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"What you need to know about mortgages and real estate. And more."



Last Build Date: Wed, 21 Feb 2018 15:12:47 -0800

Copyright: Copyright 2018
 



Fountains of Aescalon Finished!

Wed, 21 Feb 2018 15:12:47 -0800

Just finished The Fountains of Aescalon, my first fantasy. Want to read it over one last time, but will be shipping it off to the beta readers in a day or two.



"You've Got Something I'm Interested In, But I Don't Want to Pay You"

Wed, 21 Feb 2018 07:00:00 -0800

One of the things I have to deal with on a continuing basis is people calling me because they like something they saw on one of my websites, but they have no intention of doing business with me. Most common is would be buyers calling me, "Just tell me the address of that Hot Bargain Property." That's not how it works, as I explain in literally every one of those posts. It isn't luck I find those properties. It's dedication and skill. I spend a lot of time looking, not just in MLS, but in public records and physically going out and looking at them. I've spent a lot of time learning what to look for and how to look for it in all three places. Maybe, if I had personal need of their professional services, I might consider a barter - mine for theirs. But in point of fact, I suspect a large percentage of the calls I get of being lazy agents (A receptionist answering the phone in the background saying the name of a certain major chain is a dead giveaway). There is a reason these properties are of interest. I'm going out and finding properties that are noteworthy bargains. If it could be done by any random person with MLS access, anybody who could type realtor.com could do it. I can do it, in large part, because I make a habit of doing it and most others won't. It is work. If George digs a ditch, you don't pay Charlie. You pay George. Same principal here. The reason I'm worth more than the discounter, in terms of what I find, how well I negotiate, and everything else, is a function of all of the work I do that helps me find good properties, spot problems, know the micro-markets I work in, understand what is critical and what is not. If you find the property yourself without any help from me, yes I'll discount my services for negotiation and facilitation because you're not getting the largest part of the value I provide, and I'm not risking the largest source of agent lawsuits. Otherwise, I am providing more value to you than the discounter and am therefore worth more pay. And I'm providing it, not that discounter. I'm not going to give out the locations of the special bargains I find to anyone not willing to work with me. Like I said, George digs a ditch for you, you pay George, not Charlie. You want to pay Charlie, get Charlie to dig the ditch. But in this case, he not only can't, he won't try. Borrowers will call about my Real Loans for Real People. They want to know what lender that's with. Well, I hate to break it to you, but the loan I have is the loan I have. Credit Unions, National Megabank, etecetera may use the phrase "cut out the middleman" to try to get you to avoid brokers, but that's not the way it works. Even if I gave you the name of the lender, very few of them give their captive loan officers rates as low as brokers get from their wholesale division. Why? Because they're not paying my overhead, and my clients aren't captive to them. They regard their clients as captive because comparatively few people shop loans effectively. They go to big name lenders, who have no more programs than other lenders, and comparatively little imagination. They may or may not have the most appropriate loan program for a given client. Usually not. Big lenders mostly compete on the basis of name recognition and consumer comfort. A broker may be a middleman, but we function more like discount outlets. And the specific stuff I get is for my clients. If you want it, you've got to be one of them. If you weren't interested, you wouldn't have called. What I'm trying to get at is this: Trying to cut out the person who provides the value you're interested in is counter-productive. Even if I told you what lender a particular loan was with, rates change at least every day, and it's unlikely they will offer as good a deal through their dedicated loan officers, even if they are the right fit for your loan. Trying to cut out the person whose market knowledge and work enabled them to recognize a bargain means that even if you know what property it is, you're in a weaker positio[...]



Listing Agreements: Exclusive Right to Sell Versus Exclusive Agency

Tue, 20 Feb 2018 07:00:00 -0800

There are actually several different kinds of listing agreements. They get their names from the rights conferred when you sign the contract. The vast majority of agreements concluded are either Exclusive Right to Sell or Exclusive Agency. Exclusive Right To Sell means that no matter who buys the property, that agent will get the listing commission. There is an intelligent reason why most listings are Exclusive Right to Sell: If I can spend all that money and time doing the work to sell your property, and then you can not pay me for it even though I'm successful, well, let's just say I'm not going to be so enthusiastic about spending that money and that time if the prospective buyer can then go straight to the seller and I get nothing for my efforts. Some agents won't accept other kinds of listings. Other agents will only do so on a flat, up front fee basis, as opposed to deferring their fee unless and until the property actually sells. If you want a good agent to devote their full energy to selling your property, this is the kind of listing contract for you. If there is one particular person you think might buy direct from you, the owner, that can be handled via an Exclusive Right with Exception, which designates one of more persons who are exceptions to having to pay the agent, but even that is a marginal idea. Yes, it might save you a commission. But it will definitely create some doubt in the agent's mind, and less willingness to spend what they might really need to in order to get a sale made. Better to get a solid yes - or no - from that person who is an exception ahead of time. If they really want the property, they won't have any problem committing saying they want it when you ask them. And you can't sell to more than one person, right? So you shouldn't be wondering about somebody you found when you contact an agent. And before you condemn agents for acting like this, ask yourself how hard you would work at your job in order to maybe get paid, or maybe not, even if the job is successfully completed. Exclusive Agency means that you won't pay agent commission if you sell it yourself, but you will pay if they, or some other agent, brings you the buyer. Any agent with a buyer is presumed to have been procured through the listing agent's marketing efforts. Nonetheless, this does allow for random people to knock on your door and buy the property direct from you - despite the fact that the listing agent's efforts were what alerted them to the existence of the property. Since most agents have been burned on this one or know someone who has, few agents want to accept this style of agency without requiring you to at least pay for their efforts, and they are mostly not the top-notch ones. But if you really want to exercise the escape clause in having to pay the agent, count on being on your own through the negotiations and escrow process. A very large proportion of prospective buyers who will go around your agent to negotiate with you directly are sharks, unqualified buyers unable to buy, or possess some other characteristic that's going to cost you a large amount of money, time and frustration. Real estate sharks like being able to cut an agent out of the transaction, because if you negotiate a direct sale, your agent is certainly going to pack up the tent and leave, which then leaves the shark a clear field with nobody who knows how to deal effectively with that shark. Limited Service listings are popular with discounters, but they typically do not work on the basis of commission delayed and contingent upon a successful sale. They want their money up front. Cash, check, or, sometimes, charge. Furthermore, the reason they are called limited service listings is because they are not fulfilling all of the services that real estate agents are normally expected to fulfill, and their responsibility to you is also much lower. Might be a good thing to do if you're a former real estate agent who knows how to do it, but the average client doesn't know h[...]



Owner Occupied Loans Only Require A Year of Occupancy

Mon, 19 Feb 2018 07:00:00 -0800

I have a landlord, that is always harassing me every 2 weeks, for the past 2 years, on the upkeep of the property, and wants to have inspections. Also want me to mail them all their mail. Most of which is Bank stuff. I am fed up, and thinking they are under a Owner Occupied Loan. Is there a way I could find out? And who do I complain to, if I decide to?
It is a misconception to think that just because someone moves out, they can no longer have an owner occupied loan. In fact, the typical owner occupancy agreement that is required in order to get owner occupied financing is only a twelve month occupancy. When I buy or refinance today, I agree to live in it for twelve months in order to get those rates. After I have met that requirement, I can move out, rent it out, and there is absolutely nothing wrong with it. That loan contract is in effect, I have lived up to all of my obligations as far as owner occupancy, and I can keep that loan as long as I maintain my end of the other parts of the contract. It is fraud to claim I'm living there, or intend to live there, for those twelve months if I do not actually live there, but once I've met that twelve month occupancy requirement I can go live in Timbuktu so long as I get my loan payments in on time, properly insure and maintain the property, pay taxes in a timely fashion, etcetera. It is possible, as I discovered once upon a time, that if you have an owner occupied loan with lender A, that same lender may refuse to give you another owner occupied loan on a different property. In this case, it was refinance the loan on the other property, or accept a second home loan on property A. But notice how, even then, the lender did not force them to refinance despite the fact that they hadn't lived in the other property for years. They just offered the owner the choice of accepting a slightly less favorable loan (Second home financing, still much better than investment property) or refinancing the existing owner occupied into another occupancy type. Or, being brokers, we could submit the package to another lender. There are circumstances where each of these three possibilities may be the best choice. The lenders do not share this data between each other; indeed, my understanding is that they cannot legally do so. It was only applying for a second owner occupied loan from the same lender that brought this on, and not every lender even does this much. If thirty year fixed rate loans are the only type you ever apply for, it is theoretically possible to legitimately have a new owner occupied loan starting each and every time you have met the minimum time for owner occupancy for the previous lender. In extreme cases, it might be possible to get upwards of twenty owner occupied loans all in force at the same time, while having honored your contractual requirements for each and every one. The minimum owner occupancy requirement can be different. One year is by far the most common, but there is no reason that I am aware of why it cannot be longer, if that is what is specified in the contract. However, I do not know of any lenders that requires you to refinance or requires you to pay a surcharge if you move out once you have met the required period of owner occupancy specified in your Note. Caveat Emptor Original article here



There Are No Schools That Teach What A Good Agent Needs to Know

Sun, 18 Feb 2018 07:00:00 -0800

I find it fascinating the number of people who will claim that because no college degree is required to become a real estate agent, that agents can't possibly be worth any significant amount of money. The reason no college degree is required is because no college curriculum can teach what a good agent needs to know. Oh, there are license preparatory schools in abundance. They'll teach you what you need to know to pass the licensing exam. You do need to know that stuff to practice real estate, but doing a good job on real estate is a lot harder than answering multiple choice questions on a government exam. You have to understand how it all fits together. No school in the world teaches that. Real estate law and practice is an extremely complex profession, and every situation, every real estate transaction, is different because no two properties are the same, no two sellers are the same and no two buyers are the same. There are common recurring elements, but there is not one line of the standard eight page purchase contract (in California) that there isn't occasional reason to change via negotiation, and there isn't a school going that teaches what those exceptions are. Popular media loves to gloss over what agents do. People see the media depiction and think they can do it. Ladies and gentlemen, the reason the media glosses over it is because it's boring detail work, and most of the dramatic interactions take place between pieces of paper. When's the last time you saw a legal thriller that spent a proportional amount of time on all the boring background work that goes on? Same principle. I was an air traffic controller for twelve years and I have yet to see a single media program get that right, and ATC is considerably more interesting to the outsider. People are not on the edge of their seats to see if form WPA or the addendum controls in this instance, the way they are when there's two 747s on a collision course and Jack Bauer (24) has to save the day - but the real estate agent has to know, and if they don't know, they have to find out without anyone giving them the answer. It's not exciting to watch the agent visit the comparables to compare features and condition and figure out what a good offer or a good price is. It might be good drama to watch a good listing agent talk a potential client into listing for the right price as opposed to their fevered dreams of avarice, but few media writers are that good - and even fewer have a clue that this is a good thing to be doing. It's definitely not drama the way a good agent closes with prospective buyers, the best way being to show them they've already convinced themselves that they want it. Most people also don't have the critical skill necessary for an agent - the skill of betting their paycheck on weeks or months of work that may or may not move to a successful conclusion. If the transaction doesn't close, we get nothing. How many doctors you know work on that basis? Lawyers? Even the ones that work on contingency want their expenses paid, and that includes office staff, and they're not likely to take contingency cases without a very large prospective payoff. Nobody but real estate agents bet weeks to months of their time for such a small payoff. The whole mindset is completely foreign to educational faculty. Grant application papers, yes - but they're getting a regular salary while they write those. The fact that you've got to go out and get hired at least a couple times per month in order to survive is also completely outside their frame of reference, as well as most other members of modern society. For academics, even if they're turned down for a grant, they've still got money coming in. Even if they get refused tenure, they only need to get hired again once to have a new regular paycheck rolling in. Most importantly, real estate markets are both hyperlocal and changeable. I've written a series that's eight or nine articles long [...]



Personal Loans For A Real Estate Down Payment

Sat, 17 Feb 2018 07:00:00 -0800

With the down payment presenting the largest difficulty for most people want to buy right now, I am covering every base I can think of as a place to get a down payment. I have covered VA Loans, FHA loans which require a relatively small down payment, and Municipal first time buyer programs, some of which can take the place of a down payment. There are also seller carrybacks and lease with option to buy. There's also the traditional "Save it over time", and in some circumstances, you can also borrow from your retirement accounts or even take a withdrawal. You can even Sell Some Stuff. But there is at least one more entry to the pantheon. Most people don't think of it, but a personal loan is one of the ways to get a down payment quickly. It has some notable drawbacks, but it can be done. Being unsecured, the interest rate is higher than real estate loans, and the repayment period is shorter, meaning higher payments. A personal loan is a loan not secured by real property. Because it is not secured by real property, all the lender really cares about is the payments and whether you can qualify for their loan by underwriting guidelines including the payments for such a loan. Personal loans include car loans and student loans and just about every other type of installment debt out there, as well as personal lines of credit and even credit cards. Not all of these are a possibility for the subject at hand, which is rapidly acquiring a real estate down payment. CREDIT CARD CASH ADVANCES ARE RIGHT OUT!. But the possibility exists of borrowing enough to get a down payment with a personal loan. This possibility includes both institutional loans from a bank or credit union, and "good in-law" loans from family members. Negotiate a loan contract, sign it, and be certain to disclose it to your mortgage lender on your mortgage application so that they know you're not trying to pull a fast one. The reason why mortgage lenders are obsessed with sourcing and seasoning of funds is because they don't want an undisclosed loan, which might mean that you cannot really afford the all of payments you're going to be making. But a fully disclosed personal loan is just like any other open credit. It has a repayment schedule, maturity date, etcetera. The mortgage lender looks at the situation, including the loan that got the down payment, according to lending guidelines, and if it appears you have the income to make those payments, they will approve the loan. The major and irrefutable drawback to getting a personal loan for the down payment is that it impacts debt to income ratio. You have to account for the fact that you owe this money, and you are obligated to make those payments, and therefore, you cannot afford as big a real estate loan as you otherwise could. Since most people try to stretch their budget further than they should anyway, this can be a deal-killer. It can force you to buy a less expensive property than the one you have your heart set upon, or even than the property you could otherwise afford, at least by debt to income ratio. Of course, if you don't have a down payment, you can't buy the property of your dreams either. But if you buy a property, especially while the market is down, leverage can mean you will be able to buy the property of your dreams much sooner and much easier, or in plain words, buying the less expensive property is smart if that's what you can afford now. If you've got more than enough income but no down payment, that's the situation where getting a personal loan for a down payment is a serious possibility. Say you're a doctor who just spent the last two years paying off your student loans ahead of schedule. You've got a great income, but you spent everything on getting rid of that debt, and as a consequence, you don't have much for the down payment, right when it will do you the most good. It is possible, for some people who have a large down [...]



Negotiation Requires More Than Dueling Ultimatums

Fri, 16 Feb 2018 07:00:00 -0800

Not too long ago, I started negotiating for a property. I did extensive research online, and and I and my clients visited several competing properties. We made an offer that was a little under 90% of the asking price, and I justified it in a cover letter with several direct comparisons. The property had potential - but my clients were going to have to really work at realizing any of that potential - and I don't mean just carpet and paint. The owner's response? They did come down a little bit - about 2% of the asking price. But all they said was, "We want $X" That's it. No, "But the kitchen is beautiful, it's 500 square feet more than those, the location prevents it from getting socked in by traffic noise." None of which was true, but are examples of the kinds of things they could have said. Instead, just an ultimatum. I don't believe anyone can legitimately call that "negotiation", unless you want to include the sense that a flying creature with feathers that waddles on land, swims on water and goes "quack" can be labeled a Doberman Pinscher. It's still a duck, no matter what you call it, and that's still an ultimatum. If you look at diplomatic ultimatums, what spot do they occupy in the hierarchy? They're the last step before war. Similarly, in real estate, they're the last step before walking away. They should be a sign that negotiations have essentially failed. They're certainly not the way to start successful negotiations. If you want more for the property, tell me why in the heck you think I should give it to you. What you want (more money) is irrelevant. It's counterbalanced by what I want - which is the exact opposite, to pay less money. Start a conversation for crying out loud - that's what I was trying to do. I didn't expect them to take my first offer, but my clients have the ability and interest to give them what they want - cash - for what they have: a property they no longer want. Even if my clients are getting a loan, it still amounts to cash for the sellers. That's what any offer is really saying - "We're interested in buying this property, if we can reach an appropriate agreement." The initial offer is your bona fides as to what sort of agreement you're willing to reach. I don't make first offers I expect to have accepted, but neither do I make hopeless low-balls unless it is just a shot in the dark and I don't care if it "poisons the well" of possible rapport. I do want a reasonable response, and I do everything I can to encourage such a response rather than an ultimatum. Duelling ultimatums is kind of like throwing matter and anti-matter at each other. Often, there's an explosion, and even when there isn't, nobody is happy because the radiation when they combine poisons everything. If you do end up with a purchase contract, there's still no rapport, so anything that comes along later is likely to cause the whole thing to fall apart. Why in the nine billion names of god would anyone want to do that? You don't get any empathy, you don't get any respect, and you're very likely not to get a transaction, which means the buyer is unhappy, the seller is unhappy, and both agents are unhappy. Nobody is happy. It's nearly as certain as gravity. Why would you want to "negotiate" by dueling ultimatums when you know it's going to cause you and your client to end up unhappy? I know how this happened. During the seller's markets, sellers had all the power. For a couple of years, there were dueling offers on almost every property on the market that was even vaguely reasonable in asking price. Listing agents got used to being able to dictate terms, and buyer's agents went along, in part because they could only hope to extract one or two things and going along with everything else was the only way to make it happen, and in part because the next time they made an offer to that listing agent, they didn't want it rejected o[...]



What Does Escrow Do?

Thu, 15 Feb 2018 07:00:00 -0800

This is a question that gets asked a lot. Escrow is nothing more or less than a neutral third party that stands in the middle of a real estate transaction and makes certain all of the i's are dotted and t's are crossed. They make certain that all of the terms of the contract have been met, and then they make certain that everyone who is a party to the transaction gets what is coming to them via the contract. Given the complexity of a real estate transaction, you want this. In California, that's an eight page basic contract. Do you want to go through and verify that it's all done? Suppose there wasn't an escrow? Given a half million dollar transaction, do you think it might be possible that some people would try to arrange to be paid without handing over a good Grant Deed or clear title, or that they might try to pay with nonexistent funds? Escrow puts a stop to someone not giving what they agreed and still getting what they want. Many times folks complain about the escrow company or escrow officer, when it's not escrow's fault and the problem lies elsewhere. The escrow company is obligated to make certain all of the terms of the contract have been followed, not just most of them. I've talked before about how if the contract is not accepted exactly as proposed in the most recent modification, you don't have a deal. There cannot be any points of disagreement, or you don't have a purchase contract. Similarly for escrow. Usually problems that the client sees are not the escrow officer's doing, but rather someone else's. Quite often, the person complaining is the person who caused the problem. The escrow officer can't do anything without mutual agreement. If the loan officer doesn't get the loan in a timely fashion, it's not the escrow officer's fault. If the agent doesn't meet the inspector or appraiser so they can get their work done in a timely fashion, it's not the escrow officer's fault. If you can't qualify for the loan, if you have to come up with more money, if you don't get as much money as you thought, it's not the escrow officer's fault. But in many cases, the escrow officer makes a convenient whipping boy for the sins of others. This is not to say that it's never the escrow officer's fault that something goes wrong, but if one party or the other is not in compliance with the terms of the agreement, the only options the escrow officer has are to get an amended agreement or get them into compliance. Nonetheless, I have seen many transactions fall apart because the escrow officer was a bozo. The really good escrow officers are like chess masters - several moves ahead of the whole game, and when I find one, I want to use them all of the time. Unfortunately for buyer's agents, the seller often has the real control over where the escrow transaction goes, and when the seller's agent decides they want to use some bozo, that's probably where it's going. I can do all kinds of things that should move them, but the bottom line is they want to use their broker's pet escrow (who is more likely to be staffed by bozos than any other escrow company, as they've got captive clients), I as the buyer's agent cannot force them to go elsewhere. It's a violation of fiduciary duty for them as well as a RESPA violation, but if I complain to the appropriate agencies, what are the chances of my client getting this property they've decided that they want? As the escrow process moves forward, the escrow officer collects documentation that the various requirements of the contract have been fulfilled. When they have all been fulfilled, the transaction is ready to close and record. The loan is usually the last thing left hanging after everything else is done. There are a variety of reasons for this, most obvious of which is that the loan's conditions are likely to include everything else being done before the loan funds. Apprais[...]



Investing in Second Trust Deeds

Wed, 14 Feb 2018 07:00:00 -0800

This article was originally from April 2006 - anybody want to tell me I didn't call it? Of course, by that time it was like predicting a dropped anvil would fall but that was when the question was asked From an email: I've been enjoying your blog posts on mortgages. I've learned more from you about what to expect than I have from any other source, and I've gotten 10 mortgages in my life. I was reading Larry William's website this week, and on there I saw one of his newsletters from last summer: Larry Williams you may be familiar with, he's written many books on trading. Anyways, the newsletter talks about buying 2nd mortgage notes as an investment. And that's something I haven't seen you write about. With the softening of the housing market in many areas, and overextended borrowers, I suspect that the market for 2nd notes will be heating up over the next few months and years. I'd appreciate hearing your views on the opportunities and pitfalls in this area. Let us consider the efficiencies of the market. The Institutional lenders have economies of scale, underwriting guidelines, and a set checklist of procedures as to how to approve (or decline) loans. They have a system that makes them effective. They can do this because they have enough loans to make it cost-effective, and because of their experience, they know how to price their loans. From advertising to wholesaling to pricing to packaging and servicing, they are set up for efficient service. Lest people think I'm saying lenders are a better place to get loans than brokers, I am not. Quite the reverse is true. But the the vast majority of broker originated loans are with regulated institutional lenders. What happens if you're not set up like that? The answer is you're either more highly priced than they are, or you're not as profitable. I've said more than once that without regulated institutional lenders, every loan would be a hard money loan. So in trying to originate loans, an individual is competing at a disadvantage. Where then, can they make a profit? The answer is in the loans that the regulated lenders won't or can't touch. Now we need to ask ourselves why they can't or won't touch them. There are three common reasons. First is there is something wrong with the borrower. Second is that there's not enough equity. Third is that there is something wrong with the property. Something wrong with the borrower has several subtypes. Credit Score too low, in bankruptcy, too many mortgage lates, no source of income to pay back the loan. Most of these can be gotten around in one degree or another unless they take place in combination with insufficient equity. Most single problems are surmountable by a good loan officer, providing you've got the equity required to convince the bank they won't lose their investment. You'll pay a higher rate or higher fees than you would without, but better that than no loan. It's when they take place in combination that problems arise which break the loan beyond the ability to rescue. And of course, if the property is not marketable in its current condition, no regulated lender will touch it. What the first category reduces to is increased chance of default. The second category reduces to increased risk of losing money in case of default. The third category, something wrong with the property, reduces to you're going to get stuck fixing the property if they do default, which means sinking thousands to tens of thousands of dollars into it, above and beyond the amount of the trust deed. Furthermore, both the second and third categories are also at increased risk for default, even if the borrower has the wealth of Midas and the credit score to match. So let's consider what happens when something goes wrong. The borrower doesn't make their payments, and it becomes a non-performing loan. [...]



What Do Loan Qualification Standards Accomplish?

Tue, 13 Feb 2018 07:00:00 -0800

If you don't know the answer to this, don't be embarrassed. Lots of alleged professionals forgot the answers to these questions for several years, if indeed, they ever knew. It seems like quite a few still don't know the answer Loan qualification standards measure whether or not you can afford a loan. By adhering to them, the lenders both lower the default rates and have some assurance the loans they make will be repaid, while borrowers avoid getting into situations where foreclosure is all but certain. Lest you misunderstand, this is a good thing for both the lenders and the borrowers. It isn't like the lenders want to stand there like the Black Knight shouting "None Shall Pass!" They want to loan money - that's how they make profit. But unless you live in a cave, you may have heard of some problems with defaulted home loans of late. You may have heard they're a major problem for both the lenders and the borrowers. Guess what? They are. From the lender's standpoint, of course, the important thing is that they prevent loaning money to people who can't afford to repay the loan, but the other isn't a trivial concern. Even if they get every penny back when they foreclose, foreclosures are still bad business, with negative impacts on cash available to lend, regulatory scrutiny, and not least important, business reputation. Going through foreclosure is no fun from a borrower standpoint either. I don't think I have ever seen or even heard of a situation where somebody ended up better off from having gone through foreclosure than they would have been if the lender had just denied the loan in the first place. So whether you like it or not, the lenders are doing you a favor to decline your loan when you're not qualified. There are many loan qualification standards, but the two most important ones are debt to income ratio, often abbreviated DTI, and loan to value ratio, often abbreviated LTV. The first of these is much more important than the second, but both are part of every single loan. Debt to Income ratio is a measurement of how well your monthly income covers your monthly payments. It is measured in the form of a percentage of your gross monthly pay, averaged over about the last two years. The permissible number can change somewhat depending upon credit score in some situations, and with enough in the way of assets in others, but the basic idea is you can afford to be paying out 43 to 45 percent of your monthly income in the form of fixed expenses - housing and consumer debt service. You can cancel cable TV or broadband internet, you can cancel your movie club or book of the month - but the items debt to income are concerned with are essentially fixed by your situation. You owe $X on student loans, and you're required to repay so many dollars per month. Your mortgage payment is this, your pro-rated property taxes are that, your homeowners insurance and car payments and credit cars are these others. There's no possibility of this money suddenly disappearing - you already owe it, and you are obligated to repay on thus and such a schedule. Loan to value ratio is not a measure of whether you can afford the loan. It is a measurement of how likely the lender is to get its money back if you do default. With appraisal fraud and similar problems, it's not any kind of a magic bullet - but it is the best they have. When values are rising quickly and holding onto a property for six months generates a 10% profit, it shouldn't surprise anyone that the lenders are willing to take more risks with loan to value ratio than they are in the reverse situation. Many properties have lost value and even if the borrowers had kept up the payments before default, they would still owe more than the property is worth. Lenders aren't going to refinance on good terms if you're "upsi[...]



FSBO Horror and Failure to Disclose Property Defects

Mon, 12 Feb 2018 07:00:00 -0800

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. You have all the legal liability. Now I'm going to leave the marketing and pricing negotiating 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 - usually not. The most common reason people do for sale by owner is greed. 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 keep the license, 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 few are every bit as 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[...]



Mortgage Closing Costs: What is Real and What is Junk?

Sun, 11 Feb 2018 07:00:00 -0800

The easy, general rule is that legitimate expenses all have easily understood explanations in plain english, they are all for specific services, and if they are performed by third parties, there are associated invoices or receipts that you can see. Let's haul out the Mortgage Loan Disclosure Statement (California) or Good Faith Estimate (elsewhere), and go right down them line by line. To be certain, it's the HUD 1 form that's really definitive, but you don't get that even in preliminary form until you're signing loan documents, and if it's not on the earlier form it shouldn't be on the HUD 1. Origination is not a junk fee. It can be excessive, but it is a real fee to pay a real service. Relating to this is Yield Spread on the HUD 1, which is what the lender will pay the broker for a loan on given terms. Origination plus yield spread plus line 808 (Mortgage Broker Commission) is what the loan provider makes if they are a broker. If they're a lender, they make a lot more, and they can hide it more easily. Yield Spread and Origination and Broker's Commission are disclosed on the HUD 1, while the price on the secondary market is not disclosed anywhere, and if you're talking to a direct lender, they don't have to disclose Origination or Yield Spread because there may not be any; they can decide to be paid entirely off the premium the loan sells for in the secondary market - and then they tell you you're buying it down from there with discount points. This is why I keep telling people to shop for loans based upon the terms to you. If you evaluate it on the basis of loan provider's compensation, a broker who has to disclose compensation of $4000 is going to look like a worse bargain that the direct lender who does not apparently make anything but turns around and sells your loan for a $25,000 premium. In this example, the broker's loan is likely to be about a point and a half to two points cheaper to you, but if you evaluate it on the basis of who has to tell you how much they make, you lose. This has gotten an order of magnitude worse as the new 2010 Good Faith Estimate treats Yield Spread (for brokers) as a cost and requires it be included in the computation of costs. It isn't a cost at all - it's now money that actually reduces your cost. But bankers used political contributions and connections to ram through a law requiring it to be quoted as if it were a cost, thereby making a direct lender loan appear more attractive than it is when compared to a broker originated loan by someone who doesn't understand this - which is to say the vast majority of the American population. Nor do direct lenders have to so much as disclose how much they are going to make selling the loan on the secondary market. The politicians have deliberately obscured actual cost to the consumer in favor of aiding one class of loan provider over another. I'm planning an article that directly compares the exact same loan done on a correspondent or direct lending basis versus a broker originated loan. Loan Discount Fee is the fee you pay in order to get an interest rate lower than you would otherwise be offered. It is not junk, but you probably don't want to pay it, as most folks never recover the money they pay to get the lower rate via the lower payments and interest rate charges. Note that you are actually getting something for your money - lowered cost of interest over the life of the loan. It's just that it takes longer than most people realize to recover the money you spend upfront. I never pay discount points for anything except a 30 year fixed rate loan that I'm going to keep at least ten years. Appraisal Fee is not junk. There is an appraiser who needs to get paid for doing the appraisal. Before this year, many times this got [...]



Magical Thinking About Mortgage Loans

Sat, 10 Feb 2018 07:00:00 -0800

(This is an updated reprint of an article written in February 2007. The Era of Make Believe Loans that made it easier to qualify people for inflated loan amounts ended abruptly a few days later, but the sort of thinking that set people up for later default is still with us) Not very long ago, a woman who was impressed by my website called because she wanted to get pre-qualified for a loan. "Great!" I told her, and proceeded to ask about her income and her monthly obligations and everything else, and came up with a figure of about $220,000 that she could realistically afford. If you're familiar with San Diego, you know that that's a 1 bedroom condo, or maybe a small two bedroom in a not so wonderful area of town. Even with prices down now, it's definitely not a house. With a Mortgage Credit Certificate, it got to maybe $260,000. If she bought somewhere there was a Locally based first time buyer program also, that would add whatever the amount of the program was, but the only one with money actually available was a place she didn't want to live. If we went so far as to go interest only, we might have boosted the base loan amount as high as $300,000. Severe fixer houses might be had for $350,000 or so - and she had the literature for a brand new $700,000 development. She had her upgrades and drapery all picked out, too. So I tried to be gentle in pointing out that the property appeared to be a bit more than she could afford. Was she grateful? Heck no! She then asked, "How am I supposed to afford a house with that?" She was spitting mad! She acted like I was personally standing there saying "None Shall Pass!" (about a minute and a half in). "Well, if you won't qualify me for a house, I'll go find someone who will!" I'm sure she did find someone to tell her she could have a $700,000 loan if she wanted it. Put negative amortization together with Stated Income or NINA, and there are any number of people out there who will not only keep their mouths shut about the consequences to you, but aid and abet you in staying ignorant about those consequences - at least until they've got their $25,000 commission check. And you know, I can do that loan also, if you don't mind that real interest rate adds $100,000 to what you owe over the course of three years and the payment all of a sudden adjusts to over four times what you can afford, and you lose the property and your credit is ruined for at least ten years. Not to mention the fact that rarely do people allow the mortgage payment to go south on its own. There is no conspiracy keeping you away from home ownership. There is no smoke filled back room deal setting the price of properties such as the one she wanted out of her reach. Lest you be unaware, here in Southern California, we haven't been building enough new housing for the people who want to live here since the late seventies. Those desirable properties are highly priced because they are scarce, and the prices are where they are because that's where the supply of such properties balances the number of people who want them badly enough to pay those prices. Notice that I did not say, "The number of people who can afford those prices." This is intentional. If you want them bad enough, there are lots of loans out there, and at the time, there were lenders eager to make them, such that you could have that dream house - for a while. But the way financing works is like the laws of physics. Specifically, like gravity. It's there, all the time, pulling away, and there is no analog to the ground that holds us up. Think of it as an very tall elevator shaft going both directions from where you start. This month's interest is gravity, pulling you down. What you're paying is like the upwar[...]



Rent to Own and Lease With Option to Buy

Thu, 08 Feb 2018 07:00:00 -0800

This has always been a portion of the market, but right now, more and more people are emphasizing it, or at least the ones who are able. Actual Rent to Own is rare these days, a sign that the market is being driven by sellers, selling to poorly advised buyers. I can't remember the last time I heard of one happening, because there is an actual ownership interest right away, and the buyer is entitled to a share of the money put into rent, whether or not the deal is actually consummated. On the other hand, Lease Option seems to be a common Idea of the Moment, because the prospective buyer basically gets nothing if they don't want to buy, or if they cannot qualify for the loan. Just like any other purchase contract, everything about these is negotiable, but the basics are thus: Buyer and seller reach a purchase agreement, with the date of actual purchase delayed by some amount of time. In the meantime, the agreement is for for the buyer to rent the property, usually for an above market rent. Part of each payment gets set aside for the buyer's down payment if and when the option is exercised. The difference between Rent to Own and Lease with Option to Buy is that in Rent to Own, a part of each payment is actually due back to the buyer if they decide not to buy, whereas in Lease with Option to buy, that money is just gone if the option to buy is not exercised. Why do this? For the prospective buyer, it's a way to engage in forced savings for a down payment. If rent is $2000 per month, with $1000 being credited to the buyer and $1000 in rent, over a period of two years, you've got a $24,000 down payment, and this is treated exactly like any other down payment, except that the seller already has it, so you only have to come up with the purchase price less this down payment money. This is useful for people with rotten credit and/or poor savings habits, especially if credit is expected to improve within the time frame of the agreement. It's horridly inefficient, and I've never seen a residential situation where it wasn't better to buy outright, but if you have a problem qualifying for a loan or saving for a down payment, this is one way to go about dealing with that problem. With 100% financing currently dead except for VA loans and a few Municipal first time buyer programs that run out of money at warp speed every time they get a fresh allocation, this is one way for people to get their foot in the door of property. For the seller, it's a way to create a captive purchaser. These buyers have rotten credit and/or zero dollars for a down payment. Nobody else can do business with these buyers, because the buyers will not qualify for the necessary loan. They have Hobson's Choice: This one or none at all. This creates bargaining power for the seller even in the strongest of Buyer's Markets, because most sellers in such markets do not have the ability or willingness to offer a Lease with Option to Buy. They're not as powerful as offering a Seller Carryback, but they definitely give sellers pricing power they would not otherwise have. You can get an above market rent and an above market price, to boot, and the prospective buyers are more motivated than your average tenant to take good care of the property. So why isn't everybody doing them? First of all, the reason the seller has the property on the market is because they want or need to sell now, not two years from now. With either rent to own or Lease with Option to Buy ("Lease Option"), they aren't getting any equity out of the property now to enable them to buy their next property. Furthermore, they've still got all of the expenses of owning that property. Finally, the reason that buyer can't buy anything els[...]



Professional Referrals in Real Estate and Loans

Wed, 07 Feb 2018 07:00:00 -0800

People ask for referrals all the time, and many folks will stumble all over themselves to provide referrals. Some of the people referred really are excellent providers. Others are not so good, but the person providing the referral has an agenda of their own, and you have to be aware of the possibility. Never give anyone your business without shopping it around just because someone referred you to a certain provider. In many cases, the reason why you are referred to Company X Realty or Company Y Loans has nothing to do with any allegations of them being an efficient, diligent, effective or inexpensive provider of those services. Number one on the list of reasons why people tell you about X Realty or Y Loans is because company X or company Y refers business back to them. This isn't illegal, but when you ask a real estate agent for a referral to a low cost mortgage provider and you get referred to one of the ones that's competing on the basis of consumer name recognition, you should realize that the mortgage providers with national advertising campaigns are not among the low cost providers. For analogous reasons, I usually advise people to stay away from the national realty chains, even if they're not local to me. But I digress. The point is that the person who refers you to this person is effectively getting paid by referring you to them. Not exactly a sterling reason to trust their motivations in making this referral. Indeed, this is one of the ways that lenders in particular avoid competing on price. Ladies and gentlemen, so long as it is the same type loan on the same terms, a loan is a loan is a loan. The only real difference is the tradeoff between rate and cost, or, in other words, price. But lenders do not want to compete on price, because that means they don't make very much money. In fact, they want to avoid competing on price, and the captive audience from referral business is one prime example of how they do it. Joe Realtor sends Jane Lender business because Jane refers business right back to Joe Realtor, and because the client has been told that Jane Lender gives great loans at a great rate, the client doesn't shop loan providers like they might otherwise have done, leaving Jane a freer hand to charge a higher markup. These are not the only reasons why referrals happen. For instance, here in San Diego, many real estate agents will refer to one particular loan officer because they know that loan officer won't tell the client any inconvenient truths, such as, "You cannot really afford this house." They refer to this loan officer because that loan officer will just keep their mouth shut about the buyer's ability to actually afford the loan and figure out some way to get it through so that agent gets paid. Never mind that it's an unsustainable loan. This sort of thing happens everywhere, but particularly in markets where there are affordability issues for the average person. Finally, explicit kickbacks are illegal, and there are limits on how often Joe and Jane can buy each other dinner out or whatever arrangement they have to transfer wealth, but that doesn't mean it doesn't happen sometimes. After all, there aren't any Department of Real Estate employees following Joe and Jane around 24 hours per day, so this kind of stuff gets hidden all the time. I've had more than one blatantly illegal offer of referrals for kickbacks since I've been in the business. Some of these folks are brazen. No, there's no percentage in turning them in, either. This is one of those situations the saying about, "No good deed goes unpunished," was invented for. One guy I knew who did turn someone in years ago told me about the thousand[...]