There are all sorts of reasons why escrow falls through, but they fall into three main categories. They can best be described as failures of qualification, failures of the property itself, and failures of execution.
Before I get into the main subject matter of the article, I need to define a contingency period. This is a period built into the beginning of the escrow process when one party or the other can walk away without consequences or penalty, usually for a specific reason. For instance, the default on the standard forms here in California is that all offers to purchase are contingent upon the loan for seventeen calendar days after acceptance. If the loan is turned down on the sixteenth day and the buyer notifies the seller that they want out immediately, the seller should allow the deposit to be returned by escrow. If it happened on the nineteenth day, the buyer should be aware that their deposit is likely forfeit. A contingency, just like anything else, is something negotiated as part of the purchase contract. If it’s in the contract, you have one. If it’s not, you don’t, although some states may give buyers certain contingency rights as a matter of law.
Failure to qualify means that something goes astray with the buyer’s quest to acquire necessary financing. They cannot qualify for the loan, they do not qualify within the escrow period under the contract, they allow their loan officer to spin all kinds of fairy tales about what the market is doing or likely to be doing when the plain fact of the matter is that the loan officer just can’t do the loan on the terms they indicated when the poor unsuspecting consumer signed up. Maybe it existed at one time, or maybe they just hoped it would. In any case, it wasn’t locked in and it certainly doesn’t exist now, so rather than pay the difference out of their commission, the loan officer delays and hopes for the market or a miracle to save them. Or they told the consumer about a loan they thought they might be able to qualify them for, only to find out they don’t, and they’re stalling, hoping a better alternative will open up. Fact is, that if a loan officer can’t get the loan done in thirty days, I’ll bet money they can’t do it on the terms stated in the initial documents. Jokers like this are a large part of the reason you should have a back up loan if you can find someone willing. Chances are much better that both loans will be ready to go with a lot fewer games played.
Sometimes it does happen that consumers don’t qualify for the loans due to real problems that just don’t come up until the file is in underwriting. Since this can cause you to lose your deposit, it’s a good idea to ask your loan officer about any potential problems before you make an offer. You know your personal financial situation but you probably don’t know what all of the potential disqualifying issues for a lender. The loan officer should know what the issues are that may cause lenders to have difficulty approving your loan, but they don’t know your history unless you tell them. Many things that underwriting will catch do not necessarily show up on a loan application or credit report, so if you have an unpaid collection, monthly expenses that might not show up, a lien, a dispute in progress, any issues with your source of income, or anything else in your background that you have any questions about whether it could impact your loan, it’s a good idea to ask right upfront, before you get into the process. Sometimes these issues mean that you flat out do not qualify, sometimes they mean that instead of 100 percent financing, you only qualify for 70 percent. Unless you have that extra 30 percent of the purchase price lying around somewhere, the transaction isn’t going to fly, and the sooner you find out, the better. A loan officer who can’t show you a loan commitment with conditions you can meet before the end of the contingency period is not your friend.
The second category of reasons escrow fails are failures of the property. Some defect is disclosed by the inspection process that the owner does not want to correct or is unable to correct, and the buyer decides that the property is not for them under the circumstances. Mold, termite damage, seepage, damage to the foundation, and all of the other usual suspects fall into this category. Title issues are here also, although they usually become unsolvable when they impact the loan. If the seller can’t deliver clear title, the title company won’t insure it, the lender won’t lend the money, and any rational buyer should want to walk away. Why do you want to give someone money when they are likely not legally entitled to sell you the property?
For defects, both structural and title, providing it was discovered within the contingency period, it’s up to the seller to convince the buyer they should still be interested. After the contingency period is over, things are more complicated as there is the possible forfeiture of the deposit to weigh. Good agents that you want to recommend to your friends get out and get the inspections done right away to avoid this issue. Agents that are looking to line their own pocket wait until the contingency period is over before doing so, as this gives the buyer more incentive to stay in the transaction. Let’s say you’ve got a $5000 deposit on the line and seventeen days to remove contingencies, as is the default here in California. Would you rather your agent got an inspector out within a couple of days, or waited three weeks? Keep in mind that you’re going to pay the inspector, but that’s money you’re going to spend regardless. The first possibility means that you find out about potential defects while you can still recover your deposit, while the second possibility means the seller can likely keep that deposit. I know which situation I’d rather be in.
Failures of execution are likely to be because someone messed up. The seller didn’t do this. The buyer didn’t do that. One agent or the other dropped the ball. The escrow officer didn’t do their job. Loan officer failures would be here if loans weren’t a whole category on their own. This category covers all the little details in the purchase contract, each of which has to be met before the escrow officer can close the transaction. These failures may or may not be actionable, in the sense of you being able to hold them responsible for their failure. Many times, the escrow officer is used as a whipping post for the failures of other parties, but some escrow officers do screw up big time. Sometimes it takes an outside expert to dissect things dispassionately in order to figure out what went wrong where and whose fault it was, but outside experts cost money, so most of the time everybody just fades into the sunset pointing fingers at each other, unless there’s some pretty significant cash involved. The transaction is dead and it’s not coming back. Unless there’s a good possibility of recovering enough money to make it worthwhile, let it go.
Caveat Emptor
Timeshares, Pro and Con (mostly Con)
I realized that I hadn’t covered timeshares, and decided it was time.
I suppose I should define what a timeshare is, just in case. A timeshare is a property where you buy the rights to use it for a certain amount of time every year. The most typical time share is a two week period.
Timeshares are attractive to developers because they can get more money for building the same property. You might have a high-rise full of condos where the market price might be $200,000 each. But they can sell each of twenty-six timeshares for maybe $20,000 each. Because it’s not such a big bite, their potential market is far wider, and they can sell to way more people. People are willing to pay more for vacation lodging than regular housing.
Developers also make money off of the financing, and off of the monthly dues for management expenses, which are analogous to association dues in a condominium association, paid to keep the complex maintenance up (and usually maid service, etcetera). Furthermore, since very few lenders want to finance timeshares, the interest rate can be (and usually is) outrageous, not to mention that you should be prepared for severe interest rate sticker shock if you’re financing one somewhere outside the United States. The developer can gouge because most lenders won’t touch timeshares, and it’s not like the buyers are going to do any better elsewhere. Title insurance companies don’t like timeshares either.
Developers love to tell potential buyers that timeshares are an investment, because they are real estate. The fact is that timeshares are like cars – there’s a large initial hit on value, the instant the transaction is final. Nor do they tend to recover. There are at least two websites that specialize in helping you sell your timeshare, because most people figure out within a year or two that they’ve been taken. I don’t deal with them any more than I can avoid, but I have never even heard of someone recovering their investment in a timeshare (except the developer).
Sometimes the time you buy is always the same two weeks in the same unit, but this can very. Quite a few have a yearly drawing among owners of a given unit for the most desirable time frames, and a few even put all units and all owners into the pool. Read the individual sales contract carefully for how this is accomplished. If you have or draw a time that’s unusable to you, most of the same places that will help you sell the timeshare in its entirety will also help you sell or trade your time slot for the year. Nor do folks generally get back their annual cost of the unit by selling their time slot, but it can be a good way to buy a vacation time slot cheap if you are prudent and plan ahead.
Furthermore, of course the timeshare is always in the same place. This is great if you want to return to Honolulu every single year, but not so great if you want to go a different place every year. Many developers tout swap programs, often to swap your slot in such desirable locales as Ultima Thule for one in Tahiti. Not likely to happen, or if it does, likely to require a good deal of cash outlay in the direction of the people who bought in Tahiti.
Additional issues are that maintenance can be problematical. Since no single owner is responsible for the complete upkeep of any given unit, let alone the entire complex, the management is often lax about repairs and preventative maintenance. After all, if they put that new roof off for a year they can just pocket the money. Where even condominium owners have to deal with any problems pretty much every day, timeshare owners are there for a couple of weeks per year.
All of this is not to say that there are no happy timeshare owners. If you are going to go to Las Vegas for two weeks every year and your schedule is flexible enough that you can go no matter what time slot you end up with, more power to you, and a timeshare might be the way to go. If you need to go during the summer months because that’s when the kids are out of school, or if you don’t necessarily want to go there every year, not so much. I’ve never owned one myself, but I understand some nasty fights break out among co-owners for time slots, as well. Most people think the idea of a timeshare in Phoenix is to go there in the winter and play golf while the rest of the country is freezing, not go from perfectly acceptable weather elsewhere on July 4th to a modern day version of the La Brea Tar Pits because the temperature is 125 degrees Fahrenheit where the asphalt melts and people sink in and get trapped.
Caveat Emptor
The Perfect War
(originally written 20 years ago, republished because it’s worth keeping. I do not favor war with Iran)
Another blogger has a wonderful article about the demand for an antiseptically perfect war, with no collateral damage, no casualties (certainly no bystanders), and everything wrapped up in a nice little package before the attention span of the American public, attuned to half-hour television programs, begins to wane.
The first thing I want to ask the people who expect this is: When is the last time you saw a casualty-free game of chess? I used to be fairly good, not a master but good enough to win two class championships. I have never seen a game that didn’t have casualties in the form of pieces taken from the board. For all the chess stuff I used to read, I’ve never heard of one. A so-called Fool’s Mate (The fastest possible end to the game) takes a pawn, in addition to the king. Furthermore, it’s ridiculously easy to guard against, and even attempting it between players above the level of rank novice is considered insulting. Furthermore, stronger players have in their repertoire the ability to take advantage of the fact that their opponent even makes the attempt.
This translates over to real war, as well. Yet there are those that would have us act as if our opponents were rank novices, and act as if not doing so is obviously stupid and unreasonable. Karl von Clausewitz, whose 1832 manuscript “On War” has one of the defining quotes of warfare in general: “War is very simple, but in War the simplest things become very difficult.”
War is not a chessboard. Real War, particularly the war we find ourselves in at the moment, is nothing like a chessboard, and yet there are principles that translate. There are at least two participants who are doing their absolute best to inflict defeat on the other. The board does not stand still; you need to figure out what your opponent is going to do while you’re doing what you intend to them. You need to frustrate your opponent’s designs at the same time carrying out your own. Opportunity is where it happens or where you make it. And there is no such thing as the Perfect Game or the Perfect War outside of the realm of fantasy.
When you assume your opponent is incompetent, you lay yourself open to serious losses when they prove you wrong. Indeed, this itself is a strong indicator of incompetence, and Arminius is one of the earliest recorded leaders to take such advantage of a lazy, incompetent opponent who thought he could never be seriously challenged, although he’s hardly the only one.
Our opponents the Islamists are not incompetent. Militarily, they cannot match our soldiers, but the evidence is overwhelming that at least their upper echelons are well aware of this. Economically, they cannot hope to match us in the logistical support we give our soldiers. Wars are fought with money and supply lines as much as with bullets and men; indeed history records examples from Pyrrhus of Epirus and Hannibal Barca forward where the men of one side outfought the other, but that side lost the war anyway.
But the most important leg upon which a war effort is founded is the will to resist, as we rediscovered in Vietnam. Our soldiers outfought the communists, our economy out-supplied the communists, but our people lacked the will to carry through to victory, and so we suffered an ignominious defeat whose consequences we are still suffering today. I’ve mentioned this before, but Sun Tzu’s words from 2500 years ago never stop being true: “Supreme excellence consists in breaking the enemy’s resistance without fighting.” Will to fight is the all-important consideration in war. You can have the best soldiers, the best equipment, the most ammunition, the best leadership, the best strategy, and everything else.
But if you haven’t got the will to use them, you shouldn’t have bothered. You’ve wasted your time, your money, and your effort to procure them.
Now, there will be those reading this who will say, “That’s precisely my point!” because they want the money it took to produce and use these things spent elsewhere. They don’t want us to ever use our military, many do not even want us to have one. They want the resources used elsewhere, so they fight their use in military applications. This is a political self-fulfilling prophecy, and their will not to fight is the closest thing to an insurmountable barrier we face in this war. They have, from the beginning of this war, been doing their best to wear down our will to fight from within. Going back to the first principles from The Art of War, they are doing everything they can to break our resistance from the inside. “Showing the 9/11 images is upsetting,” and so they don’t get played in the media or emphasized as needed by our government. Do you think Roosevelt, George Marshall, or our media of the 1940s allowed our grandparents to forget about Pearl Harbor? Not on your life. The reminders were all over the place until well after VJ day.
The argument the anti-war crowd is making most consistently is “Our leaders have made mistakes!” Now, if you’ve studied military, political, or mercantile trade history in any depth, you know this is about the same as saying “water is wet”. Mistakes are going to happen in any war. It is endemic to any situation where you have an active intelligence planning against you, and war is certainly that. It’s like saying “fire is hot,” because the inevitable consequence is some people are going to get burned. It is one of the strongest reasons to avoid war; war is nonetheless sometimes the least harmful course – provided you have the will and make the effort necessary to win. But there is no such thing as a Perfect War. We often hear cheerleading about World War II, but the fact is that FDR and George Marshall didn’t have to deal with a hostile media and anti-war organizations doing their best to tear down the plans the whole war, not to mention opportunistic political opponents willing to do anything for power or the hope of power. Indeed, the Republican candidate for president in 1944 pointedly refused to criticize the war effort despite such spectacular mistakes as putting off the invasion of France in favor of the Italian campaign that wasted a year and tens of thousands of lives. Churchill’s “soft underbelly of Europe” was anything but. Whereas it may have looked to the politicians an easier target, the generals knew better but obeyed their political masters (Our troops were still fighting in Italy when Germany surrendered). Indeed, although our domestic oppostion to the war is horrified by the idea of slavery, their intellectual tradition dates back to the Copperheads of 1864, who would have made peace with the Confederacy on generous terms, allowing slavery to continue with no definite end in sight.
More Sun Tzu: “The best warfare strategy is to attack the enemy’s plans, next is to attack alliances, next is to attack the army, and the worst is to attack a walled city.” Well, walled cities are different than they were in Sun Tzu’s day, but that does not effect the validity of his point. The most elementary, bottom level plan of any war has to be to stay in and keep fighting until the enemy gives up. If you cannot do that, you might as well not start, and indeed, you shouldn’t start. It doesn’t matter if you’re leading the marathon, ten miles ahead of the next runner. If you give up and walk off the course with five meters to go, you didn’t win and you didn’t finish. Everyone who simply didn’t give up will beat you. You are a loser.
“But you’re missing the point!” some of you will say, “We shouldn’t have been in this war at all!”
To which I respond: No, you have missed the point. The time to make that argument was before the war began. Even if you said so then, the decision has been made, and it went against you. The decision you have to make now is whether it is more important that the United States and its allies prevail, or that the other side do so. There is no “We didn’t mean it!” in war. The notion of our leaders being out of control warmongers is pure wishful thinking on behalf of their political opponents. Nor will we be able to escape the consequences of losing if we quit. This is realpolitik. There is an idea that the United States has not got the willpower for a sustained war effort, and never will. There is significant evidence that it is true, and every time we quit the battlefield we have won while our opponents have not yet given up, we bolster every future would-be opponent. If you’re playing a baseball team that walks off the field in the fourth – or eighth – inning of every game, you know you’ll win every game by forfeit. The idea carries over into realpolitick. If our opponents know we will quit before the end, they will know that anyone can beat us. Given that knowledge, there is no reason for the dictators of the world, religious or otherwise, not to do so. They don’t care how bad things might get for their people for a while, they don’t care about how many of their people die, they only need to know that they’ll win in the end, and they will fight. Unlike a liberal democracy with all of our rights, they can make their domestic opposition disappear.
The time to discuss whether we will fight has now passed. Like it or not (and I don’t), we are at war, and the options are whether we win or the Islamists do. Nor is this a war of aggression on our part, as so many have attempted to paint it. The Islamists have told us exactly what they intend doing to us, and acted in a manner entirely consistent with their stated intentions. Every so often they or some of their apologists mouth some words to the effect of “nice doggie!” because diplomacy is the art of saying “nice doggie!” until you find a big enough stick and they seem to be fresh out of sticks at the moment. But those words are for the accommodationists and appeasers within our own ranks; among themselves, when they think the West is not listening, they are brutally frank about their intentions and plans, and you can find the reports on the internet pretty easily if you look. And they will find more and bigger sticks if we only let them.
Once you begin a war, you are in it until the end. You can realize this and attempt to make it a happy ending for civilization, or you can look for the nearest exit and face consequences orders of magnitude worse than sticking it through. Korea, although a draw on the battlefield, was a strategic victory in that it taught the communists that they could fight the west with peasant soldiers on a modern battlefield, and planted the first seeds that we were not mentally capable of a long war. Vietnam, where we won on the battlefields but left the job unfinished and our allies unsupported, gave communism a boost where it would otherwise have fallen apart years earlier than it did. Without the morale boost from Vietnam that gave them the successes in Africa, Central America, and elsewhere, communism would have rotted from within significantly earlier.
The Islamists cannot match our troops, our training, our economy that supports those troops. But they have other weapons at their disposal, weapons that we deny ourselves. They are willing to brutally murder non-combatants. They are willing to abuse the civilized covenants of sanctuary for non-combatants. Most importantly, they have learned from the successes of the communists in fighting us. They know there is an element within our society that “refuses under any circumstance to fight for King and Country” (they haven’t changed), and indeed, will do their best to break our will to resist from within. The Islamists are doing their best to encourage this group, by the way, as for instance Saddam Hussein’s cultivation of “Red Ken” Livingstone, among many other activities, illustrates. They know that every time there are casualties, of whatever number or nature, this segment of our society will seize upon it anew as proof that we shouldn’t have gone to war, misinterpreting as evidence of faulty planning.
This claim is nonsense. In fact, it’s not only blind stupidity, it’s suicidal blind stupidity. Yes, people die in war. They get hurt, crippled, maimed for life. I’m trying to keep the language here civil, so I cannot begin to adequately convey how bad this is. The alternative is far worse. If our opponents know we have no stomach for any casualties, they will inflict them upon us at every opportunity to force us to retreat lest we have more casualties. This is simple application of the principle of breaking the will to resist. If any would-be opponent knows how to break our will to resist, we will become a nation that can win no wars. If we can win no wars, potential opponents will make certain we fight, or actually, don’t fight, more and more of them. History has not been kind to nations that could not fight or could not win wars. They don’t last very long.
Those members of our military who have volunteered to stand in the front lines of our defense know that a certain number of them are not going to come back. They are willing to undertake those risks in order to guard us all. But that it does guard us all is necessary to the equation. If the equation becomes “As soon as a few of you get knocked off, we’ll quit!” they won’t volunteer in the first place. It defeats the entire purpose of their volunteering. Instead, those so inclined will go find some other civilization to guard, as ours will be doomed.
FSBO Horror and Failure to Disclose Property Defects
I keep getting search result hits for the string “fsbo horror.” It’s an amalgamation because I haven’t done any postings on this specific subject.
Both buyers and sellers have problems relating to For Sale By Owner issues.
For sellers, the largest issue seems to be properly disclosing all relevant items to satisfy the liability issue. There are resources available, but the question is whether the you took proper advantage of them and made all the legally required disclosures on any issue with the property there may be. If you have an agent that fails to do this, you can sue them. If you are doing it yourself, the only one responsible is you. You are claiming to be capable of doing just as good a job as the professional, and if you didn’t do it right, the buyer is going to come after you.
Now I’m going to leave the marketing and pricing questions out of the equation, because with a For Sale By Owner most folks should understand that in return for not paying a professional to help you, you’ve got to do it yourself. What many For Sale By Owner folks seem to fail to understand, however, is that if you haven’t met legal requirements, the real nightmare may be just beginning when the property sells.
Let’s say it was something fairly innocuous, like seeping water from a slow leak you didn’t know about. A couple years pass, and now there’s mold or settling. Perhaps the foundation cracks as a result of settling. Bills are thousands to hundreds of thousands of dollars. Your buyer goes back and finds that your water usage went up by fifteen percent in the six months before the sale. He sues, saying that even though you didn’t know, you should have known based upon this evidence. Court cases are decided based upon evidence like this every day. A good lawyer paints you as maliciously selling the property as a result of this. Liability: Steep, to say the least.
Now, let’s look at it from a buyer’s prospective. You have a choice of two identical properties. In one, a seller is acting for themselves, in the other, they have an agent. The price may be a little cheaper on the for sale by owner one, or it may not. One of the reasons people do for sale by owner is they are greedy. But when I’m looking at a for sale by owner, the question that crosses my mind is “Are they rationally greedy, or are they just greedy?” Are they going to disclose everything wrong or that may be an issue with the property? At least here in California, the agent has pretty strong motivation to disclose if something is wrong that they know about. If they don’t, they can lose their license, and even if they don’t, they have potentially unlimited personal liability. If they did disclose, they’re probably off the hook, and even if they aren’t, their insurance will pay for the lawyers, the courts, and any liability. If there’s one thing all long term agents get religion about, no matter their denomination, it’s asking all of the disclosure questions.
This is not the case for many owners selling their own property. Some are every bit as good and conscientious as any agent. A good proportion, however, are intentionally concealing something about the property. What’s going to happen when it comes to light? If there’s an agent, there’s a license number, a brokerage who was responsible for them, and insurance. The latter two are deep pockets targets for your suit, and you can find them. Once that owner gets the check, you can find them unless they’re dead, but they may not have any money. Even if they do have money, it may be locked up and inaccessible via Homestead or any number of other potential reasons.
One of the reasons that I, as a buyer’s agent, am always leery of a for sale by owner property is that I have to figure that first off, there’s a larger than normal chance that this property has something wrong that’s not properly disclosed. When that happens, my client is going to be unhappy. When my client is unhappy, they are going to sue. The first target is the seller, but if they’re gone or broke, who does my erstwhile client come after? Me. So I have to figure that not only is there a larger chance of there being something wrong, I have to figure there is a larger chance of me being held responsible for something I took every step I legally could to avoid. For Sale By Owner properties usually have to be priced significantly under the market in order to persuade me that not only am I doing the right thing by my clients in trying to sell them this property, where my clients have to pay my buyer’s agent fee out of their pockets rather than out of the selling agent’s commission, but also that the heightened risk of future problems is worth more than the price differential to my clients. Unless the answer is a strong solid “yes” that I can document in court if I have to, I’m going to pass it by in favor of the agent-listed property next door or down the street.
Caveat Emptor (and Vendor)
New Release! (and last chance at a sale)
I have a new release tomorrow, Bubbles Of Creation. It’s part of a many-worlds fantasy series named Connected Realms, and will be the last in this series. It is available to pre-order in e-book, and the paperback and hardcover versions go live tomorrow morning. They won’t allow me to do audiobook until the e-book is delivering, but I will do so ASAP.
Amazon link: https://www.amazon.com/dp/B0F4NW9LFF (alas, the hardcover is Amazon only)
Books2Read link: https://books2read.com/u/bpxJ5E (includes B&N, Apple, Kobo, etc, including 4 library services)
In advance of the release, The Fountains Of Aescalon (first in the series) is available for 99 cents in e-book form – but today is the last day!
Amazon link: https://www.amazon.com/dp/B07C5H3Z4Q
Books2Read link: https://www.books2read.com/u/bwWMgY
If you’re a completeist, the middle book is The Monad Trap
Amazon link: https://www.amazon.com/dp/B086D3XGR7
Books2Read link: https://books2read.com/b/meg8Qg
For Sale By Owner – Working Directly With a Loan Officer
Just got a search on “state of california fsbo questions to work directly with loan officers without a agent”
This isn’t a problem. Whereas it is the same license, it is two entirely separate job functions. The fact that you are or are not working with an agent has absolutely nothing to do with whether you can get a loan.
This is not to say that some folks who do both might not attempt to trick or pressure you into signing an agency agreement. The way to deal with that is to contact these folks (the link is for California, but the principle applies elsewhere).
This is not to say you should be looking for real estate agent responsibilities from someone acting solely as your loan officer. This happens quite a bit; If they’re not getting an agent’s commission, you should not ask them to do an agent’s work or assume an agent’s responsibility. Asking you to sign a form that says they are acting purely as a loan officer and are not responsible for anything except the loan is reasonable. Loan officer legal responsibility is minimal to non-existent anyway; it’s one of the reasons the loan business is so messed up and out of control. But asking a loan officer to do both jobs for the pay of the lesser fee is unacceptable. You don’t do extra work for free, you don’t assume extra responsibility for free. Why should you expect someone else to do so?
Now in California, we changed the law a couple of years ago so that in certain circumstances where the firm is licensed with the Department of Corporations, the loan officers do not have to be individually licensed. I’ve seen a lot of abuses out of such situations; the loan officer who isn’t individually licensed isn’t risking their individual ability to work in the profession, no matter how egregious the violation. Indeed, many firms licensed with the Department of Corporations instead of the Department of Real Estate have made a point of recruiting people new to the profession who don’t know any better, and no one will tell them until they go work for a company with better practices, which most of them never do. These folks also don’t know how much the company makes per loan, so they don’t have to pay them as much. Best of all possible worlds from the company’s view!
But so long as you only ask a loan officer to do the loan officer’s job, there should be no problem with doing a loan on a For Sale By Owner property. After all, you don’t need a real estate agent to refinance, do you?
Caveat Emptor
Disclosure Issues and Failure to Disclose
One of the most important things for the buyer in any transaction is confidence that the seller has disclosed all known problems. One of the things most people don’t realize, or act like they don’t realize, is that it’s at least as important to the seller.
The California Association of Realtors (CAR) has a program called Winforms that lets me ask all of the little niggling questions about the home. Very convenient, very nice, and I’ve done my duty when I fill it out with a listing client.
This does not mean that I or the seller can ignore any metaphorical elephant in the room not covered by the form. If there’s something that’s obvious, I have a duty to ask about it and record the answer, even if it isn’t on the form. The seller has a legal duty to disclose anything they are aware of that might cause a reasonable buyer to change their minds or their offering price. A cracked light switch protector plate is not a big problem and you’re going to either fix it or agree with the seller that you won’t. But past termite damage, whether someone has died in the home recently, soil subsidence (even on the far side of the property), and any number of other factors can be reasons why prudent buyers may no longer be interested, or may wish to re-evaluate their offer. The rule for smart people is “disclose everything and let the buyer decide if it’s important.” A certain percentage of sellers, however, just want to get through the transaction without the buyer changing their mind. For Sale By Owner (FSBO) sellers seem to be significantly worse about it, by the way, which is one of several major reasons I’m always leery of FSBO properties with my buyer clients. These sellers either don’t realize how strongly omissions can come back to bite them, or are hoping they will be gone by the time it comes to light.
First off, unless you’re planning on dying, you can be found. I know a lawyer that makes a good living at it. Furthermore, failure to disclose frequently makes your liability worse, in that you had a duty to disclose and you did not. It is possible that failure to disclose means a judgment for punitive damages in addition to increased economic damages is in your future, whether you are seller or agent or even buyer’s agent if it was bad enough. Furthermore, you can count on the damages being larger because the problem has had time to get worse, paying the costs incurred in order to find you, and so on, when if you had simply disclosed in the first place you would have been off the hook.
Now, your real estate agent is not (generally) a building inspector, tax records expert, or any of those kinds of specialist. I recommend an inspector for every purchase, because I’m certainly not qualified to do that job. But if I spot something that may not be right, I have a duty to disclose it to my principal, and find out if it really means anything from a real expert. Sometimes there’s a tax assessment that has passed or pending that doesn’t have numbers associated with it yet. If it’s passed, the title report should have the information, but they’ve been known to miss one occasionally. If it’s pending (e.g. bond measure on the next ballot), it’s a good idea to tell the buyer, or at least tell the buyer about where to find out.
For an agent, failure to disclose may mean that your professional insurance won’t cover it. The professional insurance is for errors (honest mistakes) and omissions (errors of ignorance), not intentionally hiding something. This liability can easily run to several times any commission you made, so it’s a really bad idea to hide anything. Agent or seller, if they buyer can prove you knew, or that you should have known, you’re basically up the creek.
Caveat Emptor (and Vendor)
Tax Treatment of Annuity Withdrawals
Asymmetrical Information has a good article about the political and budget problems faced by pensions everywhere. It touches upon the treatment of annuities, one of the most popular investment vehicles there is. Most defined contribution pensions (e.g. 401k, among others) in the United States are actually funded by variable annuities.
Annuities currently have in interesting tax status, and there are several kinds. They are certainly popular instruments and their tax deferred status gives them appeal to many investors. For this purpose however, I am going to restrict myself to the question of whether or not they have been annuitized, which is the actual process of exchanging a pool of dollars that you control for a stream of income.
Annuities are tax deferred, which means while the money is inside the annuity, it is not subject to taxation. Therefore, it compounds with the entire amount of earnings the investments made (less expenses of course). If your marginal tax rate is 20%, and your investments make 8% per year, you’ll earn about 86 percent over a ten year period taxed, 116% if tax deferred. Even after taxes, you’ll have earned a little under 93% net. Annuities are also a life insurance product – they pass outside your estate to a named beneficiary immediately on death.
If the annuity has not been annuitized, it is taxed on a “Last In First Out” or LIFO basis. What this means is that the dollars that come out are presumed to be from the most recent that went in. In other words, insofar as possible, it is the original principal that is untouched and the earned income you are using. So if you put $100,000 in (assuming the money is “after tax” as many people have annuities with “before tax” money involved), as long as the balance remains over $100,000 you are assumed to be withdrawing earnings and every penny is taxable. Only after you have depleted the annuity account below $100,000 are you presumed to be using your contributed money. Note that every dollar of contributed money you use lowers this threshold, or “basis” in the account. If you take $20,000 of the original money, your basis is now $80,000, and this is the new threshold value. Note that basis can also be increased by subsequent contributions.
If you annuitize the pool of dollars by exchanging it for a stream of income, there are implications brought on by the fact that you no longer own the pool. The first of these is that the exchange is irrevocable. It doesn’t go backwards. You can certainly exchange the stream of income for another pool of dollars now, but expect the pool to be smaller than it was as both exchanges have made the insurance company offering them a profit.
But because the exchange is irrevocable, the IRS will treat it somewhat more favorably. What they will do is take an actuarial treatment of how long you are expected to live, and then make a determination based upon that of how much of each month’s payment is interest and therefore taxable, and how much is a return of principal, and therefore not taxable in most cases. If you outlive your actuarial expectation the whole thing becomes taxable. If you annuitized a before tax account like a traditional IRA or 401k, the whole computation is moot, of course.
The implications are fairly obvious. In general, an annuity is not an account you should “protect” by drawing down other accounts instead. Indeed, annuities should probably be near the head of the list of accounts that you should should draw down and/or use to exchange value for something else that is largely tax free, like cash value life insurance or Roth accounts, lest there be a large tax liability upon your death. It also takes about fifteen years, plus or minus, for a variable annuity’s tax deferred status to pay for itself as opposed to other investments which are not inherently tax deferred, such as mutual funds. There are very strong arguments for placing even tax deferred accounts in variable annuities, but this article is not the place for them, and you should understand both sides before making a decision.
Nonetheless, thanks to Asymmetrical Information for giving me the idea for an article.
Caveat Emptor
Signing Off Loan Conditions
what is a underwriter final “sign off” on the conditions
First off, it needs to be mentioned that a good loan officer gathers information and puts a full package, with all of the information an underwriter should need, before submitting the package to the underwriter. That’s how you get loans through quick and clean. Give the underwriters all of the information you know they’re going to need right up front.
Some clients don’t understand this. They want to hang back and see if the basic loan will be approved before they do “all of this work.” This is a good way to have to work much harder on the loan. Give it all to them in one shot, and they only look at your file once. You get a nice clean approval. The issue is that every time that underwriter looks at your file, there is a chance they will find something else that they want documented, some little piece of the picture they are uncomfortable with. The underwriter can always add more conditions. The cleaner the package, however, the less likely it is that they will.
There are some matters it’s okay and routine to bring in later. Appraisal is probably the most universal of these. Title commitment (aka Preliminary Report) is probably second most common. These are completely independent of borrower qualification, and when they come in later, will generally not cause the underwriter to re-examine the whole file. But you want to submit the borrower’s package as complete as possible, right up front. If the borrowers pay stubs show up later, the underwriter will look at the file, and if the income they document is even one penny less than the initial survey of the file, they will underwrite the whole thing again. A good loan officer submits complete packages, so the file only gets looked at once.
But every loan officer gets asked for additional conditions from time to time. With the best will in the world, sometimes they are going to miss something that the underwriter is going to want to see in this particular instance.
Loan conditions fall into two kinds: “Prior to documents” and “prior to funding”. “Prior to docs” conditions are related to “Do you qualify for the loan” type stuff. Income documentation, property taxes, existing insurance for refinances, verification of mortgage, rents, employment, deposits, all of that good sort of stuff. Also appraisal, title commitment, etcetera. If there’s something missing in the loan package, it should be a “prior to docs” condition. These conditions should be taken care of between the loan officer and the underwriter. The underwriter tells the loan officer what needs to be produced in order to approve the loan, and the loan officer goes and gets it. If the loan officer can’t produce it, there is no loan.
This is not to say that a good loan officer can’t necessarily think of another way to get the loan approved. Indeed, that’s a significant part of being a good loan officer, almost as big as knowing what loans won’t be approved, and not submitting a loan that won’t be approved. This is a big game with many loan providers, by the way. They get you to sign up with quotes they know you won’t qualify for, but when the loan is turned down (or, more commonly, the conditional commitment asks for something that the situation can’t qualify for), they then tell you about the loan they should have told you about in the first place. Pretty sneaky, huh?
Getting back to the underwriter’s conditions, a good loan officer knows how to work with alternatives. But at the bottom line, the loan officer has to come up with something that the underwriter will approve. It is the underwriter who has final authority. They write the loan commitment, which is the only thing that commits the money. In fact, most loan commitments are conditional upon additional requirements. The only universal to getting these conditions signed off is that the underwriter has to agree they have been met. As the underwriter agrees that the conditions have been met, one by one, the loan gets closer to final approval.
When the last prior to docs condition is satisfied, the loan officer orders loan documents. This is also when many of the less ethical of them actually lock the loan quote in with the lender. An ironclad rule is that if it isn’t locked with the lender, it’s not real, but that doesn’t stop many loan officers from letting the rate float in hopes of the rates going down so they make more money for the same loan. Of course, if the rates go up, guess who gets stuck with the increase? It’s not likely to be the loan provider.
When the loan documents arrive, the borrowers sign them with a notary and that’s when the rescission clock begins. There is no federal right of rescission on investment property, and none on purchases, but on owner occupied refinancing, there is (Some states may expand on the federal minimums).
Now there will be “prior to funding” conditions to deal with. “Prior to funding” should be reserved almost exclusively for procedural matters, and should be taken care of primarily between the escrow officer and loan funder. There are always going to be procedural conditions here, but many lenders are now moving more and more conditions to “prior to funding” as opposed to “prior to docs”. Why? Because once you sign documents, you’re more heavily committed. Psychologically, once most people sign loan documents they think they’re all done. This is not, in fact, the case. Legally, once the right of rescission, if any, expires, you are locked in with that lender unless/until they decide your loan cannot be funded. Once rescission expires, you no longer have the ability to call the whole thing off. You are stuck.
This is not to say that an occasional condition can’t be moved to “prior to funding.” Especially on subordinations. I’ve saved my clients a lot of money by getting subordinaation conditions moved to prior to funding so the rescission clock will expire in a timely fashion to fund the loan within the lock period.
This is all well and good if the lender told you about everything and actually deliver the loan they said they would, without snags. On the other hand, I have stories. One guy I used to work with had the capper, and the reason he got into the business was he was certain he could do better. He signed documents on a purchase, and a week later they called and told him he had to come up with $10,000 additional money within twenty-four hours, or lose the loan, the property, and the deposit, and be liable for all of the fees. His father had to overnight him cash, which he then took into the bank for a cashier’s check.
He is only the most extreme example. The loan is not done until the documents are recorded with the county. Until that happens, the money does not have to come, and even if it does, the lender can pull it back. One procedural thing that happens with literally every loan is a last minute credit check and last minute call to the employer to be certain you still work there. If the borrower has been fired, quit, or has retired, no loan. If the borrower’s credit score dropped below underwriting standards, no loan. If the borrower has taken out more credit, the lender will then send the file back to the underwriter to see if they still qualify for the loan with the increased payments. So like I tell folks, until those documents are recorded, don’t change anything about your life.
The many less than ethical loan officers don’t help matters any. I was selling a property a while back, and the buyer signed documents on Tuesday. If I had been doing the loan, the loan would have funded and the documents recorded the next day. Unfortunately, I wasn’t doing the loan. This guy’s loan officer had quoted him a loan he couldn’t qualify for, and ten days after he signed documents, I got a call saying he could only qualify if I knocked $20,000 off the purchase price. I kept the deposit and went looking for another buyer. This guy learned an expensive lesson. When you sign loan documents, require your loan officer to produce a copy of all outstanding loan conditions. Don’t sign until and unless you get it. This guy had signed, and was now locked in with a lender who couldn’t fund the loan on conditions he could meet. I had even warned his agent (I accepted the offer because I was willing to sell at that price, so I wanted the transaction to go through), but hadn’t been believed. So both of us ended up unhappy.
If they give you a copy of all outstanding loan conditions, you should know if you can meet them. If you can’t meet them or aren’t certain, don’t sign. Don’t hesitate to ask for explanations. Some of this stuff gets pretty technical, but a good explanation should be easily understandable in plain English. It may be complicated, but there just isn’t anything that can’t be explained in plain English. If the explanation you get is gobbledygook, you’ve probably been lied to all along.
Caveat Emptor
Removing Private Mortgage Insurance (PMI)
“How do I remove PMI?”
First off, a definition. Private Mortgage Insurance, often abbreviated PMI, is an insurance policy that the bank may make you buy in order to get the loan. It is a monthly surcharge based upon a percentage of your entire principal balance. You pay for it, but the bank is the beneficiary. It doesn’t make your mortgage payments if you can’t, it doesn’t keep your credit from being screwed up, and it doesn’t even keep you from getting a 1099 for income from loan forgiveness. Net benefit to you: it gets you the loan, and nothing more, ever again.
You can trivially avoid PMI by splitting your loan into two pieces, a first loan for 80% of the value and a second for any remainder. Yes, the rate on the second will be higher, but it will likely save you money starting immediately, not to mention that it’s likely to be deductible, whereas PMI is not, in general, deductible. I do not believe that with all the loans I’ve ever done, I’ve ever seen one where PMI was preferable to splitting the loan in two, from the client’s point of view.
“With all this against mortgage insurance, why does it still happen?” you ask. This is the critical question. Lenders usually pay yield spread to brokers or commission to their own loan officers based upon the amount of the first loan. Pay for a second is typically (not always) a small flat amount or zero. Your loan provider makes more money by doing it all as one loan. The loan provider wants to make more money and sticks you with the bill. Doesn’t that make your heart glow with gratitude? Didn’t think so.
There are two ways PMI is collected. One is as a separate charge, supplemental to your loan. The second is as an addition to the rate.
The separate charge is never deductible, but is easier to remove. Most states, including California, have laws requiring the bank to remove it when a Price Opinion or appraisal say that the Loan to Value Ratio goes below 78 percent (or something similar). Depending upon your state, you may or may not be required to pay for an appraisal, a cost of approximately $400, in order to have it removed. Some states require only a price opinion, others, like California, permit the bank to require an appraisal.
Just because the law says that that the bank can require an appraisal doesn’t mean that the bank will require an appraisal. If the loan to value is obviously there, they might just have someone drive by to make certain the house is still basically sound. On the other hand, if loan to value ratio is close to the line, the bank has a responsibility to its owners not to increase their exposure to loss unreasonably. So if you just wake up one morning and realize property values have doubled, the bank will likely waive the appraisal. If your market is gradually increasing in value and you’re watching it like a hawk and make your request the instant you think the value is there, be prepared to pay for the appraisal. Around here, with PMI on a 90 percent loan being a surcharge of about one and a quarter percent per year on a $500,000 loan, you pay for your appraisal by not having PMI in one month – if you’re right. If you’re wrong and the appraisal comes in lower, you’re just out the money.
Suppose, instead that instead of choosing the surcharge option, you choose to have PMI built into the rate. So instead of a 6.25 percent loan rate, you have a 7.00 percent loan rate. Advantage: it’s usually deductible, because it’s actual interest on a home loan. Disadvantage: You have to refinance (or sell!) to get out of PMI, because the pricing is built into the loan itself as part of the contract you signed. It is to be noted that by itself, this method is usually cheaper than the monthly surcharge for precisely this reason, because in order to get rid of it you have to pay to refinance, and if there’s a prepayment penalty in effect you’re likely going to pay that also, and so on and so forth.
So if your loan is more than eighty percent of the value of your property, you can expect to pay PMI, although it is easily avoidable by splitting the loan into an 80 percent first and a second for the remainder, and you’re likely much better off for doing so. If you’re already stuck with it, contact your lender for steps to remove it providing you think the value has increased enough. If you suspect the lender is not abiding by the law, contact your state’s Department of Real Estate, although lenders not abiding by the law in this case is both stupid and, in my experience, rare. It’s usually the consumer that doesn’t understand the law.
Caveat Emptor