(Note: This is a repeat and 100% financing is not currently available unless you are one of those with a VA loan available to you - but the article is still valid for those who have the required down payment of 3.5 to 5 percent or more. Furthermore, rates are lower now)

A while ago, I got an email asking Save For A Down Payment or Buy Now?, and I wrote a two part article on the subject. Part 2 of Save For A Down Payment or Buy Now? gave an alternative strategy to make affordability accelerate faster. But there was an obvious, related concern that I let go because it was a very complex calculation, and that was, "What's the effect of waiting to buy on my financial situation later in life?"

This wasn't an easy problem to program, even in a spreadsheet. I'm decent with spreadsheets, but for a lot of the calculations I had to do it by brute force repetition, as the calculations are what mathematicians call a convolution (really). Had I been able to do certain functions on spreadsheets that I used to do with matrices back in the really dim times, it would have been far easier, but the area I ended up using was three sheets totaling about 60,000 cells. Most of it was change one thing, copy and paste a row or column segment, then change another. It wasn't that hard mentally, but the finished product certainly makes a microprocessor work for a living!

I also had to make some simplifications to the problem. In order to make the problem manageable, I had to assume that you hold onto your home, once you have bought, at least until the end of the scenario, and also that you never refinance. I had to program it with smooth inflation, smooth appreciation, smooth increases in federal income tax standard deductions, and smooth increases in auxiliary prices. Anyone over the age of thirty ought to know how ridiculous those assumptions are. But in the long-term statistical aggregate, it's a reasonable approximation, and adding those random elements made the problem beyond the scope of what I could realistically do. I also had to postulate no major changes in income or property tax law, and I had to ignore the effects of state income taxes. Besides, the idea was to isolate the effects of the variable under consideration, how waiting to buy a home influences your financial situation down the line. I also had to choose a set period to terminate at, and arbitrarily chose 30 years. It's not that the benefits (or costs) stop accruing at that point, it's just that I did not have the time to make the simulation open-ended.

Actually, this is two discrete problems when you really look at it, and they really are disjoint, and no matter how much the folks who sell Reverse Annuity Mortgages might try to link them, they are separate cases. What happens if you keep living there at simulation end, versus what happens if you decide to sell and move somewhere else when you retire.

Nonetheless, the following simulations are all as representative as I can make them. Except for the effects of state income tax, they are in line with current and historical California computations. Actually, they are considerably less rewarding than actual historical figures to people who buy property earlier rather than later, as even with the bubble pop we're still looking at more than seven percent per year long term historical rise in values over the previous forty years, as opposed to the lower programmed assumptions.

Example 1: Suppose you're talking about a San Diego Condo. $300,000 present purchase price, no down payment but you can save $500 per month for a down payment in the future if you don't buy now, and this amount increases proportional to salary increases. The property continues to appreciate at 4.5% whether you buy or not, association dues are $250 per month and general inflation is 4%, and you can get 7.2% return, net of taxes (10% minus an assumed marginal tax rate of 28%), on the money you save for a down payment. Whenever you buy, you can get a 6% first mortgage, and a 9% second if you need it. I'm also going to assume that in order to see any financial benefit, you're going to have to sell at a cost of seven percent of value. Furthermore, you're stable in your profession, seeing a 3% compounded annual raise in income, and equivalent rent is $1400 per month currently.



Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
purchase price
$300,000.00
$313,500.00
$327,607.50
$342,349.84
$357,755.58
$373,854.58
$390,678.04
$408,258.55
$426,630.18
$445,828.54
$465,890.83
$486,855.91
$508,764.43
$531,658.83
$555,583.48
$580,584.73
$606,711.05
$634,013.04
$662,543.63
$692,358.09
$723,514.21
$756,072.35
$790,095.60
$825,649.90
$862,804.15
$901,630.34
$942,203.70
$984,602.87
$1,028,910.00
$1,075,210.95
$1,123,595.44
still owe
*
$24,489.73
$46,429.89
$67,745.37
$88,445.34
$108,534.07
$128,010.82
$146,869.63
$165,099.15
$182,682.37
$200,029.06
$217,296.63
$233,893.12
$249,747.93
$264,783.31
$278,913.68
$292,045.12
$304,074.62
$314,889.39
$324,366.10
$332,370.01
$338,754.10
$343,358.06
$346,007.30
$346,511.78
$344,664.85
$340,241.87
$332,998.90
$322,671.15
$308,971.35
$291,299.48
housing*
$1,354.26
$1,514.40
$1,659.59
$1,801.37
$1,939.80
$2,074.91
$2,206.72
$2,335.19
$2,460.26
$2,581.85
$2,702.41
$2,822.91
$2,939.80
$3,052.67
$3,161.06
$3,264.47
$3,362.35
$3,454.09
$3,539.04
$3,616.45
$3,685.54
$3,745.43
$3,795.18
$3,833.75
$3,860.02
$3,872.76
$3,870.64
$3,852.21
$3,815.90
$3,760.00
$3,680.93
waiting
$0.00
$160.15
$305.33
$447.11
$585.54
$720.66
$852.46
$980.93
$1,106.01
$1,227.59
$1,348.16
$1,468.65
$1,585.54
$1,698.41
$1,806.80
$1,910.21
$2,008.09
$2,099.84
$2,184.78
$2,262.19
$2,331.28
$2,391.17
$2,440.92
$2,479.49
$2,505.76
$2,518.50
$2,516.39
$2,497.96
$2,461.65
$2,405.75
$2,326.67
savings*
$3,186.50
$3,026.35
$2,881.16
$2,739.39
$2,600.96
$2,465.84
$2,334.04
$2,205.57
$2,080.49
$1,958.91
$1,838.34
$1,717.85
$1,600.96
$1,488.09
$1,379.70
$1,276.29
$1,178.41
$1,086.66
$1,001.72
$924.31
$855.22
$795.33
$745.58
$707.01
$680.74
$667.99
$670.11
$688.54
$724.85
$780.75
$859.82

*Still owe 1 final payment after thirty years if you buy today. "Housing" is how much your costs of housing will be in 30 years if you bought at the indicated time is, and assumes you refinance for zero cost into the same rate you have now. Waiting cost is as opposed to buying now. Finally, the savings column has to do with how much you are saving per month over what the equivalent rent will be in 30 years, namely $4540.76 in this case.

Please keep in mind that the table is the net result 30 years out; the only time variable in the equation is precisely when you bought the exact same condo. Now there is some mildly strange stuff that goes on. For instance, starting 25 years out, there's a period where, under the stated assumptions, your saving for a down payment actually starts to increase in value faster than the property. This is mostly due to the nature of the simulation - I had to choose a set ending period in order to program it. But by that point, you've missed the optimum time to buy by, well, 25 years. Keep in mind that money will be worth less than a third of what it is today in thirty years ($1 then will be worth 30.8 cents now under stated assumptions), but you are still saving significant amounts of money on your future housing payments by buying as soon as practical.

Now let's look at the situation if you decide to sell your home at the end of the simulation and go live somewhere else:



Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
purchase price
$300,000.00
$313,500.00
$327,607.50
$342,349.84
$357,755.58
$373,854.58
$390,678.04
$408,258.55
$426,630.18
$445,828.54
$465,890.83
$486,855.91
$508,764.43
$531,658.83
$555,583.48
$580,584.73
$606,711.05
$634,013.04
$662,543.63
$692,358.09
$723,514.21
$756,072.35
$790,095.60
$825,649.90
$862,804.15
$901,630.34
$942,203.70
$984,602.87
$1,028,910.00
$1,075,210.95
$1,123,595.44
net equity
$1,043,032.82
$1,020,454.03
$998,513.87
$977,198.39
$956,498.42
$936,409.69
$916,932.94
$898,074.13
$879,844.61
$862,261.39
$844,914.70
$827,647.13
$811,050.64
$795,195.83
$780,160.45
$766,030.08
$752,898.64
$740,869.14
$730,054.37
$720,577.66
$712,573.75
$706,189.66
$701,585.70
$698,936.46
$698,431.98
$700,278.91
$704,701.89
$711,944.85
$722,272.61
$735,972.41
$753,644.28
liquidation
$7,079.98
$6,926.72
$6,777.79
$6,633.11
$6,492.60
$6,356.24
$6,224.03
$6,096.02
$5,972.28
$5,852.93
$5,735.18
$5,617.97
$5,505.32
$5,397.70
$5,295.64
$5,199.72
$5,110.59
$5,028.93
$4,955.52
$4,891.20
$4,836.87
$4,793.53
$4,762.28
$4,744.30
$4,740.87
$4,753.41
$4,783.43
$4,832.60
$4,902.70
$4,995.69
$5,115.65
net benefit
$594,459.84
$531,782.24
$526,736.25
$495,140.59
$448,046.96
$435,547.19
$407,644.83
$380,733.08
$354,624.01
$329,944.53
$301,836.93
$269,957.25
$239,420.18
$210,196.49
$182,428.96
$155,944.29
$130,741.38
$106,921.94
$84,296.01
$63,087.55
$43,073.74
$24,442.68
$7,100.56
($8,932.23)
($23,548.85)
($36,736.02)
($48,455.14)
($58,627.44)
($67,101.14)
($73,746.48)
($78,651.68)
waiting cost
$0.00
$22,578.79
$44,518.95
$65,834.43
$86,534.39
$106,623.13
$126,099.88
$144,958.69
$163,188.21
$180,771.43
$198,118.12
$215,385.69
$231,982.17
$247,836.99
$262,872.36
$277,002.74
$290,134.18
$302,163.67
$312,978.45
$322,455.16
$330,459.07
$336,843.15
$341,447.12
$344,096.36
$344,600.84
$342,753.90
$338,330.93
$331,087.96
$320,760.21
$307,060.41
$289,388.54

Net equity is what you have left after 7% costs of selling, liquidation assumes that you are taking out 360 equal monthly payments based upon the same return I assumed your money could earn before you bought. Net benefit is the number of dollars difference it makes to your financial position in the future 30 years from now if you buy at the indicated time. Notice that starting 25 years out, it actually hurts you to buy from then on out, as opposed to just letting the investments you were saving for a down payment run. Waiting cost is how much it hurt your future financial position to delay purchase by that much, so if you wait five years, you end up with over $100,000 less in your pocket.

Now let's do a second example: Still in San Diego, but you're going to buy a single family residence that would cost $450,000 today. Nudge assumed appreciation up to 5.5%, cut association dues out but raise property taxes and insurance costs appropriately. Oh, and the equivalent rent now starts at $2000, and general inflation I'm going to assume to be 3.5%. Actually, based upon the past seventy years, everything that has happened has been, over time, more favorable to home ownership than this.

Once again, let's look at the situation if you keep living in the property after 30 years first.



Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
purchase price
$450,000.00
$474,750.00
$500,861.25
$528,408.62
$557,471.09
$588,132.00
$620,479.26
$654,605.62
$690,608.93
$728,592.42
$768,665.01
$810,941.58
$855,543.37
$902,598.25
$952,241.16
$1,004,614.42
$1,059,868.21
$1,118,160.97
$1,179,659.82
$1,244,541.11
$1,312,990.87
$1,385,205.37
$1,461,391.66
$1,541,768.21
$1,626,565.46
$1,716,026.56
$1,810,408.02
$1,909,980.46
$2,015,029.38
$2,125,856.00
$2,242,778.08
still owe
*
$37,403.63
$72,247.27
$107,464.64
$143,121.84
$179,283.73
$216,014.10
$253,375.62
$291,429.94
$330,237.68
$369,858.41
$410,350.66
$451,771.89
$494,178.40
$537,625.32
$582,166.43
$627,908.86
$675,787.71
$724,872.44
$775,183.89
$826,740.19
$879,556.33
$933,643.75
$989,009.82
$1,045,657.39
$1,103,584.13
$1,162,781.95
$1,223,236.28
$1,284,925.33
$1,347,819.27
$1,410,482.12
monthly
$1,151.93
$1,404.15
$1,641.99
$1,883.05
$2,127.79
$2,376.60
$2,629.93
$2,888.18
$3,151.75
$3,421.06
$3,696.50
$3,978.46
$4,267.34
$4,563.52
$4,867.37
$5,179.28
$5,499.92
$5,834.96
$6,178.89
$6,531.86
$6,894.07
$7,265.65
$7,646.73
$8,037.44
$8,437.84
$8,847.99
$9,267.92
$9,697.62
$10,137.03
$10,586.05
$11,036.15
Wait cost
$0.00
$252.22
$490.06
$731.13
$975.86
$1,224.68
$1,478.00
$1,736.25
$1,973.99
$2,178.71
$2,388.07
$2,602.37
$2,821.91
$3,046.98
$3,277.86
$3,514.85
$3,758.46
$4,013.04
$4,274.35
$4,542.51
$4,817.67
$5,099.93
$5,389.39
$5,686.13
$5,990.21
$6,301.66
$6,620.52
$6,946.75
$7,280.32
$7,621.14
$7,962.68
savings
$4,461.66
$4,209.44
$3,971.60
$3,730.53
$3,485.80
$3,236.98
$2,983.66
$2,725.41
$2,461.84
$2,192.53
$1,917.09
$1,635.12
$1,346.24
$1,050.07
$746.21
$434.31
$113.67
($221.38)
($565.30)
($918.28)
($1,280.48)
($1,652.06)
($2,033.15)
($2,423.85)
($2,824.25)
($3,234.40)
($3,654.34)
($4,084.03)
($4,523.44)
($4,972.46)
($5,422.56)

Equivalent rent would be $5613.59. Once again, the last three columns are all monthly streams, and they do have a steady worsening the entire time, mostly because your saving for a down payment does not start to catch up to the increase in property values during the simulation period. In other words, the longer you wait, the worse it gets. Indeed, affordability is monotonically decreasing the entire time. That's math geek for "Quit waiting, it only gets worse." Even though a dollar then is only worth 35.6 cents now, wouldn't you like as many 35.6 cents in your pocket as possible?

Now let's examine if you decide to sell this starter home in retirement, and go live somewhere else.



Year
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
purchase price
$450,000.00
$474,750.00
$500,861.25
$528,408.62
$557,471.09
$588,132.00
$620,479.26
$654,605.62
$690,608.93
$728,592.42
$768,665.01
$810,941.58
$855,543.37
$902,598.25
$952,241.16
$1,004,614.42
$1,059,868.21
$1,118,160.97
$1,179,659.82
$1,244,541.11
$1,312,990.87
$1,385,205.37
$1,461,391.66
$1,541,768.21
$1,626,565.46
$1,716,026.56
$1,810,408.02
$1,909,980.46
$2,015,029.38
$2,125,856.00
$2,242,778.08
net equity
$2,082,917.20
$2,048,379.98
$2,013,536.35
$1,978,318.97
$1,942,661.78
$1,906,499.88
$1,869,769.52
$1,832,407.99
$1,794,353.67
$1,755,545.93
$1,715,925.21
$1,675,432.96
$1,634,011.73
$1,591,605.21
$1,548,158.29
$1,503,617.18
$1,457,874.75
$1,409,995.90
$1,360,911.17
$1,310,599.72
$1,259,043.42
$1,206,227.28
$1,152,139.87
$1,096,773.79
$1,040,126.22
$982,199.48
$923,001.67
$862,547.34
$800,858.28
$737,964.35
$675,301.50
liquidation
$14,138.60
$13,904.16
$13,667.65
$13,428.60
$13,186.56
$12,941.10
$12,691.78
$12,438.17
$12,179.86
$11,916.44
$11,647.50
$11,372.64
$11,091.48
$10,803.63
$10,508.72
$10,206.38
$9,895.88
$9,570.89
$9,237.70
$8,896.20
$8,546.24
$8,187.73
$7,820.59
$7,444.77
$7,060.25
$6,667.05
$6,265.23
$5,854.87
$5,436.13
$5,009.21
$4,583.87
net benefit
$1,681,408.70
$1,527,603.06
$1,482,514.85
$1,390,228.98
$1,262,990.98
$1,218,788.65
$1,139,516.49
$1,064,002.28
$991,242.90
$921,953.98
$854,914.46
$790,327.87
$728,045.15
$667,919.78
$609,807.59
$553,566.46
$498,733.07
$440,202.91
$383,770.99
$329,344.94
$276,837.21
$226,165.09
$177,250.78
$130,021.48
$84,409.45
$40,352.17
($2,207.48)
($43,321.12)
($83,034.61)
($121,387.80)
($156,994.47)
wait cost
$0.00
$34,537.22
$69,380.85
$104,598.23
$140,255.42
$176,417.32
$213,147.68
$250,509.21
$288,563.53
$327,371.27
$366,991.99
$407,484.25
$448,905.47
$491,311.99
$534,758.91
$579,300.02
$625,042.45
$672,921.30
$722,006.03
$772,317.48
$823,873.78
$876,689.92
$930,777.33
$986,143.41
$1,042,790.98
$1,100,717.72
$1,159,915.53
$1,220,369.86
$1,282,058.92
$1,344,952.85
$1,407,615.70

Now it is to be noted, as we saw under the first table, a point in time exists starting 26 years out where you will be better off just keeping your down payment money socked away in alternative investments, as opposed to actually using it to buy your home. Once again, this is mostly due to the closed end definite endpoint way I had to program this.

I'm planning to start using this sheet with prospects, under assumptions they can set - If they think inflation is going to average 7%, or appreciation only 3%, the sheet can accommodate that. I've played with the sheet over a few dozen simulations, and due to leverage, the numbers appear quite powerfully in favor of buying the best home that you can actually afford, right now. Interestingly enough, however, these number also strongly suggest that as close to 100% financing as you can manage initially will outperform larger down payments, and that's something that seems quite counter-intuitive to the usual run of financial planning. Instead of using it for your down payment, financing 100% of your purchase if you can seems to make your money work harder. Well, I can put a lot of caveats on that, because metaphorical bumps in the road happen, and nobody knows exactly when or how these disasters will strike. If you do, you can plan for it, and could you please drop me an email in warning? When you're just looking at the raw numbers, however, the advice they give is quite strongly to buy the best property you can afford as soon as you can, putting down as little of a down payment as you can, and making the minimum payments while salting away the rest for a rainy day. But be very careful not to stretch too far, because one thing you can count on, even in Southern California, is that it will rain sometimes.

These numbers represent middle of the road, statistical average type results, given the assumptions listed in each problem. In point of historical fact, in neither of the two problems did I choose assumptions as favorable to the property owner as the historical numbers we in California have experienced. Furthermore, with the market driven well below historical average pricing trends in terms of affordability, those who buy before everybody realizes the market has turned are likely to eventually realize quite a significant adjustment due to the market returning to long term levels of macroeconomic affordability.

Caveat Emptor

Original here

The scope of the problems that exist in the United States consumer mortgage market are huge. Enormously, mind-bogglingly, "How Big Is Space?" type huge. Yet, the problems are almost entirely on a retail level, when one provider works with one consumer. The system as a whole works, and it works extremely well. Consider:

Most consumers in Europe or any other country in the world would trade their loans for yours in a heartbeat. Rates there are typically around nine percent or so. Here, that's a ratty sub-prime rate. Mexican rates start at about fourteen percent. Hard money lenders here can sometimes do better than that.

No matter where you are in the United States, you have ready access to home loan capital. It's considered almost a one of our inalienable rights. Due to our secondary markets, as long as you can meet some pretty basic guidelines, you can find somebody eager to lend to you. You can find very long mortgage terms and very short terms. You can find loans without prepayment penalties, and you can choose to get a lower rate by taking a prepayment penalty. You may end up with something that's not as good as someone else if their situation is better, and the lender wants more money to compensate them for the risk of your loan, but even so, the rates here are better than almost anywhere else in the world.

Consumer protections are also better here than almost anywhere else in the world. There are federal laws that give you time to call off a transaction if you change your mind, disclosure requirements, consumer protections against builders with teeth in them, and a tort system that, if it does go overboard some times, still gives you an excellent chance at recovering what unethical people took from you. Many states (California, for instance) go well beyond mandatory federal consumer protections.

So keep this in mind when you see me or anyone else ranting on and on about the problems with our financial markets here. Consider a capital market willing to loan the average person several years worth of wages. I can get a family making $6000 per month a loan for nearly $400,000 on an A paper 30 year fixed rate basis - most expensive loan there is in the most favorable, hardest to qualify for loan market - no surprises, no prepayment penalties, no "gotchas!" of any kind, and I can do it without hiding or shading the truth in the least. That's more than every dollar they will make for the next five years, and this family is every bit as chased after as the richest person in the world (more actually, because there are more of them). When you stop and think about it, that's a pretty wonderful situation. For all of the rants I make, the unethical things that happen, and the problems that exist in our capital markets, they are pretty damned good, and have chosen a set of tradeoffs that appears to be working better than anywhere else in the world, at any other time in history.

Caveat Emptor

Original here


And I mean that literally. Do it all yourself with no begging for free property advice, free help, free negotiations help, free real estate location services, free answers to "how do I deal with this problem?" and not least of these, nobody to blame but yourself and nobody to sue when something goes wrong because you didn't understand something important.

One of the things I do to generate business is talk about bargain properties I've found that current clients aren't interested in, for whatever reason. Maybe it's a bit too much of a fixer. Maybe the location just doesn't work for them. Maybe it just looked so interesting I checked it out despite not having a current client it may be right for. It's not like a listing agent or owner with any kind of clue is going to object to having somebody else think their property is worth a closer look!

This is one e-mail exchange I went through recently. It's not at all uncommon.

Please tell me the address of this property in La Mesa so I could drive by and I will use you as a buyers agent.

This was my reply

Good to hear from you and I look forward to meeting with you!

Here's what we do: We get together, and we both sign a standard CAR non-exclusive agency agreement, which says precisely what you just typed. If you don't buy the property, no obligation is incurred. Neither of us has anything to lose by signing such an agreement. In fact, the only way I gain is by finding properties for you that really are better values than anything else - enough so that you want to buy them.

You don't like the property, you have no obligation whatsoever. This way, neither one of us is risking anything, and if you don't like my work, you can terminate the relationship at any time.

The reply is illuminating. This is the entirety:

I sign nothing but my paycheck

Note that he still has not so much as told me his full name. No phone number either. And when I note that being able to find and recognize this sort of property might be a valuable skill, and doesn't he think that someone who 1) recognizes a valuable commodity that no one else has, 2) points it out to you and 3) enables you to get an all around better bargain deserves some compensation, this was the reply:

Just what I need another low life realtor. You guys are a dime a dozen. YOu mean years of ripping people off for every nickle that you can squeeze out of them. Get a real job I have one. Don't bother responding your trash.

Aside from his desperate need to repeat eighth grade or invest in a better word processor, the charitable interpretation of this reveals an all too common mindset: that of unconscious incompetence. Less charitable but happens constantly: This person is trying to make use of my ability to find and recognize bargains without paying the price for that expertise: Using me as a buyer's agent. And make no mistake - in either case, this person is trying to prove that agents are worthless by getting me to provide one of the major reasons you need an agent, free of charge. Suppose I asked you to work for a week without pay, or your employer volunteered you for a week of unpaid work? That's the equivalent situation. And to accuse real estate agents of being lowlifes because they won't do this is different because...?

A good buyer's agent will save you more than they ever cost by a factor of at least 3 (more likely 10 or higher), and that's not including all the hidden savings from keeping you out of properties that will not appreciate, that will suck your wallet dry, or that have other issues deadly to your financial future. It took me a while to decide to share it, but here's my own story of buying without an agent, years before I became one. I didn't make several of the more common and costly errors, and I still would have been demonstrably several times better off with a buyer's agent.

If you don't think finding and recognizing such a property is a skill - and a valuable skill at that - do it yourself. The fact is that if you could, you wouldn't be asking me to do it for you. The times when I search places other than the publicly available MLS to find real bargains are vanishingly rare. I can find bargains there because 1) I know the market and can recognize what is and isn't value 2) I know what to look for, 3) I know what to avoid, 4) I am very good at spotting problems, and 5) When I don't spot any big problems, I've got a reasonable basis to believe that this really is a bargain. If this describes you, you might not need me. Mind you, any number of people who don't need a full service agent still prefer to use one due to time and liability concerns, but if you know everything a conscientious agent does about property and negotiating and the law and the market you are looking in, why haven't you got a license of your own? That you haven't taken the test is a "fooling yourself" answer - California's test doesn't cover ten percent of what a good agent or loan officer needs to know, and is one of the harder ones. The fact is that it is much easier to get licensed than to actually know what you're doing, so if you're not licensed, how could you possibly know what you're doing? In logic, this is called necessary but not sufficient. In other words, you don't know what you're doing. if you were on a game show, you'd be being told, "Thank you for playing," as they ushered you off camera in favor of the new contestant. (Many of my articles are aimed at helping you defeat the necessary but not sufficient condition of a licensee who doesn't know what they are doing, or won't do it despite knowing).

How offering a skill for sale makes me - or anyone else - a lowlife is beyond me. If you don't need the skill, don't buy it. But if you need the skill, you are expected to pay the price. This is called commerce, and the fact that you may think it is a worthless skill does not make it so, especially as you try to trick the person into performing it for free based upon a false promise. This person, and many others, has tried to get me and other agents to perform it for free under false pretenses. Does this sound like a worthless skill when it is so apparently valuable that people try to scam you out of it? Actually, I'm not certain there is such a thing as a worthless skill, but there are skills that aren't worth anything to me. I don't need anyone to make candles by hand, and am definitely not willing to pay anything for it. This doesn't mean there aren't quite sane people willing to pay a high premium for hand-made candles, but you don't find me among them, trying to get hand-made candles for free. If you really don't think what agents do is valuable, don't try and scam them into doing it for free. Do it yourself.

I do have some small element of understanding for some of these people. The NAR and various state realtor organizations have positioned the profession as a bottleneck or a tollbooth upon a highway. Trying to make people pay the toll because it appears they don't have any choice. Guess what? People have a choice. There is no legal requirement whatsoever to use an agent at all in any state I'm aware of. I can't make you pay me and I certainly won't even try to force you, but neither will I work for free. I have to feed my family somehow, and if I can't make money being an agent, I'll go do something else - but I certainly won't work as an agent for free in my spare time! I will give you reasons why I'm worth a lot more than I make in terms of the client's bottom line, and I will certainly put myself forward as being a particularly good example of an agent and loan officer. Not only is it objectively true in my case, that's how businesses succeed. But if you don't want to pay for my expertise, that's fine. I'll keep looking for those who are willing. But don't accuse me or anyone else of being a lowlife because we won't work for free.

Here are some cold hard facts: if this guy was finding this sort of bargain on his own, he wouldn't be emailing me. He'd be in escrow, if not already moved in to the property of his dreams. If what I was offering wasn't more attractive to him than what he has found on his own, he would never consider emailing me. If he was able to recognize bargains like I can, he wouldn't be looking where I advertised. In short, everything about his response and the fact that he did respond shouts out that he does consider what I do valuable. So which is correct: The cheap ego shot when I won't give him what he wants for free, or his desire for the results of that skill? Is the skill worthless and am I a lowlife, or is the skill valuable, do his actions tell the world that he considers it to be valuable, and is his response when he can't get it for free entirely too much like Aesop's "Fox and the Grapes"?

If you really don't believe you need an agent and that you can do it on your own, you shouldn't be looking for an agent willing to work for free like this. And like any other situation where someone is pretending an answer is different from the real answer, pretending doesn't make the answer any different, political spinmeisters notwithstanding. All pretending otherwise does is give the pretense needless opportunity to damage you and everyone around you. In the case of a real estate transaction for half a million dollars or more, that's quite a bit of damage indeed.

There are those who would have you believe agents don't do anything, or don't do anything valuable enough to warrant what we make. Some of them are themselves sharks that agents protect you from. Some of them have competing products of their own to sell. Some of them just look at the raw number of dollars and don't understand what anyone could do to earn that sort of money or don't understand how much a good agent who wants to stay in business needs to do. You're welcome to believe any of them. But if you do believe them, go do it yourself. Don't try to get agents to work for free - all that says is that you do recognize the value, but are unwilling to pay for value received. And don't get upset when anyone with more than an hour or so in the business recognizes the game you're playing for what it is - a scam intended to defraud them. Finally, if you're tired of playing this game because all it does is cause frustration, stop playing it and start working honestly with one or more agents. The good ones who know what they're doing are more than willing to bet their skills and their time that they will get the job accomplished, with no upfront cost to you and no obligation if they can't.

There are lots of things that any intelligent agent will happily do for free, on speculation of eventually landing a client. I certainly do. But there comes a point where there is real skill and real time and real liability on the line, and if you're not willing to sign up with them at that point, any agent with more than about an hour in the business is going to realize what you're up to.

Caveat Emptor

Original article here

(This article was originally written in July 2008. The genesis was a bad experience with medical office staff, but it applies to every customer service situation there is. If the professionals themselves are too busy to handle your problem personally, that's a problem and a red flag that you don't want to do business with them)

I still don't have the tooth pulled, but as of late last night, it seemed like the antibiotic had finally caught up to the infection, and the pain went down a lot over a couple of hours. It still hurts, even with pain killers, but it's not like being actively and continuously stabbed any longer. I'm going to try moving down to the Vicodin the general dentist gave me today instead of Percocet, and maybe I won't be quite so out of it, so maybe I can write something.

This whole experience has been a real eye-opener in another way - exactly how bad alleged customer service really can get. It's a confirmation of my policy: Nobody working for me is allowed to talk to my clients. They are allowed to take a message, and they are allowed to answer simple questions where there is reason to believe the client will probably be happy with the answer. They are not allowed to call my clients without direct specific instructions that I just don't give them. Other than that, there are many reasons why every client gets my cellular number as their primary contact, and is encouraged to call me directly, and this article is going to talk about one of the many disasters this prevents.

My tooth had started hurting on Monday, and so I'd gotten a dental appointment on Thursday, but late Tuesday afternoon, the pain basically exploded. Unfortunately, by the time I could call the dentist, the office was closed for the day, but the dentist gave me a pain-killer and antibiotic first thing Wednesday. Being a general dentist, Vicodin was the strongest thing he could give me, and it just didn't do more than take the very worst of the edge off for a couple of hours, and I had to wait six hours between doses. But to remove this particular tooth, he had to send me to an oral surgeon. Meanwhile, the infection kept getting worse.

By the time I got to the oral surgeon's office on Thursday, I was literally crying with pain despite the Vicodin. They gave me prescription for Percocet, but said they needed medical clearance from my cardiologist and my regular primary care doctor to pull the tooth. They were also worried about the blood thinners I'm usually on. My cardiologist sent back an answer to them promptly that said it was absolutely fine to pull the tooth, and I could stay on the medications as well, or the dentist could take me off for as long as he felt necessary. According to her, there was no need for any special precautions, but she was happy to go along with anything the oral surgeon wanted.

This wasn't good enough for the dentist's office staff. No, no, no - they had to have the cardiologist say exactly how many days I had to be off the blood thinners before and after surgery. She responded once again by saying that the answer was "zero days" as far as she was concerned. She gave clearance for the dentist to take me off the blood thinners if he thought it advisable, but she did not see such a need for me to stop those medications from a cardiologist's point of view.

Despite being the answer any reasonable person could have hoped to get, this was not a response the dentist's office staff was prepared to accept. I do not know if this was a programmed answer or if the dentist himself directed it, but I have no evidence whatsoever that the dentist was involved in any of these discussions. No, according to these bozos (remember, these are office staff - not nurses, not dentists, not even dental assistants as far as I'm aware), my cardiologist had to give a number of days before and after that I was going to be off those blood thinners before the tooth could be pulled. Keep in mind that the cardiologist - a very sharp young lady with an advanced medical degree and several years experience applying it - had twice said that this was not required. And she was being refuted by office staff. This went back and forth for two days, and I'm still in increasing pain the entire time, including the possibility of increasing complications as the situation is allowed to build.

Matters did not improve when my primary care physician finally responded, saying that she wanted me to be off the blood-thinners before surgery. Then the dental office staff went really berserk, trying to say that since there was a contradiction, both physicians had to consult with each other and issue a joint letter. I tried very hard to explain to them that they were dictating terms of practice to not one, but two highly qualified medical practitioners, and that the terms of both instructions could be satisfied by simply doing what the more stringent of the two had asked for - and since I'd stopped them on my own when this whole issue first started, that was already accomplished by this point, so how about scheduling me for that tooth extraction?

No, no, no. That wasn't acceptable at all to these little tin-pot dictators. And at this point, my willingness to put up with any more of their nonsense basically evaporated. Keep in mind that I had been at home, in pain, unable to eat anything solid, for two full days since they had made their demand, and it's 4:00 Friday afternoon, so we're looking at three more days of pain and lost work before I can even schedule an appointment, never mind actually getting to that appointment or the aftermath. Meanwhile, whatever is going on in my jaw continues to get worse. Buddha only knows what complications this delay is going to cause. I asked for the supervisor, then for the dentist. The supervisor was part of the problem, and they wouldn't let me speak to the dentist, nor have him call me back.

Ladies and gentlemen, part of the reason and necessity for any licensing program at all - and this principle applies just as strongly to agents and brokers as it does to dentists and doctors - is that you have shown qualifications and a sufficient understanding of the thing you are professionally licensed in to make decisions and accept the normal decision-making responsibility of that practice. If you are not willing to accept that responsibility, or have willfully insulated yourself from it, then you are not worthy of your license and definitely not worthy of my business. I did manage to go back and get another referral from my general dentist, but the first oral surgeon's office staff refused point blank to return my medical records - in violation of state law - claiming that "office procedure" was not to release those records. Let's see: "office procedure". I don't intend to try it, but do you think a realtor might get away with claiming "office procedure" to defuse an accusation of breaking state law or RESPA? Let's say you get pulled over for speeding. How well do you think telling the officer that "office procedure says I'm not allowed to do less than 80 mph" would work in getting you out of a ticket, or do you think the officer might be justified in doing something more than merely writing you a ticket in such a case?

Not only that, but by failing to turn over my doctor and my cardiologist's existing letters, they prevented the second oral surgeon from extracting the tooth yesterday, therefore, the pain continues, as well as everything else involved. By refusing to turn over the X-ray that my general dentist took, they were keeping records they had no rights whatsoever to keep, as they had taken it in the first place under pretense of being willing to extract the tooth, they explicitly added to the cost of the replacement for the job they agreed to do by accepting it - but didn't. Both the state dental licensing authority and the insurance company are going to get complaint letters detailing these facts. I can hope to put them out of business, or at least to cost them all of the clients they might have gotten from my insurer, and my general dentist certainly isn't going to send anyone else their way.

What is the lesson here, the applicability for my own business? Well, it's one I already knew, but it's been quite a while since I encountered jokers who were so determined to exercise their own petty power to the utmost. This is why I want to handle all client communications, and why an agent that doesn't is setting themselves and their customers up for a bad experience. Yes, it means I can't accept quite so many clients as I could if I were fobbing off as much as possible on an office staff - but I'd rather make a little bit less money and have clients that are 100% satisfied, making it much more likely that they will come back to me or send others to me. Because anyone who isn't 100% satisfied is poison to my business, and they're not likely to come back or send me anyone else, which makes letting office staff insulate me from my clients is far more costly that the somewhat lowered earnings ceiling of handling all customer communications myself.

When choosing an agent or loan officer, you want one who tells you to call them, not the office staff, and who handles your calls personally, not by telling someone else to call you back. It's perfectly fine to have staff handle communications between agents or offices or service providers. But someone who's too busy to handle your concerns and issues themselves also can't keep track of what those issues and concerns are - and it's likely to bite them and you. Considering the dollar amounts involved in real estate, I don't want to be bitten and I will do anything I can to keep my clients from being bitten. Be careful that any agent or loan officer you choose acts the same way I do.

Caveat Emptor

Original article here

I just went out doing some general market scouting. Looked at ten properties, and at least three were of a sort that I've started calling "vampire properties." Vampire properties are one more reason you want a good buyer's agent, and maybe even the strongest.

Like a mythical vampire, these properties are very charming on the surface, luring in the innocent victims with brand new flooring, new roof tiles, and new paint. All the relatively cheap stuff that inexperienced buyers love. There might even be a new spa in the back yard. They call the listing agent and fall in love with the property. They put in an offer, which is quickly accepted, buy the property and move in.

Then the troubles start. Those brand new roofing tiles get ripped off the rotten substructure the first time a good wind comes up. The new owners notice that the travertine floor tiles are separating, and eventually, when one comes loose, find that there's a widening crack in the foundation that runs the width of the house. That beautiful new tile in the bathroom has to come out because they discover the green board is rotten, and the framing boards have mold as well.

It'd be better if the property was sucking your blood. At least that's covered by health insurance if you've got it. But it's got its fangs permanently embedded in your bank account, instead. None of this stuff is covered by home owner's insurance, new home warranties, or anything else. Your home owner's insurance might replace the roof tiles (pulled off by wind, which is usually a covered peril), but the rotten structure underneath is your problem, caused by the normal wear of time.

In most cases, I find it hard to believe that the previous owners didn't know about this stuff. That's what the brand new facade is about. They figured a quick surface fix - the home owner's equivalent of a cheap paint job over a rusted car body - and they unload the lemon on some unsuspecting chump and walk away. Quickly.

For any of those sort of people reading this, I've got to tell you that the lawyers will find you. But for the buyers in the situation, the lawsuit - which will take years, even assuming that they win and if the judgment is paid and that it's enough after legal fees to cover expenses - is a poor substitute for not getting into the property in the first place. Particularly if, as seems to be the usual case, the buyers stretched to the extreme limit of their budget or beyond in order to afford the property.

It is far preferable, to all parties, to have the issues dealt with before the sale is consummated.

Most buyer's agents aren't licensed inspectors, and I'm not one of the few. You still want an full-on building inspection. That doesn't mean agents can't spot stuff before you have a purchase contract, come up with a deposit, and spend hundreds for an inspection. All of this is called "buy in," and works off of a phenomenon psychologists call cognitive dissonance. You've said you want it, you work really hard and jump through all of these hoops to get it, and when you find out how bad it really is, you keep going because you are so mentally committed, because you've done all this stuff. If it's something I can spot, wouldn't you rather find out before you all of this happens and before you've spent that money?

The listing agent certainly won't tell you. They'll have you sign a standard disclaimer advising you to get an inspection. Yes, they have to help fill out the disclosures, but if they're not licensed inspectors, they can't be blamed for not knowing, can they? Their responsibility is to get the best possible deal for the sellers. They have little responsibility to the buyer. You can't blame listing agents for doing their job. You can blame them for lying about things they actually do know, but that's about it Good luck trying to prove that they knew.

It's almost inevitable that the owners of vampire properties price the property like something out of Big Al's Discount Used Car Lot. "Cream puff, baby! One owner, a little old lady who only lived in it on Sundays." They want top dollar and then some. I understand, but I'm not going along and neither are my clients if I can help it. I saw one today where the list price was $40,000 more than it should have been if it wasn't a vampire. The agents should know better, assuming they are not deliberately "buying a listing." Price it to market if you want to move, and that includes a hefty discount for not being the one who has to hassle with fixing it. If you want that money in your pocket yourself, fix the problem yourself. You'll also interest a better grade of potential buyer, not to mention more buyers than just the simpleton who happened to win the lottery.

I'd rather deal with a property where the issues are out in the open. I also found one property today that has a crack across the living room floor, out in the open due the aftermath of an obvious flood, but I can find buyers who know how to deal with that (If the lot is level, it's not such a big deal, and can often be fixed surprisingly cheap). You don't have a listing agent pretending to drool over beautiful flooring that is going to have to be replaced anyway. Furthermore, it indicates that the listing agent, at least, doesn't have their head stuck in the Land of Wishful Thinking, so if I take a client who is interested despite the flaws out to the view the property, we're all pretty much on the same page as to what's going on with the property, and we have the makings of a reasonable negotiation. If the listing agent is in the Land of Wishful Thinking, I'm wasting my time to look and the client's also if I show it to them.

Vampire properties are out there. In markets such as this one, they are both increasingly common and deadly to your financial future. You want somebody whose job it is to look past the beautiful surface to the very real issues beneath. If you buy a vampire, it's worse than a disastrous marriage, because the financial consequences are likely to follow you long after you've shed that financially abusive partner..

Caveat Emptor

Original here

What's negotiable on a purchase?

The short answer is everything.

There may be standards and traditions in your area, whether they're the same in your area as there are in mine or quite different. That doesn't mean they are not subject to amendment by specific negotiation. Once you get outside legal requirements, anything is subject to negotiation. As long as it's legal and both (or all) parties concerned agree to it, that's the way it's going to be.

This is not to say that some things aren't better left alone. For example, if I was buying a property and the seller didn't want to pay for the policy of title insurance, as is traditional, I'd certainly think long and hard before continuing with the transaction. Furthermore, such behavior would certainly cause the price I'd be willing to pay to drop dramatically. If I'm helping clients, the same applies even more strongly. I'm going to tell them that this may mean the seller may know they're not be able to deliver clear title. Without clear title, I certainly don't want my clients to pay half a million dollars or so for a property they may not really own!

This is also not to say that there may not be consequences as the result. For example, if I or my client is selling the property, and a prospective buyer asks for a $10,000 credit towards closing costs, the lowest offer I'd accept would be at least $10,000 higher, probably $11,000, maybe more. Why? Because commissions and transaction costs are based upon the official sales price, not the sales price less that rebate to the buyer. The bottom line is that it costs the seller more than $10,000 to rebate $10,000 thusly. A $400,000 offer that requires $10,000 in rebates isn't a $400,000 offer. It's a $390,000 offer at best.

In order for it to be a valid contract, the two parties have to agree in every particular. If there is not complete, total, 100 percent written agreement as to what is going to happen, there is no contract. Two parties haggling over whether one light bulb gets replaced do not have a valid contract any more than two parties $300,000 apart on the price.

Nonetheless, except for those very few things mandated in law, it's all negotiable. Specific negotiation can change anything that's not legally mandated, and most things with defaults specified in law. If you've got a gold bathroom faucet that you want to keep, a normal sales contract says that it stays by implication (it's a furnishing attached to the property and required for the property to function normally). But you can change this by specifying that you have the right to remove it in the contract. Now if they buyer is only buying the home because of that gold faucet, they can walk away or counter offer that it stays. Let's say you eventually agree that it will be replaced by another gold faucet. That's specific negotiation. The replacement will be required to be installed, equal in functionality and free of defects - unless you change this by more specific negotiation.

I've seen negotiation for personal property to remain, furnishings to leave, the disposition of existing tenants, allowing leasebacks to the prior owners, and just about everything else under the sun. If there's something about the standard contract you don't like, or something specific to your situation or this property, specific negotiation is how you deal with the issue. Furthermore, even if you don't want to change anything, the other side might. More properties have further negotiations due to problems or issues raised by inspections than don't. Something is revealed to be not quite right, and the seller either has to make it right or negotiate with the buyer for acceptance in the current state. Providing they still want the transaction to proceed, of course.

This is not to say that as long as the transaction records the seller is golden, by the way. If the buyer can show reasonable evidence that the seller knew of the issue but failed to disclose it, that's a bone for the lawyers to fight over whenever it's discovered. Some sellers fight a losing battle over issues like this for years - and it ends up costing them far more money in the longer term. The buyer finds out something you should have told them after the transaction, that's a bad situation for a seller to be in. Better to disclose right away and be done with it. When the seller can prove the buyer knew the full extent of the issue and bought anyway, that's much better protection.

So make sure that if there's some issue you want resolved, the purchase contract resolves it completely and unambiguously. That contract details how the transaction is going to happen - how all the possible conflicts are going to be resolved so that there is no dispute. If it's not there, you're at the mercy of the other party. They might see it your way. Then again, they might not. More often than not, they're going to require some compensation in order to do it your way, where if you had just negotiated it in the first place, it quite likely would have been no problem, or insignificant enough to ignore in light of other factors. Incidentally, failing to negotiate complete terms in the first place is one of the big mistakes people acting without a real estate agent on their side make, and it quite often costs them a lot more than any commission they would have paid.

Caveat Emptor

Original here

Loans are declined, or actually, the next thing to it, all the time. It is pretty rare for a loan to be outright rejected; I do not recall ever having had a loan outright rejected. That's a sign of a loan officer who wasn't paying attention to guidelines when the loan was submitted. What happens far more often is that the underwriter puts conditions on it which cannot realistically be met. Documentation for more income than you make is probably the classic example of this. What usually causes this is that the underwriter finds a debt that didn't show up on the credit report and that you didn't tell your loan officer about, and so a loan with a marginal but acceptable Debt to Income Ratio became unacceptable. Or the appraisal comes in low, raising the cost or lowering the cash out due to a higher Loan to Value Ratio than the loan was priced for. Sometimes there is something that can be done about it; sometimes there isn't. If your loan officer can't think of anything to do about it, he'll tell you the loan was rejected. Sometimes they'll tell you that the quote that got you to sign up was rejected, also, but they have this other loan over here "that isn't much more expensive" that you do qualify for. Telling you that a loan was rejected is one of the best ways there is for a loan officer to do bait and switch.

Unfortunately, there really isn't anything you can do to verify that your loan was rejected, as opposed to bait and switched, or just couldn't meet underwriting guidelines. (Whether it had any chance of meeting underwriting guidelines is a subject for many more essays).

The first thing to do is realize that the fact you cannot meet guidelines for the loan that got you to sign up means that it is time to start shopping around again. That loan that got you to sign up does not exist as far as you are concerned. It's not like they are suddenly going to discover that the guidelines allow 5% higher debt to income ratio. If your loan officer is not a complete bozo, they will have gone over alternatives with the underwriter before telling you about the difficulty. If there's something they can do with a little bit more paperwork or a little more income, they're going to ask you if maybe you have the paperwork, or if you make $500 per year in some other fashion. A good loan officer told you about the loan because he believed you would qualify, but you don't. A bad loan officer told you about the loan because he thought he could use it to get you to sign up, and then pull a switch on you once he had the originals of all your paperwork and control of the appraisal that you've already paid for. There really is no good way to tell for sure. In either case, you are back to square one - shopping your loan. I would also think twice about staying with the same loan provider. He's told you about one loan he couldn't do to get you to sign up. Why not two?

So being told you don't qualify for the loan you thought you were going to get is always a sign that you need to start shopping your loan around again. That's why you don't ever give a loan officer your originals of anything. Even if somebody brings me an original, a copy is just fine and I can hand the original back. The only paperwork I need the originals of is the loan paperwork - the application I fill out and have you sign, and the disclosures associated with it. Such is not, unfortunately, the case with many loan providers. Do not ever allow your originals out of your hands. Once they've got them, many loan officers will hold them hostage to prevent you taking your loan elsewhere. It is to be admitted that it's a lot of work to do a loan. But they also dangled something you didn't qualify for in order to get you to sign up. The responsible party for their wasted work is themselves.

I used to encourage back up loans. With changes in the market making it costly to lock loans before we're certain they close, I no longer know anyone who will do back up loans - even I can't afford it any longer. And I also used to ask for a written promise to release your appraisal, but with Home Valuation Code of Conduct, that is no longer permissible. The changes that congress and other regulators have made (mostly in 2008-2010) are not for the benefit of consumers.

I've also dealt with Loan Providers Who Will Pay For Your Appraisal before. One way or another, you are paying for that appraisal. If you think you are getting it for "free", not only will you paying for that appraisal, you are paying for the appraisal of everyone who canceled their loan, too, and a good margin on top of that.

Caveat Emptor

Original here

"what happens to your equity when the bank forecloses" was a question I got.

The answer is that most, if not all, will be dissipated by the foreclosure.

Let's say you own a home currently valued at $500,000, that you owe $200,000 on it, and that you have a 6% loan. Now, for whatever reason, you can't make the payments, and for whatever reason, you don't sell while you have the opportunity before the trustee's auction.

I'm most familiar with California, but expect most other states to be similar. In California, you are going to be four months behind before the Notice of Default happens. So that is four payments of $1200. Furthermore, when you are fifteen days late you owe a 4% penalty, or $48, and when you are thirty days late, the missed payments start accruing interest. So at the point that the Notice of Default is possible, you owe $204,777.83.

From Notice of Default to Notice of Trustee's Sale is another 60 days, but before that happens, the bank is going to hit you with $10,000 to $15,000 in administrative fees for going into default. Check your contract; it's in there. Let's say $12,000, and now you owe $216,777.

Add another two months of delinquent payments, and penalties as of 15 days after. So as of the time the Auction actually happens, you owe $219,447. Furthermore, to make the auction happen, they will charge you about another $15,000. This covers the expenses of making the auction happen, of which the most noteworthy is the appraisal. At this point, you owe $234,447.

The appraisal bears special mention. Not only is there zero pressure to get a good value, the bank wants that appraisal to come in nice and low. They want the property to sell at auction, and if nobody bids 90% of the appraisal price, then they own it and have to go through the rigamarole of hiring an agent and selling it. So that appraisal is going to come in as low as is reasonable, to maximize the chance of it selling at auction. Every once in a while questions about low appraisals at trustee sales hit the site. The short answer is Microsoft Standard: "It's not a bug, it's a feature!" and from the bank's point of view, it is. So even though the property might sell for $500,000 in the normal course of things, the appraisal might come in at $440,000, meaning that someone has to bid $396,000 in order to buy the property at auction. The appraisal might be even lower, but let's say $440,000.

If someone bids $396,000 at auction (assuming they actually are able to consummate the transaction), they own the property. Less transfer costs, the bank gets maybe $380,000, of which the note is now for $234,000, and $300,000 of equity has dropped to $146,000.

But that's not usually what happens. What's usually happened is that the owners have financed it out to at least $375,000, hoping to be able to stave off foreclosure, and by similar math, they now owe roughly $425,000. How much do they get when the bank only got $380,000?

If the property doesn't sell at auction, the bank now owns it. Now they have to hire a listing agent, and offer a cooperating buyer's broker percentage, and while the listing agent looks for a buyer, the money owed keeps earning interest. Let's say the property eventually sells for $410,000, and the bank spends 7 to 8 percent of that getting it sold, so that their net is maybe $380,000. Even if you originally owed $200,000, by the time everything is said and done, you might owe $250,000 or more, leaving perhaps $120,000 coming back to the original owner. Keep in mind that in this example, you started with $300,000 of equity (60% of value!) based upon the sales of comparable properties. That's not a typical example. Even before the market decline, the percentage was typically 20% at most. With the market decline we've had, things are even worse than that for most folks.

Getting back to the example, if the owners were to short-circuit the whole process by selling successfully for that same $410,000 (almost 20% less than comparable properties might sell for) before the trustee's sale happens, and if they spend that same 7.5% to get it sold, they get about $380,000, of which they'll get to keep approximately $160,000, more than it is likely they will keep under the best possible outcome if the property went to trustee's sale. It's easy to sell reasonably maintained properties for 18% less than comparable properties are selling for. (Unfortunately, most people over-price their property even in this situation, not realizing how much time is going to hurt them)

So if you cannot afford your payments, and you're looking down the road at a trustee's sale, it is usually in your best interests to get the property sold before that happens. The lenders will generally be as accommodating as they reasonably can if you ask them and keep them in touch with what is going on. They don't make money on foreclosures - they lose large amounts of it even when the sale covers the note. Lenders don't want to foreclose. Thanks to California's Home Equity Sales Contract Act, once the Notice of Default hits, you are unlikely to be able to do business with investors except on an "emergency sale for 60% of value" basis (that being about the most those "Cash for houses" folks offer), so the sooner you act, the more money you will likely come away with.

Caveat Emptor

Original here

Hello, Mr. Melson,

I am one of your legion of fans of your www.searchlightcrusade.net website, having lucked into stumbling upon it by hyperlinking from another site. It is my goal to read EVERY ONE of your archived articles before I buy a house.

Yes, I wish you were here in DELETED, where I'd pay your going rate in a heartbeat to be my non-exclusive buyer's agent; but I must content myself with your archives to learn how to navigate this shark-infested swamp of BUYING A HOUSE. (Unless your services can guide me to such an agent here in DELETED.)

In hopes you can use this for a topic of one of your essays, yes, my husband and I are the proverbial "aging baby-boomers" looking to buy a house with his VA benefits and not interested (so as to be able to sleep nights) in anything but a 30-year fixed mortgage.

What makes us different from others in this category who might be writing to you is that we have no children, no family, no heirs but The Nature Conservancy; and we view our buying rural property as OUR LAST HOME with no relevant consideration for estate taxes, amortization, refinancing, ever paying it off, or any other usual
worries.

My question, should you be able to turn this topic into an article about Vietnam-era vets using their VA benefits to buy their final home with absolutely no intention of ever moving again and being able, through employment, disability benefits, and--soon--social security, to make the payments until we shuffle off this mortal coil,

WHY SHOULDN'T WE SHOP THE LOWEST PAYMENT WE CAN GET AND NOT THE TOTAL COST, AS WE HAVE LEARNED FROM YOUR ESSAYS?

Thank you from the bottom of my heart for your altruism in promoting consumer education on what has to be the most dangerous and confusing transaction any American consumer will ever undertake: BUYING A HOME.

Cordially,

Item the first, payment is trivial to lowball. Let's take a more or less standard example based upon rates back around the time I originally wrote this. I had a thirty year fixed rate loan at 6.00% for two points. Let's say you were buying a $300,000 home, and chose that 6.00% loan. $300,000 at 6.00% is $1847.16 per month. However, that transaction has closing costs of about $3500 in addition to those two points, plus the VA funding fee of half a point if you're not a disabled veteran. This gives a balance of $311,282. and a payment of $1866.30 (VA loans are allowed to roll up to 3% on top of purchase price into the loan). By pretending that $11000 plus doesn't exist, I could quote a lower payment, and most lenders do precisely because people do shop by payment. But you're either going to come up with it out of pocket or pay the higher costs. Actually, in this case, that's about $2300 cash you're going to need to make the transaction happen because you're above the 3% "roll in allowance", that they conveniently neglected to mention. Furthermore, these aren't the only games played with lowballing. Most people are amazed at how much it's possible to legally lowball a mortgage quote. Nor do the new proposed regulations change this. If you're shopping by payment, someone who writes an honest quote on the above is going to look like a more expensive loan than someone charging another point or so, who figures on cannibalizing your Good Faith Deposit and still rolling the maximum 3% into the loan, but pretends this money is going to come from out of the twilight zone. VA loans are just as subject to pretending real fees don't exist as any other loan.

VA do loans have another simplifying feature - they only come in fixed rate loans. I haven't kept close track, but last I knew, it was not allowed to get a VA guarantee on a ARM, hybrid, or balloon loan. This eliminates the trick of them telling you it's a "thirty year loan" while not mentioning that it's not a fixed rate for the entire time. And if you're looking for 100% financing, it's not like the lender is going to substitute something else, given the current lender fear of the market. But it has happened in the past that people were told they were getting a VA loan, but it turned out that wasn't the paperwork they signed.

Last issue on this point, there is the question of whether the rate was really locked, and for how long. Mortgage Loan Rate Locks are for a definite period. The longer you want to lock, the more it costs. So someone who knows it's going to take 45 days and quotes based upon a 45 day lock is going to be at a cost disadvantage to someone who pretends that a 15 day lock is going to be the same, and doesn't actually lock the loan, but lets it float. Six weeks from now when documents are ready, your rate is 6.75% because the market has shifted upwards and your loan was not in fact locked. Alternatively, they locked for 15 days and you ended up paying five or six tenths of a point in extension fees - significantly less that the upfront difference, which is usually about a quarter of a point.

At this update, lenders have made it extremely costly to lock a loan with them and then not fund it. It does not matter why; it only matters that a loan was locked and then had no loan actually funded. The way they discourage this is to levy a surcharge upon all future clients of that loan officer or office for a certain period, meaning you can't compete as well for future clients, so loan officers who want to offer low rates cannot lock until they are pretty certain your loan is actually going to fund. I get regular communications from the home office instructing me as to the consequences of locking a loan and failing to deliver it to the lender.

Item the second: People refinance, far more often than most people believe or are even willing to admit. You think that if you get that 6.00% loan today you're going to be happy forever. But then rates go down to where they can get 5.5% for that same two points, and they refinance. Or somebody comes along and sells them on a 5.5% loan that requires three or four points. There are VA loan companies that go around selling these, and they've got presentations that make it look like a good deal - which they are if you're one of the rare individuals who can resist them in the future. Problem is, they're going to be just as appealing then as they are now, and it's going to be just as good a deal then as it is now - providing you can resist future sales pitches beyond that. Let's look at how much money you've wasted if someone comes along and sells you a refinance a year from now:

Your choices: 6% for two points (plus VA funding and $3500 closing costs) versus 6.5% for zero points (plus VA funding and $3500 closing costs). Balance on loan 1 after 12 months is $307,459 Balance on loan 2 after 12 months is $301,615. You did save $740 in payments with loan 1, or $1150 in interest. The VA streamline does not require an appraisal, and can roll another 3% into your balance, so let's say you can get 5.5% for three points, which means a minimum of 1.5 points out of pocket, but you figure it's worth it to cut your payments. Your balance is now $316,680, and you spent $4700 plus in hard cash, to boot. $21000 plus in financing costs, to keep your payment low. If you get the "no points" loan to start with, your financing costs are $10650 in your balance and about $100 less out of your pocket, or roughly $15,000 - a difference of $6000, which is roughly $35 per month forever.

People really do get into this kind of refinancing loop, and actually it's worse than this because most people roll a month or two of payments in, plus the impound account. They just spend the money from the payment check they don't write and the impound account as well. I once spoke to a guy up in Riverside County who bought for just under $160,000, and the costs of serial VA streamline refinancing had driven his balance up over $230,000. This is real money. If they had just refinanced less often, or for lower costs, their payment would have been almost thirty percent lower, and he would have had sixty to seventy thousand dollars more equity in his property!

Issue the third: What happens in such a situation if you have a need for that money? It's gone. But aging people - particularly without heirs - develop needs for money. For instance, long term care expenses. I wrote a three part series on that quite some time ago, but they are still worth reading. one, two, three (The Republican congress later in 2006 repealed the so-called Waxman Amendment I reference in part two, but most states still do not have a partnership program). And it's not just long term care, either. You may have medical coverage and not need to worry about it, but I assure you that many seniors are not in such happy circumstances. You may be wishing at some point in the future that you had that equity available to you. I've met quite a few who did.

In short, there are a lot of traps lying in wait (or ready to be set) for the people who shop by payment. Whereas if you shop by the tradeoff between rate and cost, Ask the questions you need to ask. The payment is the byproduct of these more important items. Payment is, after all, determined by simple mathematics.

None of this is to say it may not be a good idea to buy the rate down as much as you can. If you have a history of not refinancing for ten years or longer, and you swear a pact in blood not to refinance ever, no matter how good the deal, it is a good idea to buy the rate down with points. It also reduces your cost of money over time, if you keep the loan long enough that you recover the cost of those points. The drawback is that this puts a lot of money into what is effectively a bet that you're not going to sell or refinance for a long time. If something about your situation changes before you've recouped the money, that money you sank into the rate is basically gone.

For most folks, this bet is a very poor one to make. It makes the odds of successfully completing an inside straight look good. The outcome is under your control, but the vast majority of people who make this bet voluntarily let the casino bank off the hook before they've recouped their wager investment. Nonetheless, it is a bet that can work out very well if you are a member of that tiny minority who does keep their loans long enough. In the example referenced above, the borrower who keeps the initial 6% loan the full term and pays it off will pay only $360,583 in interest, versus $389,042 for the 6.5% loan, a difference of $28,458, almost five times the difference in cost of procuring the loan. For your upfront bet investment of about $6200, you get your payment lowered by $61 per month and initial cost of interest by about $96 per month. If you keep the loan the full term of 360 months, you more than get your money back. But for the population in aggregate, that's a money losing investment, as the median time people keep their mortgages is about 28 months. Even if you double that, you're still on the losing end of the wager.

PS I am intentionally not taking into account the time value of money, or the alternative uses for the money, but $6000 invested at 10% per year turns into roughly $105,000 in 30 years, and $34,500 at 6%, which would, by the numbers alone, be another reason not to do it.

Caveat Emptor

Original article here

RESPA (Real Estate Settlement Procedures Act) prohibits an agent from requiring you to have other services performed by specified outside companies, or by a particular associated company either. RESPA also prohibits an agent from accepting payment (kickbacks) from third party service providers. Nonetheless, these are major problems in the real estate world.

It is an unfortunate fact that many agents care far more about the little bit of extra they get from third party service providers than they do about their fiduciary responsibility to the client who helps put potentially many thousands of dollars in their pocket.

For instance, never take a real estate agent's unsupported word about a loan officer. It happens on a routine basis that I talk to people in other parts of California where I'm not set up to be their real estate agent (kind of hard for me to show someone a property in Redding when I'm in San Diego), but thanks to the modern age, I am perfectly capable and set up to be their loan officer. Approximately one real estate agent in three completely refuses to cooperate with me as a loan officer, despite the fact that I'm getting their client a better loan than the loan officer this person wants them to use. I can have written authority for the information, and they won't give it to me. Okay, so I go through the escrow company - no big deal in most cases.

I can understand and sympathize with this attitude, if what they were worried about was my ability to do the loan at all. After all, if the loan isn't ready at the end of the escrow period, this transaction they've spent so much effort on falls apart.

So I tell them this: Have your friend do the back up loan, if you're so certain I'm full of it. If they were worried about a client's best interest, they'd sign off on that in a heartbeat. If I deliver, your client is better off. If I don't, they are no worse. Either way, the client is very happy and has gotten a better loan and their interests have been served.

There is only one motivation that I can think of for what happens consistently: the agent keeps carping at my client to cancel the loan with me. Let's consider what this means.

No matter how unlikely the agent thinks it is that I'll deliver exactly that loan, with cancellation, the probability I can deliver it goes to zero. So I can now guarantee that this client to whom he has a fiduciary responsibility doesn't get the lower rate loan I was working on. Greatest possible benefit to client: zero. Downside: higher payments, higher costs, worse loan, zero leverage on other loan officer to deliver the loan he said he would.

Furthermore, no matter how good a loan officer, there's always a chance something goes astray, and for whatever reason the loan doesn't get approved. He's now exposing his client to the possibility that his friend, the loan officer, won't have a loan ready to go. If this happens, client loses house, deposit and other time and money invested. Possible benefit to client: Not paying for a second appraisal (when I originally wrote this it was only a $100 retyping fee for the appraisal saved, but Home Valuation Code of Conduct was not written for the benefit of the consumer, but rather that of appraisal management companies and their contributions to the political coffers of one certain politician). Possible downsides to client: no house, lose deposit, fees for appraiser, inspectors, etcetera wasted. Furthermore, the agent loses his prospective commission - several thousand dollars.

So what could cause an agent to want his client to cancel my loan? The only thing I can think of that explains the whole shenanigan is that this agent is in line for a payoff. Can I prove it? Absolutely not. Have I tried to think of alternative explanations that make sense? Many times, with no success. Maybe I'm missing something here (if so, email it to me), but I sure can't see any other possible benefit to the client or the agent.

Here's another thing. Title and escrow companies. There are a variety of services escrow companies are supposed to provide the transaction - but title companies are actually the ones set up to provide many of these services. So the title company charges a sub escrow fee, messenger fees, etcetera for performing those services. But, they will waive those fees (not charge them) IF the escrow company in the transaction happens to be one they own.

Hey, I think, a pretty nifty way I can save my clients several hundred dollars! Makes me more valuable to them! And since kickbacks from title and escrow are illegal as well as unethical (according to RESPA and the Code of Conduct as well as good business practice, respectively) I certainly can't see a benefit to me for urging them to choose otherwise.

(And I am truly sorry to anyone reading this who works at an independent escrow company. As far as I can determine, you're just as competent as the title company escrows, and no more intrinsically expensive. But it's really hard for your company to compete when choosing your competition saves my client money that's usually about equal to the base escrow cost. Plus the fact is that it's a violation of my fiduciary duty if I don't tell them this)

You wouldn't believe the resistance I get from agents who obviously want their client to choose one particular escrow company, and one particular title company that aren't affiliated. The sellers do have the right to choose title and escrow companies, or at least to negotiate them. But that's the seller's right, not the seller's agents. And a failure to inform them of obvious ways to save money by choosing an escrow company that will save your clients this money is a violation of fiduciary duty.

I just finished fighting one not too long ago where the seller supposedly wanted to choose an escrow company whose name just happened to be the same as the name of the real estate office that the seller's agent worked for (I.e. X Real Estate and X Escrow company). Now it may be possible that they are unaffiliated with that real estate office, and it may be possible that they are set up to handle all of the duties that cause the title company to charge those extra fees. So my client's counter-offer included the following phrase:

"Since the seller has chosen title and escrow companies unaffiliated with each other, seller is to be solely responsible for all sub escrow, messenger, and additional fees assessed by the title company above the cost of the title policy."

It even gives them an out - if the escrow company is set up to handle these services that are supposedly their responsibility, and does so that the title company doesn't charge for them, it makes no difference to either client.

The other agent didn't want to present the counter to his client. He specifically asked me to drop that wording. I knew exactly what this meant, particularly in the case of the escrow company that just happened to share the name of his real estate brokerage. No evidence admissible in court, of course. But I had to threaten to have my broker call his broker with the clear intimation that my next call would be to Department of Real Estate in order just to get him to present the offer to his client. Do you think it's possible he failed to inform his client about this trivial way to save money? How likely do you think it that there was some kind of payment going on off the books? All of this is illegal.

There are two companies that provide the vast majority of all home warranties, at least in this area. I can't even name another home warranty company off the top of my head. Each of them is affiliated with a particular title company. The policies are the same, as far as I can tell. Somebody wants to know the differences, I tell them to consult an insurance expert (The expert I consulted concurred with my opinion). But one of these insurance carriers is more expensive. If I'm representing the buyer, I don't care - his coverage is going to be pretty much the same. If I'm representing the seller, I'll tell them to please consult a licensed casualty insurance agent, but B is less expensive as far as I can tell. Why then, do I keep seeing sellers who are volunteering A? I can't believe a fully informed client is volunteering to spend more money for the buyer's benefit in order to buy coverage that looks to be the same.

The long and the short of this post is that just because it's illegal under the law doesn't mean it doesn't happen. Just because that agent has a fiduciary responsibility to you under the law doesn't mean they take it seriously.

What can you do?

Well, choose an escrow company that's affiliated with your title company, or an escrow company that's affiliated with a title company, and choose that title company too. On refinances as well, do not allow your loan provider to choose title and escrow who are unaffiliated with one another (to be honest, I haven't helped buy or sell property outside of California, so have no idea how this works in an attorney state). Look for something like "X Land Title" and "X Escrow." This will save you hundreds of dollars. They'll try to sell you on benefits like "Having escrow right here is very convenient," or "I know this escrow officer won't mess up the transaction." There are poor escrow officers, to be certain, but there are lots of good ones. Make it clear to your agent that you are unwilling to pay subescrow fees. If they want to choose escrow and title such that subescrow is going to happen, make the agent agree to pay them.

Ask not just your real estate agent, but also your insurance agent about home warranty policies. Or look in the Yellow pages under Home Warranty Coverage and call around if you're selling a property. Do this before you have an offer.

And above all, don't just go with your agent's recommendation on a service provider. It's unethical, illegal, and just plain bad business practice, but that doesn't stop a certain number from having their hand out behind your back. And it's just as likely to be the highly accredited agents at Big Name Brokerages with loads of brand awareness who are doing this. More likely, actually, as the reasons people go to that type of practitioner is to pretend they don't have to worry about details.

Caveat Emptor

Original here

There are two main sources of bargain properties. The obvious one that everyone knows about is properties fresh on the market where the owner doesn't realize what they've got. This is the largest single reason why potential buyers obsess over days on market: They think they're going to find something nobody else has, yet. Unfortunately for this mindset, everyone else has precisely the same idea. Everyone else wants to look at that fresh on the market property, hungry for the bargain nobody else has discovered yet. As a result, this sort of property is where you get bidding wars as everyone else jumps on the same bandwagon, making the owner and the listing agent both very happy.

The "It's so beautiful!" property is not where you get a bargain, especially when it's fresh on the market. Actually, it's only a potential bargain when they're overpriced and the owner won't listen to reason that they get to the point where they aren't fresh on the market. People go to great lengths to make properties beautiful precisely because they will then command premium prices, especially when they're fresh on the market. This is another one of those trade-offs: You can buy a beautiful turn-key property, or you can get a bargain. Choose one or the other - you cannot have both. Choose wisely, by what is important to you. There is no sin or mistake in choosing to spend more money for a property where the work has been done. You are essentially saying that it's worth the extra money to you, and that's fine. This mistake is choosing the fixer when it's worth the money to you to have the turn-key, or in choosing the turn-key when would rather have the money (or can't afford the beautiful property where all the work has been done!)

The second, superior source of bargain properties is usually properties that have been on the market a while. They're not beautiful, so Mrs. Average Buyer does not swoon with delight at the thought of that kitchen and that bathroom. It specifically doesn't grab prospective buyers by the throat and say, "Buy me or you'll never be happy again!" If it did that, it wouldn't have gotten to this stage; it would have been bought when it was fresh on the market.

It may be old, it may be filthy, it may be cluttered, or all three. But the basic construction is still solid. This is not a Vampire Property, it just hasn't been updated in a while. There are no cracks in the foundation, no rot in the wood, no leaks in the pipes. There's nothing really wrong with it; it's just not beautiful right now. As a result, buyers will pass it by. They're too busy looking at the surfaces, looking for brand new granite counters and travertine floors that they don't notice that's what is there is quite serviceable and usually pretty easy to update.

Buyers don't swarm these properties simply because they don't know what to look for. They see fifty year old now. They're looking at what the property looks like now, not what it will look like after some very simple renovations that cost a lot less than the difference in cost between this property and the brand new rehab that's just been put on the market down the block. Some people think they know what they're looking for in a bargain, but most of them are wrong. This is one of the many places a good Buyer's Agent comes into the process. I've been around this particular block a few times, and I do know what I'm looking for and what it looks like. Lots of buyers will tell you they're looking for a bargain, but when the time comes to make an offer on one they just won't move off the dime. They're still hoping to find something for the same price with the work already (and freshly!) done. That's not going to happen. The reason the owners did that work was to be able to get more money for the property. You can pay the extra money (and the interest on it if you're getting a loan!), or you can go shopping for properties where the work is waiting for you. The folks who just remodeled in order to sell are likely to be disappointed anyway, but until they face reality, you're wasting your time.

Don't get emotionally attached to any property, especially if you don't own it yet. I tell people that if they're going to get emotionally attached, the best time is as I'm handing them the keys when the transaction has closed. Until the transaction is done, be willing to walk if it's called for. You're making an investment of several hundred thousand dollars. If that investment is going to be a problem or the owners don't want to let it go on reasonable terms, leave it to be their problem. They're trying to sell it; that's a representation they don't want it any more. If they make life too difficult for people who want to buy, that property is still their problem unless and until that transaction closes. I'd rather find my clients something else that's not going to be that kind of problem. Go through the purchase process with the mindset of, "I think I'd like to live here." Make the offer, reach the contract, apply for the loan, do the investigations, and go through subsequent negotiations and everything else with the idea that you think you'd like to live there - and be prepared for something to change your mind. many sellers, listing agents and loan officers all take advantage of people who aren't prepared to change their minds - and not a few buyer's agents as well.

The ideal bargain property is the same one it's worthwhile to remodel: Old, unfashionable surfaces with poor lighting. Most folks won't even consider such properties, which is another reason why they go for attractive prices. Nor do a lot of sellers want to deal with the updates - putting cash out of their wallet for someone else's enjoyment. I'd say inherited property is probably the quintessential example of this. The heirs just want money; they don't want to come up with the cash that enables them to get a better price. This makes it a high supply, low demand situation. You're not going to be the envy of all your friends at the housewarming party the weekend after it closes, but you are going to have a mortgage that leaves you a lot more room to afford other things, and a couple years down the line people will be asking how you got such a steal.

Caveat Emptor

Original article here

from an email:


On a related note, I hope you might have some advice for us. My husband and I just sold our condo. But we are NOT buying at the moment. Instead we are renting. (Not sure where we are going to be 6 months out and buying does not sound like a good idea until we are settled again.) So we are spending a small part of the profit off the sale on retiring the only credit card debt we still have and putting the rest in a money market to earn interest until we can use it as a down payment on our next house.

However, with no credit card debt and no mortgage (and one car loan that will be paid off in about a year) I am afraid that by the time we buy a house, we won't be considered good credit risks because of not having loans we are paying on.

We DO have a credit card that we put some charges on and pay off every month. Is that enough? Or is there something else we should be doing now to make sure we remain credit-worthy for a mortgage loan?

We will be renting an apartment. Does that show up on the credit report?

In general you want to have two open lines of credit to have a credit score. This doesn't mean that you necessarily have to have a balance on either of those lines of credit.

What you're doing seems fine and was a good idea when I originally wrote this in late 2005. Now (in 2010) I think that anyone who is in a position to buy and hasn't is crazy. It was a rough market; I probably wouldn't have bought unless I knew I was going to stay (or keep it) five years or more. In general, rent does not show up on a mortgage provider's credit report. It probably will not count as an open line of credit.

The card you use, which I gather is what you use to maintain credit, needs to be an actual credit card, which appears to be the case. If it is a debit card, it doesn't count as a line of credit to determine whether you have two open lines of credit or not. If it is indeed a credit card, you've got one existing line of credit that you've had for a while. Keep it open, keep paying it off every month. This helps your credit score even if you never carry a balance.

However, instead of closing the (other) credit card you have a balance on, may I suggest that you simply pay it off but keep it open? Unless it has a yearly charge just for having it, it costs you nothing to keep it in your safe at home. This gives you another open line of credit, and because you've had it for a while, this is better than a new line of credit (length of possession of open lines is one factor determining credit scores, and over five years is best). You might want to use it once per six months or so just so they don't think you've canceled. As long as it's a regular credit card where if you pay it off within the grace period there is no interest charge, and that's your second open line of credit. Keeping an existing card also potentially means avoiding a hit for a credit inquiry if you want a replacement.

You also currently have an installment payment operative, which is fine as long as you keep paying it on time. Depending upon how much you're getting in interest on the money market, it may behoove you to ask for a payoff. If the money market is getting two percent taxable and you're paying five on the installment debt (not tax deductible), you may wish to consider paying it off. On the other hand, if either of the two above cards is a debit card, this is your second line of credit, so keep it open long enough to get something else.

I live in San Diego, which has several big credit unions, and I've had good experiences having my clients apply for credit cards with most of them (they're also a decent source for second mortgages and home equity lines of credit - that's where they're set up to compete best - but first mortgages I can usually beat them blindfolded, because it's not where they're set up to shine). There are also any number of available offers on the internet, but check out the fine print carefully. Credit Unions may not be absolutely the best credit cards available, but they tend to be shorter on the Gotcha! provisions.

(Internet searches for credit unions in Los Angeles turn up fifty or more; in the Bay area a similar number. You need to do your due diligence and you may not be eligible to join most, but I've found it worth doing as opposed to doing business with the major banks and credit card companies that advertise like mad. The money to advertise doesn't come from nowhere.)

This should help you make informed choices as to what to do given your current situation to maintain two open lines of credit and a good credit score. Please let me know if this does not answer all of your questions or if you have any further questions.

Caveat Emptor

Original here

(click for Part 1 of Save For A Down Payment or Buy Now?, which deals with the basic question of how well saving for a down payment increases affordability)

As an alternative strategy, suppose that instead of waiting to buy that $400,000 house because you can't afford the payments now, you buy a $250,000 condo (or whatever you can afford) now - and then sell it for your down payment later. In other words, you buy what you can afford right now instead of waiting and saving until you can have the home of your dreams. Then at some later time you sell the condo for the down payment on the home you really want.

Let's look at the trade-offs for the condo. I'm going to assume that the condo's equity is the sum total of the saving you are doing, and I'm going to manipulate rents until I get $833 per month cash flow difference (your $10,000 per year savings from Part I). This yields a monthly rent of $977.46. You can't rent $250,000 condos around here for $1000 per month, but we'll stick with the situation I figured even though the argument in favor of buying the condo is far stronger. Let's also assume it costs 7% of the value to sell the property, make allowances for property taxes, HOA fees, etcetera. It'd be a bear if I didn't already have the spreadsheet done, but here are the results:



Year
0
1
2
3
4
5
6
7
8
9
10
Value
$250,000.00
$262,500.00
$275,625.00
$289,406.25
$303,876.56
$319,070.39
$335,023.91
$351,775.11
$369,363.86
$387,832.05
$407,223.66
Monthly Rent
$977.46
$1,016.56
$1,057.22
$1,099.51
$1,143.49
$1,189.23
$1,236.80
$1,286.27
$1,337.72
$1,391.23
$1,446.88
Equity
0.00
15,431.56
31,674.53
48,772.18
66,770.15
85,716.58
105,662.21
126,660.56
148,768.08
172,044.30
196,552.03
Net Benefit
-17,500.00
-13,443.41
-9,518.73
-5,769.20
-2,244.10
1,000.56
3,901.27
6,386.11
8,373.86
9,772.91
10,480.08

Now, I have to admit this seems marginal. You've only got an extra $10,000 in your pocket after 10 years. So you sell the condo and buy your house, and plugging these numbers into the affordability spreadsheet improves the affordability of the house you really want by 8% in only 8 years. Nonetheless, this is 2.5 times the affordability increase afforded by investing the money.

Now let's consider the situation as it really exists. That $250,000 condo rents for about $1300, which makes a big difference to what you save. It's like taking the previous situation, and adding $322 per month to your investments as well. Here's the numbers for the condo, adding the investment, and coming up with a total.



Year
0
1
2
3
4
5
6
7
8
9
10
Value
$250,000.00
$262,500.00
$275,625.00
$289,406.25
$303,876.56
$319,070.39
$335,023.91
$351,775.11
$369,363.86
$387,832.05
$407,223.66
Rent
$1,300.00
$1,352.00
$1,406.08
$1,462.32
$1,520.82
$1,581.65
$1,644.91
$1,710.71
$1,779.14
$1,850.31
$1,924.32
Equity
0.00
15,431.56
31,674.53
48,772.18
66,770.15
85,716.58
105,662.21
126,660.56
148,768.08
172,044.30
196,552.03
Savings
$0
$4046.11
$8515.91
$13453.74
$18908.64
$24934.73
$31591.84
$38946.03
$47070.31
$56045.30
$65,960.08
eq+sav
$0.00
$19,477.67
$40,190.44
$62,225.92
$85,678.79
$110,651.31
$137,254.05
$165,606.59
$195,838.39
$228,089.60
$262,512.11

Now let's paste these last numbers into the affordability sheet and see what we get:



Year
0
1
2
3
4
5
6
7
8
9
10
available
$0.00
$19,477.67
$40,190.44
$62,225.92
$85,678.79
$110,651.31
$137,254.05
$165,606.59
$195,838.39
$228,089.60
$262,512.11
price of house
$500,000.00
$525,000.00
$551,250.00
$578,812.50
$607,753.13
$638,140.78
$670,047.82
$703,550.21
$738,727.72
$775,664.11
$814,447.31
payments
$3,631.97
$3,670.64
$3,709.34
$3,747.86
$3,786.00
$3,823.49
$3,864.42
$3,928.79
$3,993.62
$4,058.65
$4,123.58
affordability
1.00
1.02
1.04
1.06
1.08
1.10
1.12
1.14
1.15
1.17
1.18

So we see that this strategy has increased the affordability of the house you really want by 12% over only 6 years, holding background assumptions constant. This is twice again the affordability increase rate from the last example (2%/year as opposed to 1), and so almost five times the affordability increase rate of just saving for a down payment. Furthermore, those payments on your condo are mandatory, and the increases in value happen of their own accord, whereas most saving programs run by individuals falter a bit over time, nor is there any such thing as a 10% return per year tax free. In short, I'm comparing a real world real estate investment with a hopelessly idealized other investment, and buying the less expensive property in the real world beats the idealized other investment. Saving for a down payment makes comparatively little sense unless you are not yet in a position to buy anything, either due to stability, insufficient income to buy anything, or because your situation does not permit financing for the down payment you have.

Taken all together, this forms a powerful argument for not waiting until you can afford your dream house, but buying what you can afford as soon as you are in a position to do so with the intention of trading up later. Delaying means you cut the later years off of the results, not the earlier. The benefits to real estate don't start until you put your foot on the ladder. If I had known this when I was in my twenties, I'd be millions of dollars better off today. So plan ahead, and start working towards your goals now. You can never go back in time with what your figure out later, or with the effort you expend later.

Caveat Emptor

Original here

An email asked a question I should have thought to answer a long time ago, and the answer may surprise a lot of folks. I've been vaguely aware of this for a couple of years, but I was amazed how strongly the numbers solidified my views!


My wife and I aren't ready to buy a property yet, but we are trying to plan how much to save for our down payment. You've mentioned that there's a spectrum from nothing down to 20+% down broken down by 5% increments, but how do you choose where to be on that spectrum? I can see that there are tradeoffs between the amount you have to save, the cost of your mortgage and the like, but I don't have a good way of thinking about those tradeoffs. And, since we're in the DELETED area, 20% down could easily get into the six figures, so it can be quite intimidating.

Given the way leverage works in even a slightly appreciating market, it is generally to your advantage to buy as soon as 1) You are sufficiently stable in your employment and expect that you're going to be in the area at least another three to five years, 2) You have enough of a reserve that the first minor bump in the road will not lead to disaster, and 3) You make enough to afford the payments. However, what usually happens is that people get a raise, a promotion, or a new job, or more often, they get married or have a baby and that is what sets their thinking on the road to buying a home.

(Note: When I originally wrote this, loans available were different than they are now. But the situation will go back to that eventually, and there are ways to make a minimal down payment work, even today, and the basic ideas I'm presenting are, if anything, more valid than when I originally wrote this)

Let's consider a $500,000 property and an 80% first trust deed with an appropriate piggyback 30 due in 15 second if needed, since that is generally returning more favorable rates than a Home Equity Line of Credit right now. When I originally wrote this, I had 5.875 for about 9/10 of a point plus closing costs, or about $7100 total cost. But there are potential adjusters - and relevant to this situation, having subordinate financing for 100% CLTV added one full discount point ($4000 in this case) to the first mortgage, or you can drop down to 6.25 for the same cost. 95% financing only adds 1/4 of a point in the same situation, or you can get a 6% even for the same cost. At or below 90% CLTV, there was no add to the first mortgage. If we're at 80% with a $100,000 (20%) down payment, the 5.875 first is all there is. Taking dead average credit scores (720) with this same lender, the closing costs are $500 (flat) when you do the second concurrently. 85% CLTV would be an 8% second on $25,000 for a down payment of $75,000 (15%) plus closing costs. 90% CLTV would be $50,000 down payment (10%) and leave you with a $50,000 second at 7.375%, benefiting from a bump down in rate for hitting a certain dollar value. 95% CLTV requires a $25,000 down payment and leaves you with a $75,000 second at 7.75%. 100% CLTV (no down payment) leaves you with a $100,000 second at 8%. It would be 8.25, but you've hit another economy of scale break point.

Here's a table:





CLTV

80

85

90

95

95

100

100

1st TD

5.875

5.875

5.875

5.875

6.000

5.875

6.25

2nd TD

n/a

8.00

7.375

7.75

7.75

8.00

8.00

Cost

$7100

$7600

$7600

$8600

$7600

$11600

$7600

1st pay

$2366.16

$2366.16

$2366.16

$2366.16

$2398.21

$2366.16

$2462.87

2nd pay

$0

$183.45

$345.34

$537.31

$537.31

$733.77

$733.77

interest

$1958.33

$2125.00

$2265.63

$2442.71

$2484.38

$2625.00

$2750.00


So you see that having a down payment is a very good thing. This is for a fairly ideal situation. If you were in a stated income situation (when we had stated income loans, which nobody does any longer), the rates were slightly higher and step somewhat more steeply. If your credit is significantly below average, the rates start higher and step up more steeply still. It gets rough if both apply.

However, this doesn't take place in a vacuum. Let's say you can save $10,000 per year, and earn 10% tax free on what you save. But while you do, housing prices are still going up in the aggregate (at least when the economy is healthy, and if the economy doesn't get healthy soon we'll have worse things to worry about then whether to buy real estate). Let's assume 5% per year on average. We will also assume that you can get a 6% loan for the first and 8% for the second whenever you buy, and taxes at 1.2% of value per year, here's the projected situation:



Year
0
1
2
3
4
5
6
7
8
9
10
down
$0.00
$10,500.00
$22,050.00
$34,755.00
$48,730.50
$64,103.55
$81,013.91
$99,615.30
$120,076.83
$142,584.51
$167,342.96
price
$500,000.00
$525,000.00
$551,250.00
$578,812.50
$607,753.13
$638,140.78
$670,047.82
$703,550.21
$738,727.72
$775,664.11
$814,447.31
CLTV
100.00%
100.00%
100.00%
95.00%
95.00%
90.00%
90.00%
90.00%
85.00%
85.00%
80.00%
payments
$3,631.97
$3,736.52
$3,842.45
$3,949.44
$4,057.11
$4,165.04
$4,272.73
$4,379.60
$4,484.99
$4,588.14
$4,694.16

Where payments is the total of mortgage and monthly tax payment pro-rated when you buy. Examining that column, we see that this is an argument against waiting. In fact, assuming a 3% (compounded) raise per year, the property is only 4% more affordable in year 10 with a $167,000 down payment! This neglects rises in rents and other costs of living!

I should mention that smooth raises are not the way any market works over a 10 or 20 year period. Up, down, flat, crash, skyrocket, all happen due to unforeseeable factors, as well as ones you'd have to be a politician to not see. The basic ideas remain sound as a general principle, although the actions of politicians can certainly influence them - upwards or downwards. But in general, over the long term, markets have population increases and increased demands on the land available. Real estate prices increase in the long term, whatever may happen in any individual year (or few years). leverage makes the effects of that increase have spectacular financial effects.

At this update, the only 100% financing that is generally available is if you are eligible for a VA loan, but the principles remain the same. Once you have enough to make a down payment acceptable to lenders, the numbers are very strongly in favor of buying instead of waiting for a larger down payment. FHA loans require only 3.5% down, and are available to basically everyone who hasn't defrauded the federal government.

Original here

(Here is Part 2 of Save For A Down Payment or Buy Now?, which tells one way to increase affordability more and faster)

A while ago a reader gave me a heads up that Illinois HB 4050 was hurting residents of certain poverty stricken Illinois Zip Codes. Now I have to pick on my own state:

California law generally requires special handling of sales transactions to protect homeowners in foreclosure. This law, called the Home Equity Sales Contract Act, generally applies to transactions that meet all of the following four conditions: the property is one-to-four family dwelling units; the owner occupies one of the units as his or her principal place of residence; there is an outstanding notice of default recorded; and the buyer will not use the property as a personal residence. The Home Equity Sales Contract Act does not apply if one of these four conditions is unmet. If, for example, a seller occupies a property in foreclosure, but the buyer will be occupying the property as his or her personal residence, the home equity sales law does not apply.

If all four conditions are met, however, the buyer must use a home equity sales contract, such as the C.A.R. standard form "Notice of Default Purchase Agreement" and attachments. This agreement gives the seller, among other things, a five-day right to rescind the contract. Furthermore, the home equity purchaser cannot be represented by an agent. More accurately stated, the law requires a buyer's agent to be bonded by an admitted surety insurer, but C.A.R. is unaware of any insurer currently offering the bond.

Actual Code Here

This is so brain damaged it has to be the idea of some clueless idiots out to save the world without first stopping to consider the Hippocratic Injunction to "First, do no harm." But then we are talking about the California Legislature.

Now, in the business, the term "equity sale" or "equity purchase" is most commonly used in conjunction with a sale subject to existing trust deeds. So this is a significantly different meaning to a similar phrase. Keep in mind that there are four conditions that need to be met:

1. Residential property (1-4 units)
2. Owner occupies one unit
3. Notice of default recorded
4. Buyer does not intend to occupy.

But what happens with such properties? Who buys them? Investors, that's who. Not people looking for a primary residence. Guess what? The owners want them sold - need them sold! What happens if they don't sell? They go to auction, and the owner basically gets nothing, whether the property sells at auction or it doesn't, in which case the lender now owns it.

Furthermore, they're requiring that the buyer's agent have a bond that is not available, and has not been for years. So if whether they're working with a shark or with an investor who is actually going to give the people a decent price, the buyer's agent cannot be compensated. So what are most buyer's agents going to do? Answer: Wait until after the trustee's sale! As the buyer's agent, they have no fiduciary responsibility to that seller, and no ability to get paid. But the owner wants to sell before the trustee's sale. The chances of them getting anything from a trustee's sale or afterwards are about equal to one my grandfathers giving birth to triplets. Furthermore, this creates openings for unscrupulous listing agents to set up lowball offers on the property, or buy it themselves, with even less constraint than usual.

Now, this does theoretically create an opportunity for certain people who might be willing to live in the property to buy for lower prices, since investors are (mostly) out of the picture. So we are robbing Peter (the current owners) to pay Paul (in search of new housing). There are also some truly outstanding issues. What happens if my buyer client is lying to me about whether they intend to live there? The contract is already written, the terms of the transaction set, and the buyer's agent can't back out at the last minute when the buyers change their mind about whether they're going to live there. Also, what happens if everything is fine when the contract is written, but the lender drops a Notice of Default on the sellers the day we're set to close?

In the current market, most of the folks in default do not have large amounts of equity. Matter of fact, the typical seller who is delinquent is really hoping that the lender will sign off on a Short Payoff. This is not shark investors swooping in and buying granny's $500,000 property for $80,000. With the number of people there are pushing Reverse Annuity Mortgages, that's not going to be the case any time in the foreseeable future. Granny can get a RAM, after which she can last long enough to sell for a good price. Instead, what's going on is that the properties are going to foreclosure, costing the lenders more money, adding to the fees the owners pay, and lengthening the odds against the current owners coming out of the situation with anything. They want buyer's agents on the job, finding these bargains for their clients so that the sale gets made before the trustee's sale. Keep in mind that the seller is always allowed an agent, and the seller can always say "no," to the offer. Which is preferable: Not getting as much as you might have gotten for a sale under ideal conditions, or getting nothing?

Henry David Thoreau had some words on this situation:

If I knew for a certainty that a man was coming to my house with the conscious design of doing me good, I should run for my life, as from that dry and parching wind of the African deserts called the simoom, which fills the mouth and nose and ears and eyes with dust till you are suffocated, for fear that I should get some of his good done to me -- some of its virus mingled with my blood. No -- in this case I would rather suffer evil the natural way.

As is always the case, the California legislature was determined to do good, and ended up hurting the people they were allegedly trying to help. There are very few exceptions to Thoreau's rule.

Caveat Emptor

Original here

Copyright 2005-2021 Dan Melson All Rights Reserved

Search my sites or the web!
 
Web www.searchlightcrusade.net
www.danmelson.com


The Book on Mortgages Everyone Should Have
What Consumers Need To Know About Mortgages
What Consumers Need To Know About Mortgages Cover

The Book on Buying Real Estate Everyone Should Have
What Consumers Need To Know About Buying Real Estate
What Consumers Need To Know About Buying Real Estate Cover

Buy My Science Fiction and Fantasy Novels!
Dan Melson Amazon Author Page
Dan Melson Author Page Books2Read

The Man From Empire
Man From Empire Cover
Man From Empire Books2Read link

A Guardian From Earth
Guardian From Earth Cover
Guardian From Earth Books2Read link

Empire and Earth
Empire and Earth Cover
Empire and Earth Books2Read link

Working The Trenches
Working The Trenches Cover
Working the Trenches Books2Read link

Rediscovery 4 novel set
Rediscovery set cover
Rediscovery 4 novel set Books2Read link

Preparing The Ground
Preparing the Ground Cover
Preparing the Ground Books2Read link

Building the People
Building the People Cover
Building the People Books2Read link
Setting The Board

Setting The Board Cover

Setting The Board Books2Read link

The Invention of Motherhood
Invention of Motherhood Cover
Invention of Motherhood Books2Read link



The Price of Power
Price of Power Cover
Price of Power Books2Read link

The Fountains of Aescalon
Fountains of Aescalon Cover
The Fountains of Aescalon Books2Read link



The Monad Trap
Monad Trap Cover
The Monad Trap Books2Read link

The Gates To Faerie
Gates To Faerie cover
The Gates To Faerie Books2Read link
**********


C'mon! I need to pay for this website! If you want to buy or sell Real Estate in San Diego County, or get a loan anywhere in California, contact me! I cover San Diego County in person and all of California via internet, phone, fax, and overnight mail. If you want a loan or need a real estate agent
Professional Contact Information

Questions regarding this website:
Contact me!
dm (at) searchlight crusade (dot) net

(Eliminate the spaces and change parentheticals to the symbols, of course)

Essay Requests

Yes, I do topic requests and questions!

If you don't see an answer to your question, please consider asking me via email. I'll bet money you're not the only one who wants to know!

Requests for reprint rights, same email: dm (at) searchlight crusade (dot) net!
-----------------
Learn something that will save you money?
Want to motivate me to write more articles?
Just want to say "Thank You"?

Aggregators

Add this site to Technorati Favorites
Blogroll Me!
Subscribe with Bloglines



Powered by FeedBlitz


Most Recent Posts
Subscribe to Searchlight Crusade
http://www.wikio.com
If you want a loan in California, or to buy or sell in San Diego County, my office contact information is Here

-----------------
Advertisement
-----------------

Monthly Archives

-----------------
Advertisement
-----------------

My Links