votes for incumbents. Classic Roman bread and circuses. Look into the real - economic - reasons why the Roman Empire fell apart. If you don't understand now, you will have your eyes opened.
The parallels with US Politics of today are eerie. And the largest differences between the situations aren't working in our favor.
Every once in a while I get someone who is unhappy with required paperwork for privacy reasons. There are three forms that are the driving force behind this.
The first is the standard form for a mortgage loan application, known in the business as the 1003. Admittedly, the form does ask for rather a lot of information. It's comprehensive, and intended to paint your complete financial picture, so they can make a decision on whether or not to grant the loan. It also asks for irrelevant items like ethnicity so that the government can track whether the lender is discriminating (and they are dead serious about requiring ethnicity. If you decline to state, whoever takes the application has to take a guess). This also means it asks for a lot of information that a lot of people would, justifiably, rather not give out. Plus it's a pain to fill out. So some people don't want to, and quite frankly, I understand where they are coming from. Unfortunately, this is a government mandated form, designed to collect not only the necessary financial position data but also additional government mandated information. If you want a real estate loan, filling one out is is a legal requirement. There are only two ways to avoid filling out this form completely and accurately. In order to avoid filling it out completely and accurately, you must either 1) Lie or 2) Buy the property without a loan from any regulated entity. Lying is not recommended. It is a very bad idea. Lying on a 1003 is perjury, and there's likely to be a charge of fraud added into it. You are told point blank on the form that the information required to make a decision on your request for a loan. Misrepresenting your financial position in order to induce someone to lend you money is pretty much textbook fraud. Or you could do without a loan - buy the property for cash, by trade, for services rendered, etcetera. There really are all sorts of possibilities, but even if you put all of them together I don't think they amount to one percent of all transactions. Finally, you could get a loan from an unregulated entity. Basically, this means individuals. Borrow the money from Mom, from the mafia, or from a hard money lender. Unfortunately, even if Mom has the money, she may not lend it to you. And the latter two possibilities charge a lot more interest than the regulated banks, as well as other potential problems.
The second form that often become the issue is form 4506. This is the one that says your lender has a right to look at your tax returns (or a transcript with Form 4506-T). Many people think that this means they are violating the terms of a so-called "Stated Income" loan whereby they say what their income is, and the bank agrees not to verify the amount, but only the fact of the source of income. Well, the lender always has the right to insist on tax forms for documentation of income, and sometimes they do. But they don't often use this form for it, and it isn't to your advantage to force them to use it. As the form states, the IRS typically takes 60 days to respond to this request, and loans need to be done within 30. You want it done within 30 days if you have a rate lock, and if you don't have a rate lock, whatever you were quoted isn't real because it's gone now - the rates have changed. If the lender wants your information, they're going to require it whether you've signed this form or not. In either case, if they want the information, it's better for you to furnish it directly and immediately.
What they really use this form for is when they get ready to sell the loan. Since all lenders want to able to do this whether or not they make a habit of it, and they get a better price for the loan if they can verify that your income qualifies, they want you to sign the form. If they pull it and you qualify, they get a better price for the loan. If they pull it and you don't, they tried. If you refuse to sign the form, they are well within their rights to deny the loan. So they are going to require you to sign the form as a condition of getting the loan. I can commiserate with you all you want, but it wouldn't make any difference. Options to get around this are basically the same as for the Loan Application: Friends, family, or Lenny the Loan Shark. One of the 4506 forms is almost a universal requirement for lenders, especially in the aftermath of the Era of Make Believe Loans.
The final form that causes resistance is the Statement of Information. Like the Loan Application, this form has a lot of detailed information, and sometimes people don't remember all of it. This form has nonetheless become a routine requirement, but of title companies, not of lenders. The reason for this is fairly easy. Let's say your name is John Smith. Let's say you live in Los Angeles County. There are going to be a large number of documents in the public database in which John Smith or some close variant (e.g Jack Schmidt, Eoin Smythe, or Jon Smitt, among others). Any one of these could have an effect upon the policy of title insurance. Some of them, like a child welfare lien, never go away. Back when I worked for title companies, I could tell you about having to go back forty years, and in some cases further, looking for documents which might pertain to the person in the transaction. In populous counties, the list of documents alone can go to a hundred pages of single spaced stuff, and the title company has to be certain that 1) it isn't you, or 2) it doesn't effect the transaction for some reason, before they agree to issue the policy of title insurance. Guess what? The reason the document list is so long is because of the commonality of the name, so the long lists come up a lot more often than the short ones. Even if your name is something truly unusual (mine is uncommon), they've got to check out all close variants, anglicizations, and whatnot. So to toss out as many documents as they can, as quickly as they can, the title company requires a Statement of Information. Without that, it can be prohibitive to even run through the preliminary check. These people they are paying to do these searches rapidly become skilled and fairly high paid employees, even if they start out cheap. So the title companies want you to fill out the Statement of Information. It's one of those forms you don't want to lie on or conceal information on as well.
Don't want to do it? The title company will tell you they don't want your business. No policy of title insurance, either owners or lenders. That's your choice if you don't need a loan on the property and you're willing to take the seller's word that they really do own it and that there are no title issues. I wouldn't be. I've dealt with too many properties where there were known title issues. Nor are lenders nearly so glib about it. In order to get the loan, they require a lender's policy of title insurance, and whether it's a purchase or a refinance, you need a lender's policy of title insurance. If you're dealing with Lenny the Loan Shark, he doesn't care that you've lost the property to the forgotten first wife (via a three day marriage) of Mr. Jones, three owners before you, whose brother apparently inherited and sold the property in thirty years ago, but then the former Mrs. Jones just found out about it and sued for possession. If she (or her heirs) can prove her claim, she's going to be awarded the property. So you want title insurance.
Now, there are some protections you have under law. In California, I cannot use information obtained by real estate loan applications to sell your information to third parties. Once the loan is closed, however, the lender can share your information with sister companies. Heck, I've had lenders take the information I've gathered and call the client to offer them a direct deal. Cancel the transaction with me, they say, and they'll give the client what they think is likely to be a better deal. Pretty sweet, huh? Steal my payment for the client I spent my time, money, and effort to find, and then brought to them. Unfortunately for these lowlifes, I do loans cheaper than they usually expect, and instead of canceling, the client reports it to me. Needless to say, these lenders don't get any more business from me. Title and escrow companies can similarly share information for marketing purposes. I always tell people who are concerned to write that they opt out of all marketing on the first form the title or escrow company wants them to sign or fill out. That puts the onus on them not to share your information.
Caveat Emptor
Original here
On a regular basis, I see advertisements for real estate offices that say "discount broker - full service".
This is nonsense. Actually, it is a calculated lie.
A discount broker has consciously chosen a business model whose economics do not permit them to give the same service provided by a full service provider. Here's the rundown.
A discount broker's listing agreement typically calls for them to receive 1 percent of the sales price, and the "selling broker" to receive the area standard, whether it's 2.5 or 3 percent (perhaps higher in some areas). Some few will reduce the selling broker's commission if they end up engaging in Dual Agency.
A Full Service broker's listing agreement typically calls for both sides to get the same 2.5 to 3 percent.
So a discount broker is saving you 1.5 to 2 percent of the cost of selling your home, if it sells. However, the majority of the ones I'm familiar with also want to be paid in cash up front, as opposed to making it contingent upon the successful sale of the property.
Let's ask: what does a selling broker or agent do?
They put your property on MLS and put a sign in the yard, of course. And when there is an offer, they serve as "go between" on the negotiations.
This is all a discount broker can afford to do. They have expenses of being in business. Rent, machinery, assistant's salary, etcetera. It's not like they get to freely spend every dollar they are paid, and you're not paying them enough that they can do more. Furthermore, their business model requires them to sell more properties than a full service broker, just to stay in service. The difference in their compensation between a $450,000 sale and a $470,000 sale is only $200. Which would you rather have - the high likelihood of a $4500 paycheck in a couple weeks, or the hope of a $4700 paycheck eventually? They're human too. They are much more likely to advise you to take the sale in the hand now even when you would likely do better to wait. Even though it would make a difference of nearly $20,000 to you (and that may double the money you actually get from the sale in many cases, while making the difference between walking away with money and a short sale in others), it's not important to them. Full service brokers are hardly perfect either, but they tend to be at least somewhat stronger negotiators on your behalf. At least the $20,000 difference it makes to you means $500 or $600 to them.
A Full Service broker can afford not only the Multiple Listing Service and the sign in the yard, but also ads in the papers and other places that people actually see. MLS is the single best way to sell a house, but hardly the only one. Signs in the yard help me find clients and keep my fellow agents from bugging you for the listing, but rarely actually sell that house. Ads in the correct papers at the correct time are the second best way to sell the property, and full service brokers can not only afford them, but they are motivated to do them by the "carrot" of the doubled commission if they also find the buyer. Open houses also help significantly, and full service brokers and their agents have a business model which makes holding frequent open houses worthwhile and advertising them correctly a paying proposition. Furthermore, you're likely to see better offers off of these sale sources. MLS offers are more likely to be people looking to buy on the cheap, whereas advertisements and open houses target people who want to live in your neighborhood. Once you have an offer, full service types tend to be tougher negotiators. Finally, once you accept an offer, the prospect of getting a larger paycheck motivates them to work harder getting the sale consummated, including being at the property for inspectors so that you don't have to. Some discount houses do a decent job of this last, but full service do better.
Which of these alternatives is better? Well that depends upon the state of the market and your situation. In a white hot market where everything that gets listed gets four offers within three days and bidding wars break out between prospective buyers, a discount broker or agent is likely to be the way to go, especially if you mostly care about getting it sold, as opposed to getting the highest possible price. If, on the other hand, the market is a much cooler one like most of the country nowadays, and it takes considerable effort to bring in any offer, or if your property has issues that make it undesirable (less 'curb appeal' than average), you're likely to want a full service broker or agent. Furthermore, if you want to get the best possible price, you want an agent who can and will devote the necessary time to your property.
Your situation also plays a part. If you don't care if the property sells tomorrow, next year, or at all, a discount broker is more likely to meet your needs. After all, if you don't get a good offer, you'll just keep the property. On the other hand, if you need the property to sell fast, or if you need the offer to meet certain criteria, and most especially if it would be difficult for you to accommodate inspections yourself (for example, if you're now hundreds of miles away), a full service broker or agent is likely to be the choice for you.
I have seen many sales where paying a full service commission would have caused the seller to end up with more money in their pocket, and I see more every week. My article Production Metrics versus Consumer Metrics illustrates yet another aspect of this dilemma.
Discount Real Estate Brokers should also not be confused with Discount Mortgage Brokers. The "discount" part of a real estate broker's name usually refers only to listing agreements - people who want to sell a property. For customers who approach them as property buyers, these places usually receive the same full commission that anyone else does. There are exceptions where they rebate part or all of their commission for buyers, which should be disclosed and committed to in writing. But typically if you use them to buy, if it's 3% for the full service folks, it'll be 3% for them (and if you're listing with them in a Dual Agency situation, the difference gets rebated to the buyer, not to you). Furthermore, I have directly encountered several of them who benefit from the presumption that any loans they provide will be as low cost as their real estate services, and this is far from the case. I've had direct dealings with very well known discount real estate brokerages, and their margin on the loan they got their borrower was much higher than mine - from triple to more than four times what mine would have been. My responsibility was to my clients, so I kept my mouth shut and got my clients their money for the sale of the property. But inwardly I was definitely wincing.
Caveat Emptor
Original here
Well, sometimes. Okay, most of the time. But not always.
Foreclosures: Bargain hunters beware!
Myth no. 1: A big spike in foreclosures is right around the corner...Used to be true. Not so much any more. When prices are going up 20% per year, this is true. When prices have slid as much as they have, anybody who bought for peak or near peak prices is in trouble, not to mention the folks in negative amortization loans that got into a situation where they can't afford the real payment, and now they owe thousands of dollars more than they paid. Nonetheless (as the article mentions) the banks want the loan repaid. They don't want to own the house. A "hard money" lender will foreclose fast and hard, but a regulated lender wants the loan repaid, and they'll pretty much take a loss anytime they foreclose, and it's always bad business, because it's always someone who won't use that bank, and who tells all their friends and family. The bank isn't going to have a representative there to tell their side of the story, so no matter how justified they were in foreclosing, it's bad for business. They will put it off as long as they possibly can.
...That's because in most of the country, anyone who has owned a home for even a year or two is likely sitting on enough equity to sell or refinance if the loan payments become unaffordable.
It can take a couple of years after payments start being a problem before the lender decides to cut their losses and foreclose. Sometimes the individuals concerned go to heroic lengths to stay out of foreclosure, drawing out all their savings, even their retirements to meet the payment. They are usually ill-advised to do so; nonetheless I understand the emotional attachment that occurs. The peak for foreclosure is usually somewhere around the fourth year of the loan. Foreclosures are up now, locally, but look for them to start going up further at the end of 2007, as the option ARMs really took off in 2004.
Myth no. 2: Foreclosed houses sell for far less than their market value.In a study of foreclosure sale prices in more than 600 counties nationwide in 2005, Christopher Cagan of data provider First American Real Estate Solutions found that, on average, foreclosed properties sold for about 15 percent less than comparable homes in the area that were not distressed. But in states where real estate prices have risen the most, including Arizona, California and Virginia, foreclosed properties sold for within 5 percent of full market value.
This is true. Furthermore, many foreclosure homes have maintenance and repair issues. If I can save my several tens of thousand dollars of equity by fixing the property up a little bit and cutting the price a little in order to sell it before foreclosure, I'll do it. On the other hand, if I bought it for $500,000 with a 5% down payment on a negative amortization loan, and now it's only worth $420,000, my investment is long gone, and any work I do and any money I spend is helping nobody but the bank. Some people may strip the copper out of the walls for scrap (I've seen what a few such people have left behind). Some people may even take a sledgehammer and break things in one last act of spite.
In highly appreciated areas, the auction is usually the worst time to buy. Get them from the owners before the lenders pile on all the default and foreclosure fees, while there is still something to save for the owner, equity-wise. Get them from the lenders as REOs after they fail to sell at auction. Depending upon who forecloses, that can wipe out entire trust deeds. For instance, if there's a first and a second on the property, and the first forecloses, that second is gone. Dust. History. Worthless paper with unimportant markings, basically good for fire starter. If it originally sold for $500,000, and there's a $400,000 first and a $75,000 second, but the property is only worth $420,000 now, that second holder is crazy if they show up to the auction to defend it, especially since the holder of the first has added thousands of dollars in fees, every penny of which gets paid before the second gets a penny. The second is unlikely to get a penny, and bidding on it is throwing good money after bad. It's a waste of an employee's time, if nothing else. For buyers at auction, there's a key phrase to remember: cash or the equivalent. You don't win the auction and then arrange financing; you have to have that first. This doesn't apply to sales before and after the auction. Nor does California's ninety percent rule.
Now, you are not (if you're smart) buying at auction sight unseen. You can usually make an appointment to see the property in the days before the auction. You should also look at other properties in the area. Know the market before you bid. Know what you intend to do with the property, know how much it's going to cost. Depending upon the law where you are, there may be a building inspection required, or perhaps you can take an inspector with you. This costs money, so you may want to preview once before you haul the inspector out there. Do your homework before you toss your money into the ring. That's what the people who make money at foreclosure auctions do. It's practically a full time job if you want to do well, and if you're not doing it all the time, a good agent is a lifesaver. Every situation is different, and it takes a certain amount of experience to know the best way to approach buying a given distressed property. You're competing with people who do this full time for a living. Ask yourself questions like "Why should I be willing to pay more for this property than Joe, who's been doing this for twenty years?" Auctions get crazy and emotional. If you have someone there to help take the emotion out of it, you are less likely to waste large sums of money. If you have someone there to help point out the pitfalls, you've probably just saved yourself every penny of their commission and thousands of dollars more besides. So long as they do what they say they will, of course.
No matter what else is true, there is always an element of risk in buying a foreclosure, much more so than most other homes. The owner (the lender) has never lived in the property and is exempted from most disclosure requirements. Often, they honestly don't know about problems that exist. This doesn't mean they don't have to tell you about problems they know about, but having never lived in the property or dealt with its maintenance issues, they just have no reason to know about many problems that really do crop up. Furthermore, the lender addendums that lenders will require to be signed make buyer due diligence difficult, and lenders will not fix anything they don't have to. It can be a real struggle forcing them to make repairs to safety and habitability issues, as they are required to do in California. It is also my experience that the agents that work for lenders aren't at all hesitant to defraud buyer's lenders in concealing property defects that are loan killers - a buyer's lender who may be another branch of the lender that owns the property.
Buying foreclosures is not generally for people who want to just move their furniture into a property. Buying foreclosures can be quite rewarding, but you need to have a certain amount of financial resources to be able to withstand the consequences of the risk if it goes bad.
Caveat Emptor
Original article here
On a fairly regular basis I get email asking what I think of this or that loan calculator on the web, this or that predictive model for real estate prices or loan rates, etcetera.
Loan calculators are pretty simple when you get right down to it. Numbers go in, other numbers come out. It's just math - except that you've got to be careful about the numbers going in. Just because your balance is $400,000 now does not mean it'll be $400,000 after the refinance. It's very possible to do a zero cost refinance that adds nothing to your loan, but most people don't do it. Furthermore, I know I've said this before, but the only calculator out there that I trust is one that I know the provenance of. I've caught more than one company that had programmed its calculator to low-ball the payment. There's no way to tell for certain except using your own calculator, and if you have your own financial calculator, why are you using the web? You can cross check, however, because it's rare that two calculators will be programmed to yield the same wrong answer. Also remember to add in closing costs and prepaid interest and escrow accounts, if you're going to have one, and always figure the cost of any points after everything else is added in there, because that's what the bank is going to do. Finally, don't take it for more than it's worth. Just because they tell you, "nothing out of your pocket," does not mean there are no closing costs. They exist. Somebody is paying them, somehow. Unless you know for a fact otherwise because you've discussed it and know where the money is coming from, I'm guessing that "somebody" is you, and they're getting rolled into the balance of the new loan. I've had people bring me paperwork from other companies showing new loan balances thirty thousand dollars higher than they were expecting, with correspondingly higher payments. (I've also told people to never shop for a loan based upon payment more than a few times, also)
For spreadsheets, what you can get is usually an analysis of one variable per spreadsheet. I've programmed a loan comparison spreadsheet, but it only compares two alternatives at a time and it's not really suitable for use with the public, because you have to understand the limitations and GIGO factor. Just like I've got spreadsheets that answer the "rent or buy" question, among others, but you have to understand the limitations on the results imposed by your model.
As a computer programmer, I make a pretty decent loan officer. In order to compare financial information via spreadsheets, you have to understand what points of comparison the calculations are meant to compare. If your data is out of whack, if your assumptions are away from reality, or if you're trying to apply the comparison outside its design limits, what you get is useless.
I have several spreadsheets I have programmed and use. All of them have limits that need to be understood in order to get useful information out of them.
The first is a rent versus buy spreadsheet, that I first talked about in Should I Buy A Home? Part 3: Consequences. In that article, I spent a good paragraph telling you what my assumptions were in cranking the numbers. I think they are good and reasonable assumptions for the markets I have seen in my area in my lifetime, but many people might not. I just had someone make a comment to the effect that "rent doesn't increase with inflation." Well, it hasn't been keeping pace with the cost of buying of late, but that's not the same thing as not increasing roughly with inflation. Furthermore, we've gone through a period these last few years when landlords were keeping rental rates low in the attempt to have someone else pay most of the mortgage of their investment property. Judging by the "loaf of bread" or hourly wage comparisons, or anything else except the price to buy, local rents have increased by a factor very close to general inflation over my adult lifetime. Whatever you think of my numbers, though, the fact remains that they are assumptions, and if they do not correspond to future numbers, the conclusions they reach have no bearing on the real world.
The second limitation upon this sheet is that it's assuming smooth increases. This is not what happens, as anyone over the age of ten ought to know. Over longer periods of time, the data may tend towards an aggregate average, but that says nothing about any given year. In reality, some years are plus thirty percent while other years are minus twenty. Even if my assumptions for averages are good, the spreadsheet that predicts the next thirty years is useful mainly to predict overall level of the market many years out. The numbers for any particular year are so much garbage, as far as the real world goes, where a 5% differential between estimate and actual is often enough to render something worse than useless. Even if my assumptions for average return are right on the money (and if I didn't think they were pretty close, I'd use others), any particular year could be at the top of a peak or the bottom of a market trough. If you know what state the market will be in in a particular year three decades out, why the heck aren't you richer than the ten richest billionaires in the world combined? Knowing what the market was going to do these past few years is a lot easier than knowing what it'll be like thirty years from now! I have what I think are good predictions based upon good models, but I don't have any god-level knowledge of where any part of the economy will be thirty years from now, and neither does anyone else. We see the future dimly, reflected through the present and the past.
Speaking of which, let's drag one of the standard disclaimers out and air the dirty laundry. "Past performance is not indicative of future results." Averages of past results may be the only way we have of predicting the future, but those results depend upon unknowable factors. Somebody could invent something tomorrow that utterly changes the face of housing thirty years out. You think the urban planners of the 1920s foresaw urban sprawl? I know for a fact that they didn't. What no model of the future can predict is unforeseen factors. I can't tell you what they will be or what effects they will have, but I can promise you there will be some. In 1894, Michaelson (who first measured the speed of light) said, "Our future discoveries must be looked for in the sixth decimal place." This just a few years after the formulation of Maxwell's equations, and within a year Rutherford had changed the atomic model forever, while the basis of quantum mechanics was being laid, and less than ten years later were Einstein and relativity. Michaelson was right in a technical sense that precise measurements were the key to unlocking future discoveries, but wrong in the sense he meant it, that all the major discoveries had already been made. My predictive model is more detailed than most, and I do my best to include all of the factors I see, but I have no way of including factors that I can't see, and one thing I can promise you is that there are some. It may work out that I guess right anyway, but that doesn't mean there weren't any unforeseen factors, just that I got lucky despite them. The further out the model goes, the more it is dependent upon subsequent events no one can predict. Someone could announce man-portable fusion power tomorrow, or "Star Trek" transporters, or any of dozens of new potential technologies that could alter the world, and that's just the technological possibilities. Politics and demographics will utterly change in the next thirty years (Thirty years ago, more people were predicting the world conquest of communism than the collapse of the communist system. Mr. Carter's presidency was not the United States' shining hour).
Just because we know that the precise numbers are wrong, however, doesn't mean that those numbers have no value in predicting the future. The way the numbers will move relative to each other is much more important information. Population is increasing and will continue to increase. Demand in major urban areas and desirable areas will continue to rise faster than supply, and since such areas are where most of us live or want to live, the price of real estate will quite likely continue to increase faster than inflation. Particularly types of housing which are universally desired, such as detached single family residences sitting on a certain amount of land owned basically fee simple. PUDs and townhomes are less desirable for most folks, true condominiums less desirable yet, and below that are apartments. Offer most people the chance to move up on the ladder of desirability, and they'll take it. Since the only thing preventing most people from doing so is price, price is what's going to make it ever harder to make that transition to more desirable housing. Living space in a desirable location is a scarce good. Living space, desirable location or not, is a limited good. The only way to change this is to somehow manufacture more space or arrange to have fewer people to share it. I'm not aware of any plans to manufacture enough space to make a difference to the billions of people on earth, so I'm guessing that barring worldwide nuclear or biological warfare, population density is going to increase, demand for housing is going to increase, and supply is going to stay pretty much right where it is. Nonetheless, this is only a guess. My guess is that housing will be about four to five times as expensive as it is today thirty years out. If it's only twice as expensive as today, we'll all still live in million dollar houses. If it's eight times, we'll be in four million dollar houses. The wider the net, the more probability I have of being right - and the less useful the information is. Unless the price right now is something like two cents, nobody sane is going to invest money for that long without a better idea of what the payoff will be.
Whether I'm right or not is something nobody knows right now, or even how close. Actually, not being quite that much of an egotist, the question in my mind is more akin to "how far off will I be?" But the data is still useful, because it tells me that as long as my assumptions are anything like real, we're all looking at living in million dollar real estate - the only question is exactly when. It tells me what people will be need to be able to pay every month, at least in a general sense, and it tells me that more and more people are going to get priced out of real estate, or down into less desirable housing, and that real estate is therefore going to be a quite satisfactory vehicle for creating personal wealth.
On the other hand, no system of projecting the future is better than the limitations imposed upon it by limited foresight. If the population of the United States drops to 1789 levels all of a sudden - or 1607 levels - all bets are off. Of course if that happens, most of us won't be here to worry about it, and the ones that are will have bigger problems than the price of real estate. It's pointless to waste time worrying about the price of real estate in such possible circumstances, where the price of real estate would be the least of our worries.
Caveat Emptor
Original article here
You might get what you pay for. You don't get what you don't pay for, despite the fact that the local dog target loves giving discounters free puffery.
I'm not against discounters. I'm very happy to do a discounters work for a discounter's price. Fifty percent of the pay for less than ten percent of the work and almost none of the liability is a real win as far as I'm concerned. The difference is that I'm not willing to pretend that you're getting the same value from me. In fact, the amount of value the buyer receives from their alleged "agent" is pretty much negligible, and it would be a lie to pretend otherwise.
Let's illustrate with a recent example. Some full service clients of mine had gotten interested in a property. They wanted a fixer property with potential and a view, and they asked me to check this one out. Yes, it had a view, but the view was of a high school stadium, making peaceful enjoyment of the property rather hit and miss, subject to the local sports schedule. It had some potential, true, but every surface in every room needed to be redone. It is going to take $100,000 to get that potential, and the property would only be worth maybe $40,000 more than the owners are asking. Leave out those pesky numbers and a less capable agent can make it seem like a great bargain. If all you're thinking of is a potential $5000 rebate check from the buyer's agent, which can be fraud for reasons similar to these, you may think you got a deal from a discounter. Lots of people never do figure out how much that rebate check actually cost.
If they had been clients of a discounter, they would have been in escrow on the first property. Too bad about that $100,000 they'd have to spend to get $40,000 benefit. On the other hand, I found the same people a property not far away that needed about $40,000 worth of work to be worth $120,000 more than the asking price. What does a discounter do? Write the offer on the first property. Now you've got a property you need to put $100,000 into to make it usable, that's worth only $40,000 more than you paid. Money the discounter would have rebated: roughly $5000. If they didn't have a full service agent to compare with, it even looks like a great deal, because none of the value I provided these folks shows up on the HUD 1 form, or anywhere else as numbers on paper. The value is still there, as my clients know.
If you know enough about the state of the market, what problems look like and what opportunities look like, you may spend less with a discounter, or get a rebate that doesn't cost you several times that difference. If you know everything a good agent does, there is no reason not to put that money in your pocket. But if you know everything a good agent does, why is the discounter making anything? Why aren't you doing your own transaction? Why aren't you in the business yourself and getting paid for your expertise?
A full service agent goes a long way past filling in the blanks on Winforms and faxing the offer. When I go out looking at 20 to 30 (or more) properties per week, I'm not just finding individual bargains. I'm also learning about the general state of the market, what things to look for in a given neighborhood, what common problems are with a given model of house. I know what's sold in the neighborhood recently, and I know what it looks like because I've been inside it, and I know how it compares to other stuff that's out there now. I have a pretty fair idea of what it's going to take to beautify properties, and I know what they'll be worth when the work is done, because I know what other stuff that already looks like that has sold for recently.
Real estate is a career. It may not absolutely require a college education, but many agents have one, and know many things you can't learn in college - because the professors don't know, either, unless they're active real estate agents. A good agent spends a lot of time and effort not only learning their local market, but keeping their knowledge base updated. This thing changes constantly, and it doesn't even change uniformly. How did La Jolla get to be La Jolla? I assure you it wasn't some random seagull anointing the neighborhood from above with the Bird Dropping of Higher Property Values. Rancho Santa Fe doesn't even come close to the ocean, and it's the highest mean property value zip code in the nation. How did your neighborhood get to where it is? Is it likely to change, and how? What are the known and probable upcoming changes in the neighborhood? How is it likely to effect your prospective property? Wouldn't you like to know about that redevelopment zone - or the railroad tracks they intend to drive through the area?
Full service can be a very hard sale when all that you consider is the numbers on the HUD 1. There just isn't any space for "Agent kept you from making a $60,000 mistake," let alone, "Agent showed you an $80,000 opportunity." But people who know property know that there is a lot more to every transaction than the numbers on the HUD 1. If you're dubious, may I suggest this experiment when you're ready to buy: Find a couple full service agents willing to work with a non-exclusive buyer's agency agreements, and sign them. Then compare what happens as compared to the service of the discounter you use for properties you find yourself. There is no need to sign even a non-exclusive agreement with a discounter, by the way, as the sales contract will note the agency relationship for that transaction. Like I said in How to Effectively Shop for a Buyer's Agent, let the ineffective alternative select itself out.
I'm perfectly willing - happy, even - to do discount work for "discounter" pay. I only make half the money, but I can service a lot more than twice the clients for a much smaller level of risk and still be home in time for dinner. I'm even a better negotiator than dedicated discounters, because unlike them, I know what's really going on in the areas I serve. However, saying "full service at a discount price," does not make it so, and I refuse to pretend that it is. Same as saying a fifth-hand Yugo is the same as a Ferrari, saying something does not make it true. Furthermore, the people who approach me for discount work usually end up understanding that a real professional is worth a lot more than the extra money I make, and are happy to pay it. Most people have no problems understanding that the reason a good car commands a higher price than a bad car, let alone a skateboard, is because a good car provides more value. People will pay $100 per seat for decent - not great - musicians in concert when you couldn't pay them enough to attend a garage band practice session. Why should this principle hold any less true for expert help in what is likely to be the biggest transaction of your life?
Caveat Emptor
Original article here
The guidelines for this carnival.
As always, I arranged the entries that met guidelines into three levels, based upon originality, usefulness to the consumer, and how much thought and effort and research went into an entry.
STRONGLY RECOMMENDED
There were no strongly recommended articles submitted this time.
RECOMMENDED
Home prices to decline another 20% has a lot of data and is worth reading for the thought process, but see how many reasons you can spot for disagreeing with the conclusion as I do.
Don't let your dream house become a nightmare discusses rehabilitating "meth houses" and is specific to Colorado, but a lot of the information applies elsewhere.
New Home Staging Tips That Will Sell Your House You Can Do It Yourself This is only a small part of the battle, but an important one.
Your host presents The Hope (Dashed) For Homeowners Program
MET GUIDELINES
The Benefits of a Pre-Retirement Vacation Home
Spruce it Up - 25 DIY Tips to Improve your Home's Exterior Looks like link-trolling so they can sell engineering schools, but they did meet the guidelines.
Real Estate Supply And Demand gets the idea right but is very basic, to the point of wondering if you learned anything from the time you spend reading it. But it did meet guidelines.
Santa, All I Want for Christmas is a Decent-Sized, Decent-Priced House. Observation: if the properties are selling for those prices, then they're not overpriced, are they?
Getting a Second Mortgage Generic, and really no useful information, but it does meet guidelines.
SPAM AND OTHER RIDICULOUS SUBMISSIONS
The mental midget at NLP Marketing Blog sent a self improvement post that did not so much as mention real estate on the benefits of visualization. Visualization lacks the real world feedback of whether you're actually getting the skills correct - for instance, he probably visualized getting accepted and a link from this carnival, instead he is getting the real world feedback of a severe fail. Given this feedback, it's conceivable he'll will gain the skill of submitting to carnivals. Then again, maybe he'll just go visualize writing something on real estate. But if he'd better actually do so before submitting to this carnival again.
Campello Apartments is trolling a "get rich quick" scheme guaranteed to get him rich. Others, not so much. Very short on details, no concrete information whatsoever. Avoid this clown if you value your wallet.
For those who might object to the treatment their submission received, the relevant information has been in the guidelines since before submissions were being accepted for this carnival. Having been told to read the guidelines, you willingly submitted these posts. Live with it.
Consumer Focused Carnival of Real Estate will return in one month on January 30, 2009, here at Searchlight Crusade, unless someone else wants to host. Deadline for submissions will be Midnight December 28th.
via Michael Barone, an historian compares today not to 1929, but to 1873. I think the data is a much better fit.
Reconsidering Watergate and Deep Throat
A bureaucrat, disgruntled for being passed over for a promotion, using the FBI to make political war upon the President of the United States. Somebody paid to carry out the policies of his superiors sabotaging those policies for revenge. If he'd have been a whistleblower, he would have come forward publicly at the time to make his accusations - and they would have brought down Nixon much more quickly. Instead, he played the game to his personal advantage and continued his career for another decade, keeping his involvement secret, while dragging the pain out for the entire country for more than two years.
Across Mideast, thousands protest Israeli assault
From Lebanon to Iran, Israel's adversaries used the weekend assault to marshal crowds into the streets for noisy demonstrations. And among regional allies there was also discontent: The prime minister of Turkey, one of the few Muslim countries to have relations with Israel, called the air assault a "crime against humanity."
Where were all of these outraged demonstrators when Hamas was using civilian cover to attack Israeli citizens by raining down rockets on their head - sixty per week on average for the past year, during a period of so-called "truce"?
Furthermore, Hamas called off that "truce" and with an open declaration of hostile violance towards Israel and tripled their level of rocket assaults. Where were these people when Hamas was raining death and destruction upon Israel, and Israel was forbearing retaliation?
One demonstrator carried a banner reading, "The aggression against Gaza is an aggression against the whole Arab nation.""Down with America, the mother of terrorism," read another.
In Amman, Jordan, about 5,000 lawyers marched toward parliament to demand the Israeli ambassador's expulsion and the closure of the embassy. "No for peace, yes to the rifle," they chanted.
How did that work out for you last time? The time before that? The time before that? Has it ever worked? The Palestinian people exist at all because of Israeli restraint. Were the situations reversed, does anyone have any doubt as to what the Palestinians (or Arabs) would do to the Israelis?
Israel is in a situation where they cannot afford to lose once. Given that fact, I do not understand why they have not driven the Palestinians completely out, dispersed them to the four winds, and put an end to the issue, but they haven't. They're more compassionate than I am, and far more compassionate than their opposition - which translates into Palestinian as "enemy"
In Jordan's squalid Baqaa camp for Palestinian refugees and their descendants, protester Yassin Abu Taha, 32, blamed America and Israel for the Middle East's problems."The Israelis kill our people in Gaza and the West Bank. The Americans kill our people in Iraq. We're refugees, kicked out of our home in Tulkarem in 1967 and we're still displaced," he said, bemoaning his family's flight in the 1967 Mideast war.
If they're such poor pitiful victims, why don't their fellow Arabs allow the Palestinians to assimilate into their society? Why don't they improve the lot of the Palestinians? The other Arab countries or the UN could permanently solve this issue with the expenditure of about two years budget for the ongoing problem created by continuing to deny the Palestinians the ability to assimilate into the rest of Arab society - but then they wouldn't have a ready made grievance against Israel, would they?
In Iraq, where the government has also condemned the Gaza airstrikes, a suicide bomber on a bicycle blew himself up amid a crowd of about 1,300 demonstrators in Mosul who were protesting against Israel, killing one demonstrator and wounding 16, Iraqi police said.
We're definitely into Life of Brian territory here...
Private Papers: More California Dreaming
California is a governmental train wreck in progress. Unfortunately, it being a state rather than a country, revolution is impossible.
Every purchase contract I write includes an addendum for Wood Destroying Pests. In California, this is accomplished via form WPA, a one page addendum that requires an inspection and details responsibility for who makes repairs. The work needed is separated into two sections. To quote from the actual standard report, Section I work "CONTAINS ITEMS WHERE THERE IS EVIDENCE OF ACTIVE INFESTATION, INFECTION OR CONDITIONS THAT HAVE RESULTED IN OR FROM INFESTATION OR INFECTION," while Section II is "CONDITIONS DEEMED LIKELY TO LEAD TO INFESTATION OR INFECTION BUT WHERE NO VISIBLE EVIDENCE OF SUCH WAS FOUND."
The standard around here is that the seller pays for Section 1 items, the buyer for Section 2. The reasoning for this is quite solid: The lender isn't going to fund loans for properties where they know about termites in the process of eating the property that they're taking as security for the loan. They could very well end up foreclosing upon a property that cannot be sold, or cannot be sold for the amount of their loan. Federal Reserve Regulations frown on that, so say the least.
So when I got this from an agent on an REO, I was skeptical
Hi Dan,
The bank will not pay the termite - Section 1. They said we must get bids and the buyer will need to pay for it. This is not allowable with VA. I already know how much it is - $1550 - I ordered the report. The property needs tenting.
I forwarded that to my clients, who responded:
Thanks for the update. As usual I have some questions.
1. (irrelevant to this article)
2. We are definitely eager to see the termite report. Are they likely to give it to us, and if it does show serious structural damage, can we back out?
3. Is the VA loan going to hinder this or is it a simple matter of writing another check?
4. Would they have told us about this if we were going the conventional loan route?
My answers?
2) They have to give us the information if they have it. Not only is it in the contract and the law, disclosure laws require it. The only legal way not to disclose it is if they honestly do not know. That isn't the case - they're telling us there is known Section 1 work needed.
3) Section 1 work eliminate the VA loan as well as any others unless it's done. It's a condition of the contract. The lender is going to want to see the report. When they see the report, they're going to say no. Section 1 work is a loan killer, no matter the loan type. The only ways to get around it are an all cash offer, or agreeing to eliminate the termite clearance from the contract.
4) They would have had to. See answers to 2 and 3
However, this work is the owner's responsibility - in this case, of the lender who owns the property. Section 1 termite work impacts safety and habitability; not to mention that no agent who doesn't hose his clients is going to agree to clients paying section 1 work before escrow is completed (in other words, before you even take title). Since transactions fail to close for other reasons at the last minute, this means you could end up paying for the work and not taking title. The property and our offer were predicated upon the property being in a certain condition, but now we know it is not in that condition. Work is needed to bring it up to that condition. Therefore, the property is worth less without that work being done. The owners can do this work, or they can give an allowance in the price, and since this work is necessary to get a loan, not doing it makes a major difference in the price.
You can decide what you want to do. This may be just a testing tactic. If we respond strongly, they may give on the issue. If they don't, I would very strongly advise you to reconsider the property - it's very possible that you would end up spending the money to tent the property and still not getting the property. But that isn't my decision to make.
I am certainly going to advise against deleting the wood destroying pest addendum from the contract offer, which would enable us to pretend to our lender that no such damage exists. Not only is it fraud (and they would come after all of us), but what happens if it were to turn out that damage was greater than represented by the sellers?
If they are going to stand upon what the agent is representing here, the property is worth considerably less than the asking price, and they are trolling for an agent who will allow their clients to be hosed in the interests of getting a commission check, or willing to commit loan fraud.
We went back and forth a bit, and this was what I ended up sending back to the listing agent:
My clients are indicating that their offer was predicated upon the Wood Destroying Pests Addendum.
Section 1 Work is required to be done by every lender and every loan type I am aware of. Failure to disclose it (when known to exist) to the lender is fraud. Therefore, it needs to be done prior to loan funding, and therefore prior to transfer of title. Since the only non-fraudulent way to get a lender to fund such a loan is to do the work, it is the responsibility of the current owner to obtain a termite clearance.
Furthermore, since required Section 1 work impacts both safety and habitability of a property, an "as is" transaction does not shield the current owner from the need to repair this fault.
So the current owner is advised that they are required by the terms of our offer and the need for most potential purchasers for financing to do the work.
Otherwise, may I suggest you solicit "all cash" offers?
Here is the situation: The current owner and listing agent know that there is Section 1 work that needs to be done. Knowing this, if we were to conspire with them to eliminate that particular phrase from the contract, we would be guilty of fraud, in that we would be asking the new lender to fund a loan where we know there is a disqualifying condition of the property, but failing to advise them of it. This would be particularly pointed in the case of an agent who also does the loan (and therefore has a fiduciary duty to the new lender), but it doesn't let everyone or even anyone else off the hook: That listing agent is conspiring with malice aforethought to keep relevant information secret from the new lender, as are the current owners, who happen to be a bank, and therefore should be fully apprised of what usual lending standards are. Fraud, fraud, and fraud.
They ended up rejecting our counteroffer. Chances are they'll find someone who doesn't mind committing fraud. Lots of agents do this, as evidenced by the fact that she barefacedly proposed this fraud in written communication (email). That doesn't change the fact that she is proposing an intentional concealment of known information that a party to the transaction (the new lender) has a legitimate interest in knowing, and that is just as much fraud as appraisal fraud, concealing cash back from the seller to the buyer, or any of a large number of other ways to commit fraud in consummating real estate sales. Remember that agents owe a duty of fair and honest dealing to everyone, not only contracted clients. That includes the buyer's lender, whomever it may be. Just because you may not deal with them directly doesn't make them any less of a party to the transaction. Lots of escrow officers and agents are discovering this now in regards to concealing sellers giving buyers cash back, because the property is therefore worth less than presented. The exact same principal applies to the termite report.
Caveat Emptor
I read a lot of the info. you have on your web page ... thank you.I don't live in San Diego so I'm not looking for a home.
What I am trying to decide is whether to sell or refinance.I live in DELETED. My mortgage payments are now approx. $2,400. I cannot afford to refinance into a fixed rate mortgage or interest only. I wanted to reduce my payments and I was recently offered a neg-amortized loan.
While I do have plenty of equity in the home, I balk at the thought of using my home as a piggy-bank. It's just not my style. I feel like I made a terrible mistake. I had a very modest home ... fairly low payments & property taxes ... but I wanted more, so I sold it.
I bought a good-sized lot with the proverbial "fixer-upper." Mistake #1 I should have thought of it as the "MONEY PIT."Anyway, five years later and I've just survived a remodel but I'm still struggling.
Do you have any sound advice/suggestions?
First off, despite your market being somewhere I am licensed, each area's market is significantly different. Unlike the loan market, each commuting area has enough of its own concerns that nobody can keep track of more than one - not really. If someone called me out of the blue and asked me to list a property even a few miles outside my normal area of San Diego County, I would not have a good idea what it should list for. I can do a comparative market analysis, but that's just cranking numbers, and there's a lot more to market knowledge than cranking numbers. In the last week, I've looked at between 50 and 60 properties, and in the case of 20 to 25 of them, I can explain to an idiot why it is priced wrong by at least 10%. Sometimes they're under, sometimes they're over. Whichever it is, it's not good for the owner. Some agents will tell you there's no harm in being high, which is a premeditated lie. Properties that sit on the market because they are priced too high will sell for less money than the owners could have gotten, and that's if they sell.
Some properties are money pits, while others are vampires, charming on the surface, while they embed their fangs permanently in your wallet. The best opportunities, however, are all fixers. The reasons a good buyer's agent is worth more than they will ever make are legion, no matter how much our local dog-target keeps pushing discounters. I just got a call from one pushing a property I previewed last week. Yes, it had a view, but the view was of a high school stadium, and every surface in every room needed to be redone. It's got potential, but it's going to take $100,000 to get that potential, and the property would only be worth maybe $40,000 more than they're asking. Leave out those pesky numbers and a less capable agent can make it seem like a great bargain. On the other hand, I found the same people a property not far away that needed about $40,000 worth of work to be worth $120,000 more than the asking price. Money the discounter would have rebated: roughly $5000. Difference in outcome: $80,000 in prospective equity and $60,000 of wasted work. Prospective differences in listing agents are every bit as large.
Now, let's consider the kinds of issues that might give you a better idea about what to do about your situation.
You say you've been through a remodel and have significant equity. That's good news in that you are not "upside down", but should be able to sell the home for more than you owe on it. That's better than a lot of folks right now.
However, the unavoidable fact is that it costs money to sell. A good listing agent is going to cost money - and a bad listing agent will cost you more, and this cost is no less real for the fact that most of it won't be on the HUD-1. A good listing agent is going to tell you to offer a good buyer's agent percentage, also. Furthermore, you're going to buy a home warranty, and a policy of title insurance. I warn my fixer clients that it's going to cost about eight percent of value to get the fixed up property sold at a good price - so they might as well include that estimate in the calculations of whether the property is worth buying in the first place. I'd rather work a little harder, and have a client that keeps coming back to me because they keep making a profit worth making. So figure eight percent of value in addition to the fact that my local market has been very soft for sellers, although things are changing now and the rest of the country may follow soon. The softer it is, the less you're going to need to be prepared to accept if you sell. For most of the last three years here, if you had a property that appraises for $500,000, you may only get $480,000 or less on the purchase contract - and you may have to give allowances on top of that. $480,000 less eight percent is $441,600, and if you have to give a $15,000 allowance for closing costs, that's $426,600. So you can have a good amount of equity on the face of things, and be upside-down in fact when it comes to the actual sale. Even if you have $100,000 in equity, it just turned into $25,000 to get you out from under a loan you can't afford. It depends upon your local market, the condition of the property, and the neighborhood it sits in.
On the other hand, given the fact that you cannot afford your payment, your alternatives do not include doing nothing. If you try to do nothing, you will have your credit ruined and lose the property as well as quite likely get a 1099 love note from the lender that says you owe taxes and possibly (depending upon whether or not your loan has recourse) a deficiency judgment. So doing nothing is not an option.
When I originally wrote this, another alternative was a negative amortization loan. Those are pretty much history now with long overdue regulatory changes, but I'll leave the example just in case they come back: Something fairly middle of the road in a negative amortization loan would have a payment based upon a nominal (in name only) rate of 1%, for which the payment on $400,000 would be $1287, saving you $1100 per month in cash flow. On the other hand, if your real rate is 7.75 (reasonably median), at the end of two years you owe $433,500, and that's not including the prepayment penalty. After three years, when most negative amortization penalties expire, you owe $452,000, assuming rates stay exactly where they are, which I do not expect them to. Even if you got the loan for zero cost, you spent $1450 per month of your equity. In order for you to come out even, you'd have to net almost $479,000. That means you need to get a little over $520,000 sales price in three years if you don't have to fork over that $15,000 allowance, or $537,000 if you do.
It's true that you don't have to make only the minimum payment every month. Nor do you want to. However, let's be honest with ourselves. For most people, most of the time, they will. Even if they had it to spend on the mortgage, the kids need shoes, they "need" a new car, or they "need" a vacation. My understanding is that less than 5 percent of the people who have negative amortization loans make bigger payments than minimum more than five percent of the time. So whereas you won't necessarily owe this much in three years, it seems a pretty good bet to me.
Now here's where people helping people in situations like yours get grey hairs. We're guessing at where the market is going to be in three years. Not only about what we think the general market will be like, but what we think this property will be worth. Some things are consistent. For instance, unless you do another remodel, it's unlikely your property will spontaneously acquire brand new cabinets and stainless steel appliances, and since you are stating that you can't afford your current payment, it's unlikely that you'll be able to purchase such. Your property will probably compare to the rest of the market about like it does today, or maybe a little worse. The carpet will get older, the paint on the walls will be a little older, the shingles on the roof will have used three more years of their useful life. You get the idea.
On the other hand, the market really doesn't have to gain much to offset this. Mostly it just has to firm up, and if it does so, then even a two and a half percent annualized rise in prices would cause you to break even. On the average, that's trivial. Less than half the overall average annualized rise. On the other hand, it's not something I or anyone else can guarantee. It's investment risk. The market could continue to slide for a while, or it could be completely flat. Once you buy an investment, any investment, there is no way to remove risk from the equation completely. One of the things that caused the problems a lot of the country has in the current market was agents who promised the people that their property would appreciate - and sometimes it doesn't. It's one thing for people to make the choice knowing the risks; it's quite another to sell them property by telling them that "real estate always appreciates," or even that "Real estate never loses value." Both are patently false.
People have a tendency to assume that the market will keep doing what it has been doing in the most recent past. At this update, lots of people are writing how my local market is going to lose another 20% in the next year - completely ignoring that we're no longer priced at economically unsupportable levels, and indeed, we're about thirty percent below where a macroeconomic analysis of real estate prices suggests that we should be. The excess inventory ("high supply") that was half the reason the prices fell has been steadily falling for the last year, people are now finding that they can qualify for more than they thought (removing the bar that has been choking the demand side). Decreasing supply and increasing demand: What do you think is going to happen? Furthermore, buyers are coming out of the metaphorical woodwork right now. I've been running every second of the last three months, and I haven't been soliciting - every last bit of business I can handle has been coming my way all on its own. Furthermore, in the high demand areas of town we're starting to see regular bidding wars like we did in 2003 and 2004, only this time the people involved have hefty down payments, and are qualifying for "A paper" thirty year fixed rate loans full documentation. Five years ago, military personnel had to settle for crummy housing unless they were an O-5. Now I'm finding even E-6s and E-7s beautiful detached homes, bigger than my own, of recent construction that they can actually afford to buy at current prices with full documentation loans.
There is one more level of complexity to add, though. What are you going to do for a place to live if you sell? What do the alternatives look like? How are rents, and what are likely to do in your area? Are landlords going to have to increase those rents? Are people moving out of your area, causing them to drop? A good agent in your area will know. Rents here are seeing significant upwards pressure, and although this isn't your area, the Era of Make Believe Loans is over. Sane landlords can't pretend that as long as rent makes up for the majority of what they spend, they'll eventually get it back with profit when they sell because the prices are rising as fast as they were. Apartments and condos make economic sense to rent out - single family detached housing, not so much.
These, then, are some of the things to consider. There's less risk in the "sell now" option, but you're accepting a significant hit by exercising it. If you hang on those three years, you might be just fine, or you might be hosed even more completely than you are now. When I originally wrote this, given that you know you can't afford the property, if you had come to me in San Diego, I'd probably have advised you to sell now (That advice would likely be quite different now). Selling is the safe option, however unsatisfying it is. Once you have sold, the hemorrhaging is over - you're not bleeding green every month. Sell to someone who can afford the property, and who can afford the risk that it will further decrease in value over the short term. The assumption would be that they would be getting a deal - but what if you hold on to the property and the dice come up snake eyes? You are looking at a maximum length of time before you will have to cut your losses or have them cut for you. This is a recipe for a disaster even bigger than selling now.
Caveat Emptor
Original article here
That was a question I got.
One point, either discount or origination, is one percent of the final loan amount. After all of the loan amounts and fees and what have you are added, for a loan with one point, multiply the amount by 100 and divide by 99, and that will be your final loan amount. For a loan with two points, multiply by 100 and divide by 98. The general formula is multiply by 100 and divide by (100-n) where n is the total number of points.
Points come in two basic sorts, discount and origination. Origination is a fee your loan provider charges for getting the loan done. Some brokers quote in dollars, most quote in points because it sounds cheaper than an explicit dollar cost. Most brokers out there charge one point of origination. To contrast this, direct lenders do not have to disclose how much they are going to make on the secondary loan market. And many direct lenders still charge origination. Judging the loan by how much the provider makes (or has to tell you they make) is a good way to end up with a bad loan. My point is that it's the rate, type of loan, and net cost to you that are important, not how much the guy is getting paid for doing your loan. Remember two things here, and they will save you. First, loans are always done by a tradeoff between rate and cost. For the same type of loan, the more points you pay the lower your rate will be, and vice versa. Second, remember to ask about "What would it be without a prepayment penalty?" It's a good way to catch people who are trying to slide one over on you, and the lenders pay a lot more for loans with a penalty, and the lenders make a lot more on them when they sell them to Wall Street, so they often do them on what looks like a much thinner margin until you ask the question "What would it be without the prepayment penalty?" Remember it.
Discount points are an explicit charge in order to offer you a lower rate than you would otherwise have gotten. To use an example I ran across the day I originally wrote this, six point five percent with one point, seven percent without. As I type this update, it's about 4.75 with one point, 5.25 with none, but the curve between the two is much steeper at the low rate end. On a four hundred thousand dollar loan, one point is essentially four thousand dollars, either out of your pocket where you're not earning money on it, or added to your mortgage balance where you are making payments and paying interest.
Is it a good idea to pay discount points, or is it a better idea to pay the higher rate? That depends upon the loan type and how long you keep it. Let's say the loan is $396,000 without the point, $400,000 with, just to keep the math easy. Your monthly interest charge on the first loan when I originally wrote this was $2310, on the second it was $2166. On the other hand, you would have paid $361 principal on loan 2, only $324 on loan 1. Today, the numbers are $1583 and $1733 cost of interest, $503 and $454 principal paid the first month. Here's the bottom line, though: You've got to get that $4000 back before you sell or refinance. Just a straight line computation, that second loan saves you $181 the first month. $4000/$181 per month is about 22 months to theoretically break even (and it's a little faster than that, because loan 2 pays off more principal per month). On the other hand, even after you've theoretically "broken even" there is a period where if you sell or refinance, you will inexorably lose money because you're paying interest on a balance that's higher than it would have been.
But now let's run the actual numbers. If the above loan is a thirty year fixed and you keep it four years, you're well ahead. You've saved yourself $6944 in interest and your balance is only $2159 higher. $6944 - $2159 = $4785. Even if your next loan is at ten percent, you're only losing $215.90 per year. Especially when you consider that at a cost of money now versus later, you'll never make it up, because you can invest that $4785 you saved and it'll pay more interest than that. Similar numbers apply to today's loan tradeoffs.
On the other hand, let's say the rate was only fixed for two years. After that, it is a universal feature of hybrid ARMs that they all adjust to the same rate. You are theoretically ahead by $363, but because of your higher balance, even if the loan adjusts to five percent, you're losing $154 per year due to your higher balance, and there is nothing you can do about it. Play now, pay later - and you still owe more.
There is no cut and dried answer about whether it's to your benefit to pay points. I tend not to do it, myself, because rates do vary a lot with time, and money sticks around in your balance. If I've got a zero or low cost loan and the rates drop half a percent, it's worthwhile to refinance for free. If I have a loan I paid a point for, I'm going to have to pay that same point again to see a benefit on refinancing, and as we've already discussed, if you don't keep the loan long enough, you've wasted your money. The median time between refinances is right about two years right now. I see no reason to pretend I'm any different from everyone else, but some folks do have a history of keeping loans a long time. You need to make your own choice to fit your own situation.
Caveat Emptor
Original here
I got a question about "what does it mean if my loan is not funded after right of rescission?"
It likely means your loan provider lied to you, probably from day one. Once you have signed documents, there shouldn't be anything but procedural matters left. Things that cannot be taken care of earlier. Things like final payoff coordination, the escrow officer using funds to pay homeowners insurance. Every once in a while, a good loan officer will get a subordination moved to prior to funding because it's on the way, but it is necessary to start the three day right of rescission now in order to fund on time under the lock.
Every once in a while, it'll be because of something happening to you in the meantime. Lenders who are risking hundreds of thousands of dollars don't just sit there and presume nothing has changed since the first time they checked it out. They are going to check again, right before they put the money to the loan, to make certain that nothing the loan was based upon has changed. So sometimes while they are doing a final Verification of Employment (making certain you still work there), the answer comes back that the borrower doesn't. The final credit check comes back with a score that no longer qualifies under that program. These are not the loan officer's fault, except inasmuch as they didn't warn you not to do whatever it was. Whether you quit your job or were fired, the result is no loan. So I always tell folks not to change anything about their life or credit without checking with me first. Neither I nor they can really do anything about layoffs, of course, but the point is not to voluntarily do anything that messes up your loan.
The vast majority of the time, however, what's going on is that the loan officer never had the loan. There's some condition holding it back that you, the borrower, can't meet. They have a choice between hoping to get around it or going out and actually finding a loan that you can qualify for and telling you about that instead. I shouldn't have to draw you a picture as to which choice they will likely make. Many times, they were teasing you with a loan that you had no hope of qualifying for as an incentive to get you to sign up. This is a standard "trick". They get you wanting that loan, which sure sounds good, and you apply. Unfortunately, that loan was never real, or never something you had a chance of qualifying for, but now they've got you signed up. Now you've done their paperwork, and you're mentally committed to their loan.
Now if it's an honest mistake, they are not going to have you sign documents. They're going to come back and tell you as soon as there is a condition they can't meet on loan qualification. But the question was about when you have signed documents and the loan doesn't fund. They can keep stringing you along, hoping it will happen, or they can come clean and tell you they can't do the loan. In the first instance, they might still get paid. In the second, they likely won't, because if you're smart you'll go elsewhere. Needless to say, this can waste a lot of time getting "one more document" from you or jumping through one more hoop. If the loan doesn't fund at the end of the rescission period and you are not certain as to why, you've probably been had. This is why I always tell people to ask for a copy of all outstanding conditions on the loan commitment before you sign final loan documents. Ask them to explain them, too. You see, once you sign loan documents and the rescission period expires, you're stuck with that loan provider. You can't go elsewhere unless and until they give up. Even if you have a back-up loan waiting to go, they can't do anything until the other loan funds or gives up, which could be weeks. Not a bad situation for an unethical loan provider to be in. In the meantime, the seller cancels your purchase and you're out the deposit. Or the rates go up and you're not getting a refinance on anything like the terms you might have really qualified for at the start of the process.
Caveat Emptor
Original here
Hi Dan wondering if you could help me out I'm getting a lot of different answers from a lot of people and I'm really searching for help I bought my house brand new (three years ago) for 550,000, and (the next year) I refinanced into a mta loan. which at that time was around 4.25% and now is 7.125%. I have a hard prepay of $12,000.00 which expires in (fifteen months) house just appraised for $775,00 balance on 1st loan 440,000 balance on 2nd 148,000. should I ride the next 15 months out to avoid pre pay or refinance now into a fixed. The rate on the second is prime plus zero.First off, a disclaimer. A precise infallible answer depends upon the rates when your prepayment penalty expires, something that is not currently known. I think thirty year fixeds will be in the low sevens, but I might as well be sorting through animal entrails to get that answer. I also think that the five year hybrid ARMS will stay about where they are, or perhaps even decrease a tad. But I don't know; nobody does. It also depends upon what comparable homes are selling for then, which determine your appraisal, and how long you keep the new loan.
Your rate moving like that is one of the reasons I recommend so strongly against negative amortization loans. The person who did your loan at the time had to know that, due to the nature of the mta yours is based upon, the rates were already set to rise into the mid fives for certain, and likely further, as older months were dropped from the average in favor of newer. Were it fully explained, would anyone rational agree to take a loan where you get a lower rate for six months, but then the rate rises inexorably, as the treasury rates the loan is based upon had already been rising, to a level that is well above what is available on A paper three or five year fixed? And with a three year prepayment penalty, so you're in precisely this sort of situation?
"No points" thirty year fixed rate loans were sitting right around 6.75 (Note: This is a republished article. No points 30 year fixed rates as of this date are actually around 5%, but how to run the numbers is what is important), and you're at 75% Loan to Value. The bad news is you're definitely a jumbo loan, as the conforming limit is $417,000. This boosts your rate a tad, depending upon the lender, to 6.875 or 7.00 percent without points. I prefer to discuss loans without prepayment penalties or points, but it might be in your best interest to pay a little to buy the rate down if you refinance. I'm going to use seven, as it makes the math slightly easier.
The good news is your loan to value ratio. According to the numbers you gave me, you're below 80 percent, even with the prepayment penalty. You owe $588,000 (If you bought for $550,000, the turkey did this negative amortization loan scammed you out of a lot of money), and the prepayment penalty boosts this to $600,000. Assuming you have enough liquid reserves to put up the money for interest and impounds, this means the costs of doing your loan are going to put you at about at $605,000 new balance (perhaps a bit below, but let's keep the math as friendly as possible).
Basically, it cost you $17,000 to save yourself an eighth of a percent on the interest rate. Under more normal circumstances, I wouldn't even put that one through the calculator. No way that's in your best interest. But your real rate on that MTA is going to keep rising - by at least another quarter percent due to increases already on the books, more likely half. I'll use 7.5 as your mean rate. Furthermore, the second is at 8 percent, likely to soon be 8.25. Monthly interest under the current loan at that rate: $2750 for the first, $987 for the second as it is. Monthly interest on the new loan, $3530. It saves you $200 per month in interest, albeit with a higher payment, $4025 as opposed to what you've got now. I am assuming you have documentation that you make enough money to justify the loan in the underwriter's eyes, and that your credit score is about average. On the other hand, divide $17,000 by $200 per month, and you get 85 months to break even on the cost of doing it.
However, this decision does not take place in a vacuum. You can't let that negative amortization loan go forever. In fifteen months, I think equivalent rates will be about 7.25, which translates to 7.5 percent for your loan. Furthermore, I believe prices will be a little lower then, so in order to refinance, you're likely to have to split into two loans. Assume prices are 10 percent lower. Any of these prognostications is an educated market guess, no more, and I could be way off. The appraisal would come in just under $700,000, but let's say $700,000. Your first, for $560,000, would be at 7.5%, and for your second, I'll presume you get a new HELOC on the same terms, on which the balance would be about $33,000. Interest on first and second, at 7.5% and 8.25% respectively, comes to $3500 plus $227. The payment on the first would be $3915, plus $227 (assuming interest only HELOC) for a total of $4142. So $12,000 saved if you wait, versus about $200 per month less in interest charges per month if you dive in. Divide that out and it comes out to 60 months. Five years. If you keep the new loan five years, approximately, or more, you'll be better off refinancing now. If you keep it less than five years, you're better off waiting is what the calculations say. Plus chop off the $200 per month you save starting right now for the next fifteen months, and the answer turns into forty five months or a little less, being your time until break-even.
I'm a reasonable risk taker. Were I plopped down in your situation, I have to tell you I would probably hang tight until the prepayment penalty expires. Roll the dice and bet on my personal ability to come up with a good loan. On the other hand, you may not be as much of a risk-taker as I am. The stuff I quoted you for refinancing now is available now, no suppositions about it. The rates could well be higher in fifteen months than I have estimated, perhaps much higher, or they could be lower (although I don't think so with increased federal borrowing). You need to decide what your level of comfort is. If you're the sort that is averse to risk, refinancing now could pay for itself just in peace of mind, because you're not worrying about it. That's why I always offer a 30 year fixed rate loan, no matter how wide the interest rate spread is between that and my favorite hybrid ARM. There are folks who just won't sleep nights. The difference comes out to about $7 per night, and my sleep is worth more than that, so I presume yours is, as well.
Caveat Emptor
Original here
(This was originally published December 13, 2005. I'm reprinting it because it shows how utterly predictable the housing meltdown was)
Ken Harney has a column I found in the local rag yesterday. It seems that there is (finally!) concern amongst the regulators for this risky loan which begs for trouble for consumer, lender, and the system as a whole when there are too many of them out there.
First off, Mr. Harney is wrong, or his editor really screwed up what he did write (The Washington Post? <sarcasm>Say it isn't so!</sarcasm>). Read the contract. The attraction of negative amortization loans has nothing to do with the actual rate. Zero. Zip. Zilch. Nada. It has everything to do with lower permitted payments. There is not one day, not one hour, not one second where the actual rate being charged is reduced even by a minuscule amount. But for a certain amount of time, the minimum payment is calculated as if the rate is lower than it actually is. This is why they are easy sells - because the average real estate consumer "buys" a loan based upon the payment. So when someone tells the average consumer that they can get a "$170,000 mortgage for $850 per month!", it sounds attractive and the majority of people won't investigate any further. A large portion will actively avoid anybody who tries to tell them what's really going on, as if the loan will somehow magically be alright if they manage not to hear about all the bad stuff.
Furthermore, the real rate on these loans is variable from day one. There literally is not one month where you can truly predict what the next month's payment will be. I have, and always have had, lower interest rate loans that are hybrid ARMS with truly fixed interest rate for five years or more, have lower costs to obtain them, and no hidden gotchas. Heck, from my first day in the business I've always had loans that fit all of the forgoing criteria and require interest payments only. If you cannot make a payment of at least the full amount of the monthly interest, it is quite likely you shouldn't make the purchase.
These loans do have a niche. But I can't think of a case where they should ever be the purchase money loan for a property. Even on refinances, they should be no more than one percent of total refinances - not the forty percent share of San Diego's purchase money market the last figures I saw had them having. Investment property, the rules should be somewhat looser, but still nowhere near 40 percent of the market is appropriate. If this were the securities or accounting industries, the regulators would be throwing people into jail over this, and shutting down offending companies completely and permanently. There's a world of hurt coming down the pike, and the prevalence of these pieces of garbage is going to greatly exacerbate the problems, particularly in high cost markets. Let's say, hypothetically, someone put 5% into a $500,000 home here in San Diego at the beginning of the year, at a nominal rate of 1%. They had one $400,000 mortgage and one $75,000 mortgage. Assuming the nominal rate on the first is 1% and that the second is "interest only" as is common, they would now owe $10,000 more on a home that is worth about $30,000 less (and in December 2008, nearly $200,000 less). After three years, they owe a total of $505,000 even if the rates don't rise any more, which I can promise you they will (Yep, even though they've now dropped again). If values hold steady right now, their home is worth maybe $470,000, of which they would get about $440,000 if they sold without paying any closing costs for the buyer, which isn't happening right now. So under perfect theoretical conditions, they've gone from having $25,000 in the bank to having to come up with $65,000 just to get out from under. Since they likely can't, their credit is going to be ruined for ten years at least, plus they're going to get a love note from the IRS saying they owe taxes on $65,000 more income (which incidentally slides most folks into higher marginal brackets).
(In December of 2008 - they could get maybe $300,000 of the $505,000 they owe, and the debt forgiveness for short sales expires December 31. $205,000 of taxable income on top of suffering through this disaster of losing their home)
You can survive being "upside down", owing more on your mortgage than your house is worth, for a long time if you have the right loan. Negative amortization loans are not the right loan for market conditions I see happening in the next few years. They are always risky, and mortgage lenders and brokers who do them do not have, in the aggregate, an even vaguely acceptable track record of disclosing their risks. Not that it's any great shakes of a prediction, but I predict that lawyers will be prosecuting a lot of these as civil cases in the next few years, and winning large judgments that are not going to be covered by insurance because it's neither an error nor an omission, but an intentional misrepresentation.
(December 2008: not a lot of cases yet. Perhaps because few of the victims can afford a retainer?)
Under the right conditions, these can be useful loans. But the right conditions are rare, and when you have those conditions, the lenders are not likely to approve the loan because the prospective borrower is not a good credit risk. In short, if you're approved for one of these, you almost certainly had better much options available to you. If negative amortization loans are actually appropriate for you, I'll bet a nickel your loan won't be approved. This is the kind of marketing strategy which has gotten many industries in serious trouble, and the lenders who are involved in this are likely to be hurting anyway when the house of cards they've been supporting comes tumbling down. Expect corporate bankruptcies, also.
(December 2008: not to mention $700 billion of bailout money that is essentially gone with no great effects upon the mortgage market)
Caveat Emptor.
P.S. If you haven't read anything on these previously, you might want to check out this article as well as this one.
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