Yesterday, I checked my referral logs and found an article where somebody was essentially saying “If you want to be depressed, go read this site and then go rent somewhere for the rest of your life”.
I can understand where the sentiment is coming from, particularly if they were of the sort of person who wants to meander around occasionally looking at houses until they find one they like, then sign a couple of papers and move in. Lest it not be obvious to you, these are the elements of disaster. I would never put an offer in without looking at at least ten to fifteen properties in the area, without aggresively shopping the mortgage market, or without taking positive steps to insure that I have at least as much leverage over the service providers as they do over me.
The fact is that for most people, the largest transactions of their life are all going to be real estate related. When the average transaction is in the hundreds of thousands of dollars, and those transactions are so complex as to defy understanding by non-professionals, you have the elements for a system that’s going to suffer abuses. Many past abuses have been corrected through the passage of legal impediments, but many others remain, and some are illegal but keep happening anyway (See my article on “What to beware in Third Party Services linked at the bottom of this article).
What I am trying to do here is give you the insider’s appreciation for what goes on (although not the professional’s specialized knowledge. It may not be “rocket science”, but to pretend you can pick up everything a working professional learns and gets exposed to every day by reading a few articles would be false, and of no service to you). With this information, you can debunk the worst of the nonsense that you are told and get a better bargain for yourself no matter who your real estate agents and loan providers and financial planners and whatnot are. I am writing about knowledge that you need to have to understand the system, and I’m not pulling any punches about what goes on, anywhere in the transaction. I’m trying to show you limitations and blind spots in the information you may receive, and show you strategies that put you in a stronger position. Most of the articles I have written thus far pertain to real estate and mortgages, but this applies to other areas I intend to work in as well.
So if you’re the sort of person who prefers to go on in an “ignorance is bliss” state of mind, the education may be disturbing. Indeed, many people seem determined to go about their real estate (and other) transactions in this state of mind. They resist when I attempt to educate them in the realities of the market, figuratively in the same vein as people who put their hands over their ears and say “la-la-la! I am not listening! la-la-la! I am not listening!” It’s like they want to get taken, or at least not having to think about it is worth more to them than the money they’re being taken for. Since the money they’re being taken for can easily go into five figures whether it’s a purchase or a refinance, I find this difficult to believe. If you’re making that much, you shouldn’t need a loan.
Nobody does loans for free. Nobody does real estate for free (nobody does financial planning for free, legal advice for free, etcetera). “Free” is likely to be the most expensive service of all (This is different from at such a rate that yield spread pays all costs). If you’re of the school that forewarned is forearmed, what you’re reading here should give you the information you need to guard yourself against the deceits in the system. I’ve done lists of “red flags,” warning signs not to do business there, “Questions to ask” that you can print out and take with you, “Salesgoodspeakian to English,” debunking of pat phrases used to mislead you and what they really mean. I’ve given you strategies (apply for back up loans, order the appraisal yourself, don’t sign exclusive buyer’s agreements, etcetera) that give you more leverage down the line. I’ve gone through what real closing costs are, what points are, and warned you of the dangers of shopping for loans or real estate by what they tell you the payment will be. Most importantly, I’ve shown you how to keep control of your transaction by being aware at the start of the process what the likely bumps are going to be.
Not everyone in the business does everything I’ve warned you about. There are ethical providers out there; people like myself who will walk away from business or tell clients the pitfalls if something is not in the client’s best interest. You can find us if you look for us. Nor are those who practice otherwise necessarily evil. Real Estate, financial planning, and many other fields are set up such that someone new in the business learns from somebody experienced. In many cases, they’ve been told “This is the way things are,” and they just don’t know any better. The person who taught them didn’t know any better. It is my aim to ensure that people “know better.” The change is not going to come from within the industry – the system is set up for their best advantage, and any one agent or loan provider unwilling to toe the industry line is at a competitive disadvantage, and their business is likely to fail. It’s kind of the tragedy of the commons: their own individual behavior shows them nothing to gain, and everything to lose, by full truthful disclosure, and where there are people who do it anyway, we are comparatively few. Therefore, the change must come from outside the industry. So by being knowledgeable consumers and helping yourselves, you provide impetus for practitioners to reform their practices for everyone. It may take a long time, and it may never be complete, but if it’s never started I can guarantee it won’t get done.
Exclusive versus Non-Exclusive Buyer’s Agent Agreement
From an email:
I was in the process of buying and selling the house when we saw a FSBO house we liked was for sale. But sale fell through, which is a good thing anyway because of contigency on our house. But I also suspected it failed ecause the seller refuses to pay commission to our buyer agent.
My question is that this real estate agent that would represent us as a listing agent is also a buyers agent. However, I had another friend look into the contract and the buyer’s agent agreement is valid until December 31, 2005. So that means anytime we find a house, he will be paid? We do the work to find a house and he gets paid? It didn’t strike to me as ethical or fair. It will simply takes us off the real estate market until January 1, 2006 when we can start all over with a clean slate. Correct?
We don’t think it should’ve been in effect until December 31. It should be in effect only for that FSBO house we liked, and if the deal falls through, then his job as a buyer’s agent also stops.
Am I dealing with a greedy real estate agent or is this typical?
Can I have one agent to sell our house and another agent that represents us to buy a house?
This depends upon the nature of the agreement you signed with him. I use non-exclusive buyer’s agreements, which basically say that if I introduce you to the house, then I get paid when you buy it. Others use exclusive buyer’s agreements, where they get paid no matter who finds the house.
If I have an exclusive buyer’s agreement with you, then I am going to get paid on any house you buy. If I have an non-exclusive agreement, I will only get paid if I introduce you to the house, and you may have any number of non-exclusive agreements in effect as long as you are careful to inform each agent you are working with that you have previously been introduced to a given property, and therefore, any commission that takes place will be paid to the other agent. All of the forms used by California Association of Realtors state that you will pay a commission to the agent if the seller won’t, so an agent has comparatively little stake in which house you buy, as long as you buy one through them. This gives them the largest possible incentive to work on your behalf, without binding you to one particular agent who rather be working with another client who came along with a bigger budget, and therefore a bigger commission in the offing. When looking for homes to show, ethical agents won’t seek out a For Sale By Owner (FSBO) for reasons I go into near the bottom of this article (basically, protecting your pocketbook), but these do not apply if you, the client, choose to make an offer on a FSBO.
I suspect that you signed an Exclusive Buyer’s Agent Contract with him, something I would not do unless he’s providing you with lists of foreclosures or something. Once such a thing is signed, that agent is going to get paid no matter what house you buy during the agreed upon period. I would never agree to either a listing or buyer’s agents period longer than six months. This gives the agent plenty of time to sell your house or find you one. So if the agreed upon expiration is six months from now, then if you buy before then, that agent will be paid – out of your pocket, if not the seller’s.
There are two competing factors here. One is your desire not to pay for services not provided for this particular transaction, versus the agents desire to get paid if they actually do the work anyway. If they serve as your negotiating agent, or help expedite the transaction by providing services, they are ethically entitled to be paid whether or not they introduced you to the property. On the other hand, if all they do is obstruct, there is neither a legal nor an ethical reason why they should be paid. Depending upon the nature of their obstruction and how much it cost you, you may wish to contact an attorney to recover, or your state’s Department of Real Estate
Sad to say, there are agents out there looking to line their own pockets in any way they can. A better agent wants to get paid, but realizes they will make an excellent living – better in the long term – by putting your interests first. Without more evidence, I cannot say for certain, but it appears at first glance that this agent had you sign an exclusive buyer’s agent agreement in order to represent you in a transaction you found. I am not aware of any regulation prohibiting this, but it does seem like it’s excessive from a neutral viewpoint. It is probably not voidable, however.
There are standard California Association of Realtors (CAR) forms for both exclusive and non-exclusive buyer’s agents agreements. Look up at the title of your copy. If it says “Exclusive”, you are stuck with this person. If it says “Non-exclusive” you may do business with anyone you please, as it applies only to those properties this particular agent works on. Of course, many agents and brokers use non-standard forms for this, as the standard CAR forms are readable and understandable by anybody. If they want to throw curves, non-standard forms are one of the best ways to do it.
As to whether you are dealing with a greedy agent or if this is typical, the truth lies somewhere in the middle. As in all sales occupations, the idea of locking up your business creates powerful motivations for them to have you sign exclusive agreements. There are nonetheless, people such as myself who feel that if I am not helping you, I don’t deserve to be paid, and let someone else have a shot. But if I’ve got an exclusive agreement with you, I should be providing daily foreclosure lists, copies of all new listings, or at least something that goes above and beyond sitting on my hands.
Many agents want you to sign an exclusive buyer’s agent agreement before they do anything else. Unless you’re getting something special out of it, you shouldn’t sign one at all. Offer to sign a non-exclusive buyer’s agent agreement – that way you have leverage over them, not them over you. They are motivated to work for you and find you a property that is attractive to you at a price you want to pay, because if they don’t, someone else will. Even the best agent can’t find stuff that doesn’t exist, like a 3 bedroom home in La Jolla for $250,000, but if it does exist I’m going to work to find it first, and I will get paid for it because our agreement says I will get paid if I introduce you to it. If you have signed an exclusive agreement, there is no particular hurry for them to help you.
Finally, listing agreements for sale are (in general) individual agreements for a particular piece of property for a particular period of time. As long as there is no more than one listing agreement per property in effect at a time, you can have any number of different agents for sales, even if you have signed an exclusive buyer’s agreement for purchases.
Please let me know if this does or does not answer all of your questions.
Able Danger, Databases, and the Right to Privacy
While I was reading up on the Able Danger controversy this morning, I ran across some side information on a recurring theme of mine. I want to bring this to the attention of my readers:
From the CNN interview of Colenel Shaffer
What I did was I married the land information warfare activity, LIMA, at Fort Belvoir, Virginia, an Army unit, Army capability, to the special operations command for the purposes of this exercise, this targeting exercise of al Qaeda. What the LIWA did — and it was their ability to go through massive amounts of open-source data, 2.5 terabytes, and look for patterns that related to previously-known terrorists. It was that information then which popped up…
S. O’BRIEN: So, by trolling the Internet and LexusNexus, things like that, I think that’s what you mean by open source data? Am I right about that?
SHAFFER: Open source — anything that’s not a classified database. We’re talking about commercial databases, financial databases. Anything that’s out there that relates to the real world.
And let me be specific on this. S. O’BRIEN: And his name pops up?
SHAFFER: Well, yes, because terrorists live in the real world. As we recognize from the London bombings, there’s a picture of the terrorist in a whitewater rafting trip. They live in the real world just like we do. They plan in the real world.
S. O’BRIEN: What were those documents that — give me a sense of what kinds of documents targeted Mohamed Atta a year before 9/11 as a potential terrorist.
Look at this. This man is telling you that you have no privacy. Just the illusion. If someone wants to find out about you, they can. So don’t do anything that you wouldn’t want to see on the front page of every paper in the world.
Now, this illusion of privacy allows for a lot of evil things to go on. Identity theft. Cons and scams. Evil men and women going from place to place to place to catch new victims. It allows the powerful to protect their privacy legally while invading yours in fact. They can prevent us from looking at them; it is much easier for them to look at us.
It also allows for the perpetuation of more hypocrisy than most people think about. If it were legal and trivial for me to find out if Mr. Rich or Ms. Powerful violated any number of vice statutes (drugs, prostitution, gambling, blue laws, etcetera), how long would the police be able to hassle ordinary citizens on these points? How long would vices of personal choice like this remain illegal? What would this do to the economic underpinnings of organized crime and gangs? Why should anyone pay Mr. Criminal Drug Dealer whatever the street price of illegal drugs is when they can go buy it at the pharmacy? How much would we save on all the enforcement activities and incarceration? How much would we lower theft, burglary, and mugging when the stuff is no more expensive than aspirin?
On the economic front, imagine if every Good Faith Estimate for every loan that every loan officer ever did was freely available to prospective clients, along with the subsequent HUD-1 when the loan funded. Prospective clients could see if a loan officer did or did not have a track record of delivering what they said they would. Imagine if every real estate transaction had a subsequent issues attachment in a public file, and you could search the database for past performance by an agent, by an owner, or by a property. Imagine if every piece of investment advice could be tracked on a database by who gave it, who followed it (and whether the person giving the advice was among them), and what the results were. The deadwood and parasites would vanish from all three of these professions. Con games and fraud would shrink to a fraction of their current size. Real Estate and loan transactions would have large portions of their costs demolished.
This is not a complete list, by any means. But I’ve long since decided that this illusion of privacy is far too expensive. It allow the powerful the ability to restrict our liberty while maintaining theirs. It allows the criminal to steal our property. It allows the incompetent to remain anonymous, and the con man to prevent their victims from being warned. It forces us to spend our tax money places it doesn’t need to be spent. It allows too much of the way we spend our tax money, and the process by which it is allocated, to remain unscrutinized. It allows the very process by which our tax money is collected to remain unscrutinized, and if potential IRS abuse of the tax code doesn’t bother you, or abuse of the tax code by those who can afford “protection money” (i.e. lawyers, accountants, etcetera), then something is wrong.
Bottom line: This illusion of privacy allows those who would do us harm to walk among us undiscovered. It allows those with power the ability to harass those who aren’t hurting anyone. It allows those who have harmed us to escape what should be the consequences of their actions.
This is one book with a very worthwhile explanation of the issues. I’ve been hitting this subject since before it came out, but Mr. Brin does a more comprehensive job here with these issues than I have seen elsewhere. It also discusses what some limits to transparency should be.
Take your time and decide which is more important to you: Being able to pretend in public, or not having to pretend because no one else can, either. Lies, Hypocrisy, and Demogoguery to distract us, or public disclosure and scrutiny of real issues. Criminals and incompetents and rip off artists being able to pretend in public that they are fine upstanding citizens with our interests at heart, or being carted off to jail, losing their licenses, and just plain being put out of business? Being able to escape accountability for your actions, or being able to ensure that everybody is accountable.
I know which side I’m on.
Saving Money by Being Realistic About Your Mortgage
If you haven’t heard about the thirty year fixed rate mortgage, welcome to planet earth and I hope we can be friends.
The thirty year fixed rate loan seems to be the holy grail of all mortgages. It’s what everyone wants, and what they’re calling about when they call me to talk about refinancing a loan.
Well, it is secure, and it is something you can count upon today, tomorrow, and next week, etcetera, until the mortgage will theoretically be paid off.
The problems are three fold: First, it is the most expensive loan out there. It always has had the highest rate of any loan available, and always will (Except for the 40 year loan which is making a comeback for no particularly good reason). This means you are paying more in interest charges every month for this loan. Second, according to data gathered by our government, the vast majority of the public will refinance or move about every two years, whether they need to or not, paying again for benefits they paid for last time, and didn’t use. This is essentially paying for 30 years of insurance your rate won’t change, and then buying another 30-year policy two years down the road, then another two years after that, etcetera. Finally, because it is always the highest rate and this is what everyone wants, many mortgage providers will play games with their quote. They will quote you a rate on a “thirty year loan”, meaning that it amortizes over thirty years, not that the rate is fixed the whole time. Or they’ll even call it a “thirty year fixed rate” loan, but the rate is only fixed for two or three years. Every time you hear either phrase, the question “How long is the rate fixed for?” should automatically pop into your mind and proceed from there out of your mouth.
The fact of the matter is that there are other loans out there that most people would be better off considering. In the top of the loan ladder “A Paper” world, there are thirty-year loans that are fixed for three, five, seven, and ten years, as well as interest only variants and shorter-term loans (25, 20, 15, 10, and even 5 year loans). The shorter-term loans tend to be fixed for the whole length, but of course they require higher payments.
I personally would never consider a 30 year fixed rate loan for myself, and here’s why. First, the available rates go up and down like a roller coaster. They are the most volatile rates out there. Given that I will lock it as soon as I decide I want it, it’s still subject to more variations that any other loan type. Back when I bought my first place, thirty year fixed rate loans were running around ten and a half percent. Five years before that, they were fourteen percent and up. Second, having some mortgage history, I can tell you I refinance about every five years. Why would I want to pay for thirty years of insurance when I’m only going to use about five?
Even in 2003 when I could do a 30 year fixed rate mortgage at 5 percent without any points, I could do a 5 year ARM (fixed for five years, then goes adjustable for the rest of thirty) for four percent on the same terms. I keep using a $270,000 mortgage as my default here, so let’s compare. The 30 year fixed rate loan gives you a payment of $1449, of which $1125 is interest and $324 is principal. The five-year fixed rate loan gives me a payment of $1289, of which $900 is principal and $389 is principal. I saved $225 in interest the first month and have a payment that is $160 lower, while actually paying $65 more in principal. What’s not to like? If I keep it the full five years, I pay $51,549 in interest, pay down $25,791 off my balance if I never pay an extra dollar, as opposed to paying $64,903 in interest on the thirty year fixed rate loan, while only paying down $22,062 of my balance – and I’ve got $13,500 in my pocket, as well as the $13,300 in interest expense I’ve saved and $3700 lower balance. If I choose the five-year ARM and make the thirty-year fixed-rate payment, I cut my interest expense to $50,539 while paying off $36,426 of principal (remember, every time I pay extra principal it cuts what I owe, and so on the amount of interest I pay next month.). If I then pay $3500 to refinance, adding it to my balance, I have saved many times that amount. I still only owe $237,074, as opposed to the 30 year fixed rate loan, which has a balance of $247,938. That’s over $10,800 off my balance I’ve saved myself, plus over $14,300 in interest expense, simply by realizing that I’m likely to refinance every five years. And the available ARM rates are more stable as well as lower. From the first, I haven’t had one with a rate that wasn’t in the sixes or lower. Finally, if I watch the rates and like what I see and so I don’t refinance, I’m perfectly welcome to keep the loan. And all of this presumes that the person who gets the thirty-year fixed rate loan doesn’t refinance or sell the home, which is not likely to be the case. Statistically, the median mortgage is less than two years old, and less than 5 percent are five years old or more.
At rates prevailing the day I wrote this, I can get the same loans at 5.75 and 5.125 percent (without points), respectively – which is about the narrowest I’ve ever seen the gap. Assuming a $270,000 loan, for the 30 year fixed rate loan that gives a payment of $1576, which five years out means that I have paid just under $74,996 of interest, $19542 of principal and have a balance of $250,457. If I choose the 5 year ARM, my payment is $1470, so if I keep it five years I’ve paid $66,581 in interest, $21,626 in principal, and my balance is $248,373. Plus I’ve kept $6300 in my pocket, or alternatively, if I used the $106 per month to pay down my loan, I’ve only paid $65,713 in interest, have paid $28,826 in principal, and have a balance of $241,174. Even if I then add $3500 in order to refinance and the thirty year fixed rate does not, I’m still ahead $5700 on my balance plus the $9200 in interest I’ve saved, and the chances of the person who chose the thirty year fixed rate loan not having refinanced is less than 5%.
ARM mortgages are not for everyone. If you’re certain you are never going to sell and never going to refinance, it makes a certain amount to sense to go for the thirty year fixed rate loan. And of course, if you’re going to lie in bed awake every night worrying about it, the savings work out to a few dollars a day and my sleep is worth more than that to me, and so I’m going to presume it is to you, as well.
But what most people should be trying to do is cut interest expense while not adding any more than necessary to the loan balance. As I’ve gone into elsewhere, money added to your balance sticks around an awful long time, usually long after you’ve sold or refinanced, and you end up paying interest on it, as well.
So even though various unethical loan providers tend to quote you rates on loans that aren’t really what you are looking for if you want a thirty year fixed rate loan, they’re actually doing you a favor in an oblique and unintentional way, and somebody who is up front about offering you a choice between the thirty year fixed rate loan and an ARM is quite likely trying to help you. Consider how long most people are likely to live in their home (average is about nine years right now), how long they’re likely to go between refinancings (less than two years), and your own mindset. It is quite likely you can save a lot of money on ARMs. Why pay a higher interest rate in order to buy thirty years of insurance that your rate won’t change, when you’re likely to voluntarily abandon it about two years from now anyway? Why not just buy less insurance in the first place?
Caveat Emptor
UPDATE: I had someone question the numbers in the paragraph comparing the 4% 5/1 ARM against the 5% 30 year fixed rate loan, both of which were available at the same time in the summer of 2003. Now I have had it pointed out to me that I made a mistake in calculations somewhere. The numbers for interest and balance savings are correct, but those for payment savings are $9623, not counting the time value of money. Your savings are not the sum of the three numbers. It depends upon your point of view as to which is most important to you. The interest savings and the dollars in your pocket plus lowered balance are essentially the same dollars. They are two sides of the same coin. It’s just a question of what you’re most interested in. Not that $13,000 plus is chump change, even on this scale, and no matter how you look at it, you’re $13,000 plus to the good. You’ve either got $9623 in payment savings plus $3670 in lowered balance, both of which are “in your pocket” in one sense or the other. You wrote checks totaling $9623 less, and you’ve got $3670 in lowered balance, which translates to increased equity – not to mention that you’re not paying interest on it any longer. Or you could look at it as simply 13,000 plus in interest you didn’t pay. Most folks will lose some of the interest in the form of taxes they don’t pay, but 1) That’s never dollar for dollar and 2) I wasn’t going that deep when I wrote this article.
Mortgage and Housing Market Virtues
The scope of the problems that exist in the United States 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 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 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
Estate Tax
I have never liked or favored the estate tax, and yet I was very much of two minds about actually abolishing it. It actually did die for a year, before the legislation sunsetted and things reverted to the previous status quo, although it’s to be admitted the exemption amounts are now significantly larger. Estate tax reform was extremely popular, yet I suspect lawyers and accountants of being the culprits behind its return, in violation of client interest. Planning for estate tax it is only one of the issues involved in planning for what happens after your death.
The benefit of no estate tax (or one that doesn’t impact a particular estate) is obvious: people don’t get taxed, so their heirs get what they earned rather than the government. This is a good thing, and I favor it for that reason.
On the other hand, there were so many mechanisms varying from outright gifting to 529 accounts to life insurance to trusts, each of which except the first can be used to retain control and benefits of assets while avoiding estate tax liability, that estate tax was basically voluntary. You had to just not plan in order to pay estate tax, and some of the mechanisms available actually increase your available estate over what would have been its original gross value otherwise. Since we know that death is something each of us is going to have to face, there can be no reason except stupidity for not undertaking to plan for it. Whatever else it may be, estate tax is a voluntarily paid tax on stupidity.
Furthermore, there are other estate and contingency planning options that people need to take care of, and fewer people are doing so as estate tax was one of the primary levers that moved people to do it. All of this planning is just as necessary as estate tax planning, and usually taken care of at the same time.
Here are just a few of the other issues:
Will: The will probably should not be used for financial purposes, but resolves other functions such as who gets custody of minor children. Please note that a will is not necessarily binding upon the states where your will is probated, and can be challenged. Many wills are challenged, a large portion of them successfully, and even if your estate wins the battle it will be diminished in the process.
Durable Power of Attorney for Health Care: if you can’t make health care decisions, this tells who you delegate that power to. If there’s a court case brought, it’s going to be very short and abrupt. Case closed.
Trusts, revocable and irrevocable. I’m not certain it’s possible to successfully challenge a well-constructed trust where the assets that are actually transferred to it are concerned. You didn’t own them. The trust does, and the trust didn’t die. The instructions live on, like a corporation. The named successor trustee also usually gets the ability to manage the trust’s assets if you are alive but incapable. Assets in a trust can avoid not only estate tax, but probate as well. If you want to be certain of the disposition of what you leave, particularly in a speedy manner, this is probably the way to go. Many estates are not finished with probates for years, and until they are, your heirs don’t get control of the assets. Probate is also expensive, time consuming, and lucrative for attorneys. Seven percent of probated assets seems to be about the minimum cost, and it can easily top thirty percent. I haven’t investigated, but I suspect the trial lawyers would be solidly behind the return of estate tax for this reason.
Business operations: many small to medium sized businesses have no plan to keep them going in the event the owner-operator dies or becomes disabled. Certainly nobody else working there has the knowledge, the experience, and often the necessary licenses. If the business closes because the proprietor isn’t there, it’s worthless. If there’s a plan of succession to keep it open and operating, however, you or your family can likely sell it as a going concern with consistent profit.
Retirement plans: If you have certain types of tax deferred retirement plans, they can be expensive to convert to assets in your heirs’ possession, even without estate tax. Better to draw these down and keep other accounts available.
Life Insurance: There are going to be expenses when you go. These vary from taking care of the body you leave behind to probate to keeping your business running if you have one. The people doing these things want cash. Life insurance is usually the cheapest way to pay them. Your family is also likely to need something to replace your income. Life insurance is about the only choice.
One hopes you begin to get the idea. Consult an attorney and financial professional in your area to find out how it works, but all of this needs to be taken care of, or your family will wish you had.
Caveat Emptor
Let us Disagree Without Being Disagreeable
Scott Kirwin of Dean’s World directs us to Harry Stein column in City Journal, and then amplifies on one aspect, saying that he, too has a mixed marriage, and that it works very well and helps make him and his wife better people. He quotes Gerald Ford, “We can disagree without being disagreeable.”
First off, I want to corroborate his story. My wife’s family are all democrats, she marched with Cesar Chavez as a young girl. Mind you, they’ve pretty much stayed in the same place politically while the Donkeys drifted further to the left, to the point where she has actually considered registering Republican in the last year or so. Furthermore, most of the people I tend to hang out with are either Libertarian or Democratic, and they keep me from going to far towards the right.
Second, when exactly did we lose the ability to disagree without being disagreeable? When and where did people start automatically assuming that the opposition is evil? Particularly if they don’t convert to your point of view upon a first exposure to what you regard as pertinent facts?
Out of personal experience, I can trace the phenomenon back to 1976 on the left. Some members of my family are what we today call die-hard moonbats. I remember when Ronald Reagan was challenging Gerald Ford for the Elephant nomination back then them using some significantly over the top rhetoric on their part, “crazy attack dog who needs to go back to the B movies,” “He’d have us in a nuclear war in twenty minutes”, etcetera. I seem to remember him serving as president for eight years, correct me if I’m wrong but I don’t recall any nuclear wars during that period.
On the right the first I encountered it was Rush Limbaugh. I can remember the first time I listened to him, thinking, “Okay, he’s funny, he’s willing to call it like he sees it, he is a breath of something pointed vaguely in my direction politically, but he’s dangerous.” I haven’t listened to Rush in quite some time. I stopped years ago because even when he and I agree, I could detect no pretenses towards what I see as rational thought process on his part.
People are entitled to hold to different viewpoints than my own. Some of these people are rational, thinking human beings. The universe knows my own views on many subjects have evolved over time. Why can’t somebody with a different starting place be different now? Why can’t they have gone further, or not as far, or off in a completely different direction? Some of the smartest people I know think differently than I do. My father, who was beyond doubt the best man I’ve ever had the privilege of knowing, was a Democratic New Deal man to the core. He voted the straight Democratic ticket every election his entire life. You could have run a Democratic slate pulled from their KKK wing and their Communist wing, and he’d have voted for them all. I loved him anyway.
Why do people believe differently than I do? First off, they have different value systems. Somebody who legitimately believes that surrender is preferable to war is not going to agree with me on much having to do with national defense. I take solace in the thought that there are a lot more people whose values coincide with my own on this point than there are of them.
Second, we’ve had different life experiences. Someone who’s family comes from Central America, for example, is going to have a completely different viewpoint on the CIA and our national defense structure, as for a large part of the 20th century the US didn’t exactly treat those countries with a whole lot of respect.
Third, we may even see different facts differently. I am completely convinced that Lee Harvey Oswald was solely responsible for the murder of John F. Kennedy, but we have major films from people who aren’t. These people have regular conventions, periodicals, etecetera. I think they’re in denial and even if they’re right, it wouldn’t make a difference today. They think I am the one in denial, and that by so believing, make myself into a Tool. Maybe one of these days I’ll come across a fact, verified and vetted, that causes me to change my mind (not likely, I’ll admit. But the possibility is there.)
Fourth, we have different competencies. I’ve got a fairly broad spectrum of general stuff that I’m pretty good at, with areas of specialization here and there. Some of these are because of college coursework, some due to vocational concerns, and a whole lot of them because I find them fascinating (For instance, the intertwining of military, political, and technological history). On the other hand, aside from marveling at the skill involved in a masterwork painting, I have no clue about painting. I can sometimes spot that “This looks like a Van Gogh” before somebody tells me, but that’s about it. I have no idea of the artistic heritage that led to Van Gogh, who his influences were, or anything else that crowd finds fascinating. Similar situations apply in other fields. It’s not that I despise these people, it’s just that I’m interested in other things. When I talk about Napoleon’s influence on Clausewitz and through him on the Prussian (later German) army, or influences on tactics derived from the advent of rapid fire weapons, and how the American Civil War was a prelude tactically to World War I, I see the same blank stares back as I give them when they’re talking about Rembrandt or Picasso. That’s okay. But it means I see things through a different prism of learning than I do. Through the things I have studied, I am going to understand background facts without needing them explicitly covered, sometimes they are. And sometimes even after we have them explained, we’re not going to change our minds. It may not be rational, but it is human. It doesn’t make us evil.
Now, how do we disagree with someone without being disagreeable? First off, to the extent practical, we can aim our opposition at the issue, not the individual. It is not the same to say that “2 plus 2 equals four” as it is to say, “only an idiot wouldn’t realize two plus two equals four.” Second, spend some time listening to them. Try to understand what they’re saying. It doesn’t cause cancer. Maybe there’s a fact in there that one or the other of you has wrong. Maybe there’s a misunderstanding that you can clear up. Maybe you have a misunderstanding that they can clear up. And maybe the metaphorical temples that both of us listen to for our daily wisdom are both in the habit of ignoring inconvenient facts, and the real truth lies somewhere in the middle.
Once upon a time not too long ago we could disagree without automatically hating each other’s guts. Back in the 1950s it was a national joke about the wife’s vote cancelling out the husband’s (or vice versa). If two people who agree about nothing political can nonetheless be and stay happily married for life then, why can’t we be civil to those who disagree with us in public discourse today?
The 2006-8 Housing Bubble
“Housing Bubbles” were invented by stock brokers, and real estate remains, and will almost assuredly remain, your absolute best investment.”
(me again)
Actually, California pricing has reliably gone through cycles within my lifetime. We have hit the peak of the fifth one I remember (1991 was the last peak, which makes this the longest period between peaks ever. Previous peaks were mid 80s, about 1978, about 1970, and one when I was very young), and started a downslide. Right now it is primarily the higher end properties which have been hit, but it’s starting to push the middle down as well. It is important to note that with the exception of the slide of 1929 to 1932 (when real estate prices fell, as well, and didn’t come back to 1929 levels in most of the country until after the war), the stock market has not had a slump which it didn’t come back from within ten years, either. Furthermore, when you consider returns uncorrected for leverage, the stock market reliably outperforms real estate over the long term.
In fact, nobody that I’m aware of has said that anyone who intends to buy and hold for years cannot make money – a lot of it – in the current market, even if prices do fall for a while. The problem is in the formerly large number of people looking to buy a property with the intent of “flipping” it for a quick profit. As the ability to buy your average property with the goal of selling it in six months for a substantial profit even after paying transaction costs is just about dead, so too are those deals that would have been made by those buyers. This has the effect of reducing marginal demand, and voila!, the prices are starting to slip. I (and every other bubble proponent out there that I have read) am confident that the prices will come back eventually. The question now, as in the stock market bubble that ended in 2000, will be how long it will take to come back and how far down it’s going to go. Right now, lots of people are still down more than 50% from the stock market peak in March 2000. If they need to retire, or need the money for some other reason now, they are stuck. The same goes with housing, which due to the increased leverage of the investment can be much better when it’s good to much worse when it’s bad. There are at least three “short sales” (where proceeds will not cover obligations) in process in my office right now. If you can’t hang on, it does not help you that prices will come back eventually. There’s an awful lot of “Negative Amortization” loans out there that will be coming up on recast in the next 18 months, as well as “interest only” loans where the people just cannot afford the amortized payment. Be prepared for problems when they do, as this is going to significantly enlarge the supply (Inventory in many markets is over 200 percent of last years levels already, and mean time on market is even higher as number of transactions slips). The fact that prices have slipped will place many people temporarily upside down, and so unable to make their payments and unable to refinance when their loan adjusts or starts amortizing. Expect foreclosures to further increase the supply of available units.
If you are heavily leveraged on a short term loan (total loans against property total over 70% of current value, and most especially over 80%), I seriously suggest refinancing it into a longer term fixed rate loan now, while appraisers can still find justifiable comparables that use peak real estate values. It is entirely likely that any property which has changed hands in the last couple of years, at least here in urban or urban fringe California (and many other markets, as well), is going to end up upside down for an unknowable period of time.
I am a Loan Officer and Real Estate Agent, and still have current financial licenses which I have not yet abandoned. Real Estate Bubbles are not “invented” by stock brokers; the just ended bull market run in housing was the longest in recent memory partially due to peripheral psychological factors on behalf of investors “chasing returns” in what many will tell them is a “safe market”, as well as things having to do with the financial aftermath of 9/11 as well as overcompetitiveness on the part of many pieces of the financial market, most particularly the subprime and Alt-A market. As a particular prediction, when the fall off from the current market is over and done with, I wouldn’t expect there to be any lenders willing to go 100 percent on the value of a property for quite some time. There are many people out there too young to remember previous housing cycles, and partially for this reason and partially because the housing markets are more heavily leveraged than at any point since the Depression, I expect to be in for a couple of UGLY years.
I would be delighted to be wrong. Nobody will be happier than me if you can crow at me in a few years time “Told ya!” But I see what I see, and I won’t lie about it to anyone (especially not clients) simply because it makes it easier to earn a commission. If you happen to be in the real estate business, be very careful what you tell your clients, or, at least in California, you’ll likely wish you had.
Both real estate and the stock market go through periodic downturns. The question is not if, but “when” and “how much” and “how long.” You always need a place to live, and you can make money if you invest prudently in any market, and the permitted leverage upon real estate together with favorable tax treatment gives it an advantage that’s hard to beat. I had clients make double digit positive returns in each of 2000, 2001, and 2002 in the stock market, too. They were the ones who didn’t get greedy (2003 was a rising tide that lifted all boats. It isn’t genius when everybody makes 25%). Even in this market, you can make money on real estate, just like you could in the stock market when it was sliding.
In both cases, “time in” counts for more than “timing”, but that’s not the mentality you encounter in the average client. See my post Getting Rich Quick In Real Estate and Cold Hard Numbers for more information, but although real estate can be the best possible investment if you handle it correctly, it is not liquid. In fact, it is just about the least liquid investment you can make. You cannot go to your real estate person, as you can to a financial person, and say “liquidate it for cash” and expect to have a check for market value within a few days. You have to find a willing buyer. This is one reason for the existence of the “bigger fool theory,” and sometimes that bigger fool doesn’t come along when you need him to.
Caveat Emptor
For Sale By Owner
I’ve been taking a long look at the world of For Sale By Owner and similar concepts lately. With the digital revolution, you always want to be watching the tide to figure out if you’re in a business that’s about to go the way of milk delivery and diaper service – a few left, but only a tiny fraction of the size they were. Since blogs and online magazines replacing or at least greatly supplementing mainstream journalism is one thing I’m constantly reading about, it might be good information to know if my real career is about to go the way of journalism.
At this point, I’m not worried about needing to change professions. The world of For Sale By Owner (FSBO) does seem to be figuring out the legal ramifications fairly well. There are resources available to get most, if not all, of the legally required disclosures for sellers to avoid future liability to the buyers. I’m going to go on record as believing from the things that I have read that they are not as assiduously practiced as they are by people with real estate agents working for them. Reading the groups, I am seeing all kinds of whining about “Do I have to disclose X?” “Do I really have to disclose Y?” Sometimes, the stuff is minor and inconsequential (leaky toilet, drippy faucet), but a lot of times it’s pretty major as well (water leak in/under slab, lead based paint, asbestos, “minor” cracks in the slab). Mind you, I’ve heard similar whining from real estate agents, particularly new ones. But the real estate agents at least want to be in business (and not sued) for a long professional career with many transactions every year, and so have motivation to disclose everything they find out about, lest one transaction cost them their license. Many individual owners, it seems, even the ones who have been made aware of the legal requirement to disclose, are hoping to get through the one transaction unscathed. After all, they hope they’re going to be long gone when the problem crops up. To this, I say, don’t count on it, and failure to disclose can often make your legal liability worse than it needs to be.
Needless to say, this is a big “let the buyer beware,” when dealing with FSBO properties. You’re standing across the table from someone with an immediate motivation to not tell you about whatever metaphorical bodies are buried in the property because once told you may not still want to buy, and most particularly you may wish to reduce your offering price. They have only a hazy motivation to tell you – the indefinite threat of perhaps some legal action sometime in the future. If it doesn’t make you uneasy, something is wrong.
One area FSBO is falling short in is picking an appropriate asking price. By the evidence, this is not only lack of information but also homeowner ego speaking here. Some people are not aware of what their home is really worth, or if they are aware then they are ignoring the evidence. Speaking from personal experience in the current market, persuading people to put an appropriate asking price on their property is one of the most difficult parts of the listing interview. They are still mentally in the seller’s market we had last year, where they could automatically expect to get more than their neighbor got a couple of months ago. Also significantly, in the long seller’s market just concluded, many real estate professionals were making a lot of money buying “For Sale By Owner” properties that were under-priced, and immediately “flipping” them for $30,000 to $50,000 profit, often more. Here’s the math for a property that sells for $460,000 but should have sold for $500,000: In the latter case, assuming you pay a standard 5%, you paid a $25,000 commission, split between the buying and selling brokers. But you come away with a net that’s $15,000 higher. I personally know of several sales where an agent purchasing a FSBO property then sold it again before escrow was even completed for profit of $75,000 or more.
There is still some of that going on, but the problem right now with most FSBO properties seems to be over-pricing the market, rather than under. Their neighbors house sold for $500,000, and by god they are going to get $525,000. Never mind that the neighbor house has an extra bedroom, an extra bathroom, 800 more square feet, sits on a corner lot that’s twice the size, and most importantly, sold when demand was high and supply was low. They are going to get that price, come hell or high water. So they put that out as the asking price, and they wonder why the one or two people to express an interest vanish as soon as they’ve seen it. The reason is simple: They’ve priced themselves out of the market. There are better homes to be had for less money. In the past few years, this was a survivable defect. When prices are rising as fast as they were, the market would catch up to anything that was vaguely reasonable. That has changed now. It’s bad enough with people who have a real estate agent for their listing. Two of the hardest fights with listing clients in this market are keeping the property priced to the market, and getting them to accept what in today’s market is a good offer rather than hoping for last year’s “bigger fool.” Seems that most people who don’t have an agent are just in denial. There’s a FSBO two doors down the block from a corner listing we had where I held an open house. Even with me drawing the traffic to him, he didn’t get a single offer because his asking price was too high. That’s fine if you would be happy and able to stay if the property doesn’t sell. If you’re not in that situation, it’s not.
Another area where FSBO properties are falling short is in marketing. They’ve got an internet advertisement and a sign in the yard. Maybe they’ve got an advertisement in the paper (usually the wrong one), and maybe they are holding open houses. All of these are nice. None of these are optimal. First thing is that internet advertisement you have is often on one site where even internet savvy buyers don’t necessarily see it. Even if that is free, it’s probably worth money to list on a co-operating network of sites. For Sale By Owner signs in the yard are more bait for agents than a prospective buyer. I’ll put a sign out there when I get a listing also – it does catch a few people, and a sign with an agent or broker’s name on it keeps other agents from bothering you. But it’s a long shot at actually selling the property.
There are places to advertise your property to actually sell it, and there are places where agents advertise their business to attract new clients. Most of the FSBO ads I see seem to be in the latter sort of place. I don’t think I recall a “For Sale By Owner” ad in the places where I’d expect it to generate significant actual interest in buying that particular property. There are reasons for this. The ones that are likely to generate interest require more lead time. I don’t mind spending the money (especially amalgamating my listing with other listings in the office). Even if it sells before then, it helps the office generate more clients we’re going to go out and show similar properties with, and I get a certain proportion of those. But For Sale By Owners tend to balk, as they are thinking one transaction. There are also resources that make an Open House effective, but are not cost effective for somebody looking to sell one house.
Number one resource for actually selling the property is the Multiple Listing Service (MLS). Put it out there where the agents who the buyers come to will see it. My primary specialty is buyer’s agent. I know they are ready, willing and able to buy a property. Do I even take them to look at “For Sale By Owner” properties? Not unless I know ahead of time that the seller will pay my commission. Nor does any other buyer’s agent I know of. Before you “For Sale By Owner” types start cursing us, remember first, we’ve got to make a living so we’ll be there for the next buyer. Second, we’re actually living up to our fiduciary responsibility when we do this, as I’ve got their signature on a piece of paper that says they’ll pay me if you don’t. So unless your property is priced far enough under the market to justify the expense on my client’s part, your property is not a contender, and I’d better be prepared to justify the expense on my client’s part in court, so your under-pricing the market has got to be by more than my commission. Furthermore, going back to legal requirements, I’ve got to figure that there is a higher than usual chance that the seller will not make all the necessary disclosures, or perhaps won’t tell the complete truth and nothing but the truth on them. This puts my clients, and through them, me in a bind: Sure my clients can and will sue you, but if you don’t have the money my insurance is likely going to end up paying out, because even though I’ve done everything I reasonably could have done, you didn’t have an agent.
Given that the Multiple Listing Service is far and away the best tool for selling any given property, if you’re not on it, you’re missing out on buyers. If you don’t have a selling agent’s commission listed on Multiple Listing Service that is at least what is specified in the default Buyer’s Agent Agreement in your area, you are missing out on buyers. If you don’t have an agent at all, you are missing more buyers. Because I, like other buyer’s agents, want to be certain we’re not wasting our time. I’ve done a real pre-qualification or even a preapproval on my buyers (if the transaction doesn’t actually go through, I don’t get paid by anyone). Compare that with Mr. P, whom I sent away the night before I finished this essay. He’s out there looking at houses he wants to buy, but the fact is that given the situation he should continue renting. A competent loan officer such as myself who was less ethical could maybe get him the loan anyway, or maybe not. It would certainly be an uphill fight. So he’s out low-balling “For Sale By Owner” properties on his own today. The one who’s desperate enough to sell at that price needs the transaction done with the first buyer who comes along, and is going to spend at least a month finding out there’s only a small chance of the transaction actually going through, a month that they likely don’t have to spare. The other For Sale By Owners are likely to get mightily annoyed with him, but he’s the customer they’re most likely to get.
Caveat Emptor (and Vendor)
What can I do to Qualify for a House or Mortage?
There are a fair number of specific helpful suggestions to make in helping you purchase a home. All of them revolve around the loan. Let’s face it, the loan is far and away the most hypothetical and uncertain part about most real estate transactions. If there is a non-loan related problem, chances are that you really didn’t want to buy that particular property anyway. Most of the time, these problems mean that you would be buying into trouble, and nothing but. Unless you have specialized knowledge in sorting out that particular problem, it’s likely to be more expensive than any money you saved through reduced purchase price.
A poor loan officer can always botch a loan, of course, and even the best may not be able to push it through if you are a marginal enough case. So how do you improve your case standing?
The first thing is to get a credit score above 720. If you’re there already, keep doing what you’re doing. Even if you’re not there yet, it’s easier to improve than most people think, although it takes time. Make all of your credit payments on time, especially any mortgages and rental payments. These are the most important things to mortgage lenders. Note that you make a payment a few days later than it is due, and you may even pay a penalty, but the lender will not report it as late until 30 days later, and that’s when it counts as late. In order to qualify for the A paper loan, at the top of the market, the general rule is no more than two 30 day late payments on revolving debts within two years, or one 30 day late on mortgages or rent.
Most lenders want you to have three lines of credit, and a twenty-four month credit history. If you don’t have at least two open lines of credit, a given reporting bureau may not report a score, and if you don’t have two different scores from the three big bureaus, only a few sub-prime lenders will give you a loan. The longer your lines of credit are open, the higher your score will be. So if you keep opening new lines of credit, expect your score to be low.
Revolving credit balances should be kept low, less than half of their limit. There is a significant hit if your credit line is more than half its limit, and the higher you go, the worse it is. If you have two $5000 limit credit cards, it is much better to have $1500 on each than $3000 on one and nothing on the other. It make even more difference if you have $2000 balance on each as opposed to $4000 on one. And if you’re one of those people who keeps buying off on the “transfer your balance to a new card and get zero interest for six months”, it will really impact your credit in a negative way, because if your credit balances sum to $8000, that’s usually what the limit on the new card will be, and so you’ve got a brand new credit card that’s maxed out, which is a major hit on your credit.
One of the best ways to improve your credit score relatively quickly is to use your credit regularly but pay it off every time you get a bill. Once per month, charge something small that you know you will be able to pay off when the bill arrives. This will still take some months, but better months than years.
The next way to improve your ability to afford a house is not to have any large monthly payments. The best rates are for full documentation loans, where you prove to the lender that you make enough money to be able to afford all of your payments. “A paper” lenders will allow you to have total monthly payments of 38 to 45 percent of your gross monthly income. Some sub-prime lenders will go to 55 percent. If your family makes $6000 per month, this means that total payments can be up to $2700 for certain A paper loans, up to $3300 for sub-prime and still qualify full documentation. This also means that the more income you can document, the more house you can afford.
This number includes not only the amount of the mortgage, but also the property taxes, homeowners insurance, association dues (if applicable), and anything else you may need to pay in order to keep the home, as well as car payments, credit card payments, and any other debts you may have. This means that somebody with other payments of $80 per month can afford a lot more house than somebody with other payments of $900 per month. This should be intuitive, but you’d be surprised how often people don’t realize it.
The final thing that is helpful is a down payment. The larger your down payment, the less you have to borrow. Lending money is a risk-based business. Up to a point, the lower the ratio of loan balance to value of the property will help you get a lower interest rate and more favorable terms, because the bank will be more certain of getting all of their money back. A 5% down payment is better than none. 10% is better than 5%. The first 5% makes the most difference, but every bit helps. Of course the larger your down payment, the less you have left over for other purposes. It seems to be a phenomenon today that people don’t want to risk any more of their own money that they have to, and 100% loans can be done right now, although how much longer that will be the case is anyone’s guess. Still, people who make a habit of saving money are always in a stronger position that those who do not.
Caveat Emptor