California Notice of Default Law

I was just asked this question and had to look it up.
I figured it was worthy of a post.

In California, if the property is in Notice of Default (NOD), and the purchaser does not occupy the property (Investor), the transaction becomes what is called an Equity Purchase.


That's important because there are specific rules that need to be applied and adhered to.

Here's the actual question:

"I plan on buying a home that is in foreclosure and flip it, But I just heard the seller (homeowner) has a 2 year right of rescission. What does that mean? Do I have to hold the property for two years before I can sell?"

As I mentioned, I had to look this up to make sure I had the correct information.
Here's what I found.

Once the sale has closed, the investors title is subject to the seller in foreclosure's Two Year Right of Rescission due to any unconscionable advantage the Investor might have imposed on the transaction.

So does that mean the homeowner can get their property back?

Not quite. Assuming the investor has already sold the property to an unknowing buyer, the remedy would be a recovery of the money the original homeowner was out.

That figure would be determined by the value of the property at the time of resale, less the old loan amounts, less any funds received (good faith money) in the original transaction from the investor.

Interestingly, if it was a sale rent back, where the homeowner never left but instead started to pay the new owner rent, they will not be able to recover any of the rent paid - NONE.

They will however get paid 10% interest on the equity they lost from the start of the violation.

Where did I find this information?
California Civil Code 1695.10 and 1695.14

Buying a foreclosure and planning on living in it?
These rules don't apply to you.

Remember, always work with a professional. Always!

My Blogging Road Map

My name is Mike Mueller. I am a Loan Officer / Mortgage Broker / Mortgage Planner in Concord, California. I have been in the industry for 14 years, I've seen the good times and the bad. I work for Patagonia Finance in the San Francisco Bay Area. I am a residential mortgage broker for all of California, a commercial broker for all 50 states.

I was talking to a reader yesterday who had searched Google for a particular problem she was having. She typed in not keywords like most people do, but her actual question. Google interpreted what she was looking for and served up results. That led her to one of my blogs. The wrong one. She read many of the pages but when she couldn't find what she needed she called me. I was thrilled! Really. That's why I list my phone number at the top of every page.

I write to 5 different real estate blogs (almost daily). Each one has it's own particular flavor and purpose. Four of those are right here, the other is an international real estate network. I also guest blog in several other places. For now, I'll just limit this map to what is here on Patagonia Finance's Website.

Mike's Minute...

This is my main blog. It's been going strong since early 2001. It's a catch all, general purpose bin of useful information. It is usually 100% all my writing. No guest authors, no reprints. The topics can range from financial news (Bernanke is scheduled to speak this morning) to explaining complex mortgage plans and theory in layman's terms, to a little fun. All in all it's my personal spin on what is topical right now in the mortgage and real estate business.

The Foreclosure Report...

As a national blogger I have come in contact with some of the very best real estate people. Real honest ethical professionals who always do what is best for the client. As a loan officer I have also seen the evidence of what the worst people in the industry can do. With many homeowners facing foreclosure there was a void in the internet where these homeowners could find that honest unbiased information. The Foreclosure Report was my answer and fills that void. I have over 30 different real estate agents, loan officers, title and escrow people contributing their honest information for those homeowners in trouble. I also have searched out and found the contact information for as many Lender's Loss Mitigation Departments and continue to add to that list. The Foreclosure Report... is aimed at the homeowner that is trouble now or worried that they might be in the near future.

Foreclosure Investing...

Obviously this is the other side of the coin. Much like The Foreclosure Report, this site deals out honest and ethical information but is aimed at the person looking to purchase or invest in foreclosures, Notice of Defaults, Bank Owned Properties, and Short Sales. The information contained in this site is primarily for the investor looking at purchasing rental property correctly. Believe me there are hundreds of ways to do it wrong. Late night infomercials, get rich quick seminars, and scammers have always found this arena fertile ground for their devious ways. We work very closely with our preferred investor clients. While this site delivers only some of what we give our clients, it's a start.

Reverse Mortgage Help

Here's another area where the scammers and unethical individuals can reap steep rewards. Make no mistake, as Reverse Mortgages increase so will the crooks. This blog is meant to counter that and provide simple honest information. A reverse mortgage can make a huge difference in the quality of life for seniors when properly done. As the nation's boomers age this will soon be a very important aspect in the mortgage world. Working with a true mortgage professional will be critical. Knowing the difference vital.

So that in a nutshell is a virtual roadmap to who I am, what I write, and what I do.

I can't fight the bad guys all by myself but via the power of blogging and search engines, I'm trying.

Thanks for reading, and please please, feel free to call me, anytime!

Mike Mueller

Technorati Tags: mortgage, real estate, short sales, foreclosures, reverse mortgage

Real Estate Investor?

This is Part One in a Three Part series

The System

Have you ever seen one of those signs and wondered?

"We Pay CASH for Homes!"

or the latest incarnation...


"Real Estate Investor Apprentice Wanted"

Wonder how all these people could pay cash for all those homes?

Wonder why the same looking signs have popped up everywhere?

Wonder why if they have so much money, they can't afford better signs or advertising?

Wonder why if they are seeking an Apprentice - why are they driving a beat up Pinto?

I have too.

So a little over a year ago I paid good money to go to this big Real Estate shin dig in Moscone Center. It was put together by the Learning Annex. It had keynote speakers like Anthony Robbins, Robert Kiyosaki, and even The Donald.
I certainly wanted to "Learn" and why not learn from guys like that?

For three days, for twelve hours a day, I attended "class" after "class". If I remember right there were over 80 different "classes" offered. Not by the Keynote guys above, but by True Professional Real Estate Investors. These people were some of the most successful people on the planet. They had spent the early years of their life learning how to strike it rich with real estate and now wanted to give something back.

I know they were truly successful because of the expensive silk suits they wore. And then I couldn't help but notice their flashy watches. Oh and the way they talked about their last vacation. And then to verify what I already knew, they also told me they were (extremely wealthy). Each and every one of them did.

Amazingly, they were all willing to share vital information, the very same information it took them years of hard work to learn, with anyone!
Almost.

Just as long as you were one of the first 500 people to make their way to the back table and give their wonderful helpers a credit card.

Don't think of the $1,800 charge as a high price to pay for 12 CDs and a booklet. It's an investment in your future!

Time and time again, in each and every "class", with the very same speech pattern, the rush to the back was on. People of all walks of life were suddenly running for their financial lives.
Not for the door (as I might have hoped) but for the back table!
These good people would literally inundate the 20 or so wonderful helpers.


"NO... Take my Platinum Card first, I was here first!"

At times it reminded me of glorious holiday times past.
Cabbage Patch Kids, Tickle Me Elmo, and Beanie Babies have nothing on this spectacle.





Continued soon...

Existing Home Sales UP!

Good News!
The National Association of Realtors (NAR) released their numbers for Existing Home Sales in February.
Internally this is called the PHSI, or Pending Home Sales Index.
It tracks the number of contracts signed.

Nationally, the number of sales of existing homes rose in February .7% over January numbers.
The biggest gains were in the South with a gain of 4.5%
The data surprised market watchers nationwide.
http://www.realtor.org/press_room/news_releases/2007/phs_feb07_show_effects_of_weather.html

Here's a breakdown of the numbers nationally and regionally.
http://www.realtor.org/Research.nsf/files/PHS.pdf/$FILE/PHS.pdf

Here's the Bad News...
In the Western United States, we didn't see the same jump as the rest of the Nation.
Instead we saw a decline of 6%!


We'll have more defined numbers (broken down to cities) soon as various agencies filter the local data.

To read more about what the report means to you here's a good explanation: LINK

East Bay, Hot Bed of Defaults

I read an article in the Contra Costa Times yesterday.
It was also covered by all the news stations.

"Loan Defaults are the Worst in the East Bay!"

Hey, I can see that.
I blame all sorts of people here: LINK
Good people have been mislead into signing for more house than they can honestly afford.
The payments on the loan changes and viola!

"Honey, we can't afford to pay the mortgage this month"

And since money is the primary cause listed in divorces - guess what else the east bay might soon be leading in?

I was talking to a divorce attorney the other day and he was eagerly waiting for the flood. He already hired a couple extra people to help with the "soon to be" workload - really!

No matter why the current homeowner is past due there are a couple of things to look for here.

On the Opportunity Side of the coin, if you are buying your first home, picking up additional investment property, or just looking to get a deal - This may be your time!

• Distress Sales
• Foreclosures
• Notice of Defaults
• Short Sales

You name it, they'll be a lot more coming!
But are you ready?

To take advantage of any of the above you need your "Ducks in a Row".
You need to be able to act quickly.

You should be pre-approved now by a mortgage professional.
We're talking "Full Doc" and at a high enough interest rate that if rates bump 1/2 % your approval isn't out the window.
Remember, you are not locking at this rate, just qualifying at it.

Make sense?

Before you dive head first thinking you are going to get the deal of a lifetime - do your research. Read, read and read some more. Flipper? Start here: LINK

What if you are on the other side of the coin?
What if your spouse just told you, "Honey, we can't afford to pay the mortgage this month"?

Don't wait - don't hesitate - you need to Activate!
Get in contact with a mortgage professional now!

If you have to refi - do it.
If you have to sell - do it.
Do everything you can to NOT make a LATE mortgage payment.

Even if you have a couple of late payments - it's not the end of the world.
You still have options but ONLY if you act quickly - wait too long and those "opportunists" listed above will be taking advantage of you and you don't want that do you?

Want to read more about dealing with foreclosures?
http://www.patagoniafinance.com/2006/12/youre-in-foreclosure-happy-holidays.html

The Envelope Please...

Ok, so it's not so dramatic as that.

The Fed's as predicted - are keeping rates the same.
Here's a link to the press release: LINK
or you can just read it here.

Tame comments in the dialog section regarding inflation concerns.



















12:30 Update: Did you see what happened to the market when they read the "Tame" comments ? Dropped like a rock!

The Fed's and You

When we say the Fed's, we're talking about the FOMC.

That stands for the Federal Open Market Committee.
Sometimes they'll be called the Federal Reserve Board.
And then sometimes they are called other words to nasty to print here.

No matter what you call them they quietly go about their business.
They meet behind closed doors, they do very little interviews, and the twelve member board generally speaks through one voice, that of it's Chariman, Ben Bernanke.

With all this lack of fanfare and sensationalism, the entire business world watches and waits on their every move.

Let's put it this way,...
Take Britney Spears, Lindsay Lohan, Jennifer Aniston, Jessica Simpson, Angelina and Brad, Tom Cruise and his woman, end every other one not named here but had their picture on one of the grocery lines trash mag covers over the last year. Add everyone who didn't make the cover but had a picture on the inside. Heck, just for good measure we'll even throw in Madonna!
Now let's roll them all into one person - and call that The Fed.

Now take everyone who watches Wall Street, everyone who works on Wall Street, everyone who invests in Stocks, Bonds, Mutual funds. Everyone who runs a company or has a part in running a company. Every business student, every business teacher, every business writer, every business reporter, every business watcher and reader. Add all pension and retirement watchers. Add every bank VP. Add just about every person in the world who is mindful of the business world and what goes into it.
Round them all up (picture the Verizon commercials with the mass of people lined up).
All these people are The Paparazzi.

They follow the Lindsay's, and Britney's everywhere they go.
They listen to everything they say.
By the time Jessica sneezes, the head office already has the report.
These people are ruthless in finding out what the Fed thinks, what the Fed's might do next.

Is that a good analogy?

And yet with all this hoopla, the Fed's really do just one little thing.
They set the Fed Funds Rate - that's the rate in which the Feds lend money to the big institutions.

Now just like, "Why Britney shaved her head", there's much more to the story than just that.
The Fed Funds Rate influences the Discount Rate which influences the Prime Rate, which influences the private school K-Fed's kid is going to enroll in.
(I was just kidding about that last part)

But the Prime Rate effects you and I.
It's what our Home Equity Loan is tied to.
It's what our small balance commercial loan is tied to.
It's the loadstar of short term rates.

Do we need to become Paparaza of the Fed's?
No.
But we do need to mindful of what they are thinking and doing.
They'll be announcing today (11:15 AM Pacific Time) one of three things:

1. That they either have lowered rates,
   
2. They have raised rates or,
3. They have left rates the same.
   

The mindful people think they'll keep them the same, this time around.
Personally, I like this kind of stuff far better than reading the tabloids!

Commercial is Different

My main project today is to get to started on a 6 Unit Complex refinance. (Obviously this isn't the property)

This is a new client. We met and discussed ideas last week and very late on Friday she bought in the paperwork I requested.

Since she is a new client, I'm starting from scratch.
I don't know who did her original loan - and that really doesn't matter.
What does matter is she has a loan now that is rapidly painting her in a corner.

She says...
She has a 5 yr ARM.
Her rate started at 9.75% the first year.
Her rate bumped to 11.75% the second year.
Her rate is going to bump again to 13.75% very soon.
She has a Pre-Payment Penalty.
She also has a Second Pre-Payment Penalty.
She is Cash Flow Negative now.
She was barely Cash Flow Even the first year.

I ask you, does that sound anything like a Residential Loan?
Not even in the slimiest loan office - right?

I haven't started looking at her documents but I can take an educated guess at what I'll find.

She has a step loan, or for those that have been around a while a GPM.
I also think she has a Pre-Pay and a Lock Out.

While there is a Sub-Prime in Commercial, features like Step Loans, Pre-Pays, and Lock Outs are not indicators of Sub-Prime. They can be found in A Paper loans as well.

In the end, her original loan officer did a horrible job matching her loan to her goals.
She was sold a bad loan and didn't ask the right questions.

I just hope I can get in there and correct the situation.
We shall see.

Be careful out there.

New Century Mortgage

Just Wednesday I mentioned the changing combo loan marketplace. LINK

Low and behold the poopie hit the round spinning thing.

Yesterday, New Century Mortgage, a major Alt-A slash Sub-Prime lender that has some deep problems suspended all new loans yesterday.

I had a colleague yesterday call my processor looking for help.

She had no less than 3 loans with New Century in process, (some signed and waiting for funding) when she got the call.

In the email I received, I'm guessing that all 3 were... HIGH LTV Loans.

"In order to pursue this opportunity we have elected to suspend new loan submissions effective immediately. We will lift this suspension as soon as we are able to identify a liquidity solution.

During this time, we will continue to fund our approved loans as permitted by our lenders. This includes the prioritization of purchase transactions with the exception of 80/20 Combo and 100% One Loan products."

Bummer, right?

But let's assume these three loans were for purchases.
Now you have 3 different houses that went off the market, accepted offers, and were very close to the Close of Escrow.

The sellers of these three houses have now been deeply effected by the sub prime collapse, even if they themselves have had perfect credit all their lives.

Let's follow the domino a little more down the line...
These 3 sellers, upon having their home in contract, probably went out and made offers on 3 homes for them to move into. Those offers were probably contingent on the sale of their home.

Now that their home is going to have to go back on the market, they cannot complete the sale of their next home so those sellers (twice removed) are also negatively effected. And the domino doesn't stop there it keeps going.

No it's not fair, but it is proof that all things are connected.

Volatility Kills

Volatility.

In Chem class we learned volatility was about how fast something went from liquid to vapor.
"The higher the volatility the faster our beaker of blue stuff evaporated."
I know that because that's exactly what Susie D. (my lab partner) wrote down for Problem 17 on the big test.
And that's exactly what I wrote too. Ok, so I was a "team" player.
And then that led to Mr. Wisner bringing in my parents for a... shall I use the word, "Volatile" meeting?

So there I was, hopelessly wishing that any of the participants, Mr. Wiz, my parents, or even myself, were a little more volatile.
I for one certainly would have liked to have vaporized at that moment in time.

Flash forward to my wine sommelier moments...
"Next we want to gently swirl the wine in our glasses.
This volatizes the esters of the wine.
This aerates the wine and releases its aroma and bouquet."
You can imagine it was a much more pleasant 'volatile" time in my life.

Equity traders, option traders, and the like speak glowingly of volatility.
To them volatility is a chance to get in or out of the market or stock.
Long or short, call or put, if a stock is flat or sideways it's hard to make money on it.
Volatility, financially speaking, "refers to the standard deviation of the change in value of a financial instrument with a specific time horizon."
Thank you Wikipedia
If you are on the wrong side of a volatile trade you could see your whole portfolio go to vapor.

Now let's talk about Volatility in Mortgages.
This is deadly stuff.
Yes, rates go up and down that doesn't change.
Sometimes the rates go up and down with greater speed and velocity.
There's another V word - Velocity.

But the warning I want to get across is this.
Small moves in rates, combined with the ever tightening credit window, combined with higher and higher debt, combined with flat or minimal appreciation rates will yield a highly charged, highly Volatile marketplace.

There are people I come across each and everyday who have questionable loans for their particular goals.
2/28, 3/27. 3/1 ARMs, POAs, Interest Only's -
Don't get me wrong, they are all good loans for the right person at the right time, but so often I see them with the wrong person at the wrong time.
I see volatility.

I have someone who came to me to refi last week.

• They have minimal credit,
• they have to "state their income",
• credit cards are close or at the limit,
• they have a new boat payment,
• just a little money in the bank,

Oh, and their loan amount now is the same as their home value.
All they want to do is get into a loan that will not adjust. (Theirs is about to start adjusting)

They up the Creek and there is no Fixed Rate Paddle, or any paddle for that matter.

You could say they are on the extreme side.
But I see many, many other borrowers just a couple steps away from them.
Borrowers who over the last 2 or 3 years have grown very comfortable with a Minimum Payment, or an Interest Only payment.
When it's time for them to get into something fixed - even with good credit, good income, there may no longer be a fixed paddle available.
It's not all about rates, the credit window has volatility too.
Right now with the sub prime issues the volatility of the credit window is high. And that window is closing!

When it comes to mortgages:

• Volatility in appreciation,
• Volatility in interest rates,
• Volatility in the underwriting guidelines,
• Volatility in the credit window,
• Volatility in pretty much anything can kill.

Be careful out there.

Existing vs. New Home Sale

Each month we get two reports back to back.

The Existing Home Sales Report and the New Home Sales Report.
While they sound like they are pretty much the same they are indeed drastically different.

The Existing Home Sales Report derives it's figures and data from The National Association of Realtors. It's based on exactly what you might think it is, the number of existing homes sold over a given period of time.
Existing home sales account for roughly 85% of all home sales.

The New Home Sales Report doesn't come from N.A.R. - it comes from the builders themselves.
It's what we call a fuzzy number.
It's actually the number of initial sales contracts signed over a period of time.
A contract is fine, but here's where the fuzzy comes in.
When will those houses be completed?
When will the buyers move in?
How many of those contracts go to completion (as in a funded loan)?
Would you believe 30 to 40 % of those contracts will drop out?
True story!
That's Financial Fuzzy-ness.

How many in the Existing Home Sales report will drop out?
Zero. They are real and hard numbers. They are actual completed sales.
See the difference?

Then there are the incentives.
Builders have a cashflow problem. They need to keep selling in order to keep building.
In the normal world if you have too much inventory you drop the price and the item sells.
Builders cannot do that. They have to offer incentives instead.
(Here's a whole post about the issue of builder incentives: LINK)

As the builder's inventory is presently very high, they are offering some unrealistic items.
Material upgrades like granite counters are the norm.
You may have heard about them throwing in new cars?
I've even seen copious amounts of cash back at closing (Fraud Alert!).
I have an offer from a builder on my desk right now for a 700,000 home where the builder is offering 100,000 in incentives!
Back to the report, guess what? The numbers the builders report DO NOT include these incentives.
More Fuzzy-ness.

While the existing market may also include seller incentives (cash to close, repair concessions) this is so minor and often times reflects in the sales figures.

If 85% of all sales are existing, that means the New Homes account for only 15% of the market - right?

So new homes don't matter as much?
Not true, they do indeed.
But in a very different way.

New Homes and the building of new homes is an industry unto itself.
Building a new home requires labor and materials.
More new homes means more labor being put to work.
It means more demand for the building materials.
More new homes means building material suppliers are going to have better earnings, better revenue. Sell more New Homes and Home Depot makes more money.
The New Home Sales Report might be thought of as more of a gross economic sector report.

Sell an Existing Home and Home Depot makes nothing.
Existing Home Sales are more of an indicator of the housing market as it is now.
They put a value on the market conditions as they actually were last month.
Cut and Dry.

So as you see these two reports hit the headlines each month, keep in mind where they come from and just how different the two really are.

Doom and Gloom in Stocks

While this is a stock market (equity) story it also has dramatic parallels to the housing market.

I was talking to one of my stock market friends last night about yesterdays stock market drop.
This guy has worked on Wall St, he's been down in the pits, he's a true seasoned professional.

In case you didn't know the market dropped dramatically.
The Dow dropped 416 points in one day.
The largest single day loss in 5 years.
At one point in the day, the computers couldn't keep up with the orders and they saw a drop of over 100 points in a single minute!

Why did this all happen? The news reports list 3 different factors.

1. China had some "issues" which bled over to the other econimic markets around the world.
Their market dropped 9% partly due to concerns over government interventions in their markets.
China is important mainly because China is such a big player.

2. Durable Goods orders on big ticket items (think planes, trains and automobiles) fell 7.8% last month.
That was overall, the big plane part of it all dropped 60.3% - wow!

3. And then, there is the general overall feeling of world uncertainty and instability.
The Middle East, Iraq, Iran, North Korea.
The assassination attempt on Dick Cheney being the latest example.

But after all this doom and gloom, the truth of yesterday's stock drop is that it represented only a "correction" of 3%.
My stock friend says market corrections of 10% are normal and healthy.
He was actually happy about the correction but said it wasn't enough!
No he's not selling puts.

He explained that with a market hitting higher and higher highs, there are no really good buying opportunities.
These corrections represent perfect times to purchase quality products.
It's a good time to buy that stock, assuming there was a good reason to buy in the first place.

Here comes the Housing Connection:

But then he also had another insight that became crystal clear to me.
In a correction period, the true professionals know how to deal with it, they know how to ride out the storm.
The weekend warriors (as he calls them), the daytraders, the E-traders, the speculators, the Amateurs either cannot or do not want to ride the waves.
They drown, they drop out, they walk away.

In his words, (he called it a courtesy flush), this clears the playing field and gets the market back to being worked by the professionals.
It's like the Zamboni coming out between periods of a hockey game.

Transfer that over to our field of expertise - the Housing Market.
Is a correction of 10% normal for our field?
Is a clean sheet of ice coming for us?

I'll take the same position as my stock friend.
I've always said, I'd like to see rates rise and watch the amateur loan officers go back to selling cars and siding.
I'd like to see the weekend flippers lose all their equity and drop out of their game. Fewer part time agents wouldn't be all that bad would it?

Sounds a little harsh but I think it's a move that'll make for a healthier housing market overall.
Sometimes a little pain is good.

The Lead Gen Biz - Part One

So I caught a little flak over my explanation of the Tree and it's business model.
LINK

No biggee.
If I get this right, I am the "Flak-er", and they would be the "Flak-ees".

The Flak-ees reactions ranged from the standard issue knee jerk "Duh", to eye opening wild disbelief.


Let's do this in two parts:
Part One - the answer to the Dee-Dee-Dee side, (Carlos Mencia reference)...

Some of the Flak-ees maintained that the Tree was and is doing what it needs to do to stay in business. In order for the Tree to continue offering the great services it does to us poor consumers, they need to sell the leads. "Wadda you think? They should just give 'em away?"


Uh, no...
I have no problem in their selling the fruits they have grown.
I do have a problem with their trying to deceive both the buyers of the leads and the customers.

Advertising has been called the business of half truths.
Some might argue that there's far less than half of a truth in any advertising.
But I'll say, if the banks were competing you indeed would win.
That is the truth. But the truth is, the banks can't really compete.
For many reasons, the playing field is stacked against honest competition.

With the Tree sending leads to their own mortgage company first, they get a jump on the competition. If they really wanted you to know they had a mortgage company wouldn't they have called it something like Lending Tree Mortgage?

Home Loan Center doesn't sound like L.T. at all does it?

Then there is matter of human nature.
I'm a good guy, but I know there are plenty of less than honorable people out there.
As I have said before, they can lie thru their teeth about rates and fees all the way to the signing table. There's nothing illegal about it. It's called Bait and Switch and I see it everyday.
And guess what? If they know they have to beat 3 other liars to get your business, guess what they are going to do?

The best liar wins.

I have a great solution.
Make them tell the truth!
How?

The "Mueller Act"!

Force the lenders (you figure out how) to quote you a rate, a term, a prepay, the total non-recurring closing costs, all fees, everything, and then set that quote in stone.
No changes - period!

Then, if the loan you get isn't what they quoted - they have to pay the difference plus let's say $10,000 in damages.

Furthermore, take the quoting away from individuals (loan officers who work for commission) and put it in the hands of the corporation. Not that corporations don't lie - they'll be more apt at looking at the bottom line.
In short, fully guarantee the quote.
Sounds like a sound and reasonable idea - right?


Now let's step back and see what happens.

From the Lender side:
The lenders will now be caught between trying to compete but not underestimate the rates and fees. They know there are 1,000 ways a loan can change from application to funding.
Many of which are completely unseen this early in the process.
As a lender, you can take a calculated risk and hope nothing increases the rates and fees, that you can close before your lock expires, that the supporting documentation comes back as stated.
But that's a risk. Guess wrong and it costs you money.

So the business is going to price these with a certain amount of cushion.
How much? - Nobody could tell for sure, but a cushion for sure.
Cushion means... not the lowest rate possible, yet low enough to win the deal.

Let's go over to the consumer side:
I'll take two different borrowers, one who has it all together and a super clean deal with no surprises anywhere. We'll call him Mr. Clean.

The other one has everything imaginable come up - not necessarily by his own fault. Both have identical income, credit, and debts. He's Mr. Calamity.

Mr. Clean is doing a refi on his condo. He locks for 15 days (cheaper rates), the appraisal is done and comes back perfect, the prelim as clean and clear as well. His HOA does what they need to do and keeps the records they are supposed to.
Working with any reputable lender, he would get the absolute best rates and fees.

Mr. Calamity, doing the same refi, the same amount, locks for 15 days as well.
But then the poop starts hitting the fan.
His appraisal comes back with issues - there are questionable comps, they need more pictures, or a zillion other things. The Prelim comes from title and shows tax liens. It also shows his ex-wife who happens to be on safari with the new husband. Ooops. We need a quit claim deed signed. His condo turns out to be unwarrantable, the parking is under the building as opposed to outside the footprint, the loan he applied for also says it needs to be 75% owner occupied complex wide. Oh, and there is pending litigation from someone who tripped on a sidewalk last month and is suing the HOA.

Each and every item listed added to the rate, points and fees of Mr. Calamity's loan.
That's just a couple of items that might go wrong.

So under the newly enacted "Mueller Act" the lender that quoted both these guys would get the same loan. Not having a crystal ball, the lender would have quoted the same to both. Got it?

But here's where market forces screw it all up.
Mr. Clean - had he gone the traditional route, would have gotten better rates and fees.
Why? Because the lender had to build the risk of unknown factors into the original quote - the cushion. Mr Clean paid more for his refi then he had to.

Mr. Calamity however made out like a bandit.
Not intentionally, but the lender would have to honor the quote.
(eat the difference)
His real rate and fees would be incredibly higher.
Missing his lock might have cost him a 1/4 point.
Tax liens, pending litigation, HOA cert. all would bump him out of an A paper loan.

The lenders, learning from their mistakes on Mr Calamity would adapt and build in a bigger and bigger cushion. Unfortunately imposing this cushion on the next Mr Clean.

So in the end, the "Mueller Act" would fail in what it was enacted to do.
Mike Mueller would be impeached,
the Act would be repealed,
and the lessons learned would be taught to high school history students across the US for years to come.

Ok, how's this idea instead?
We educate the consumer to make insightful decisions, by working with trusted professionals, who understand the consumers objectives and goals.
I like that better.

Next time we'll look at the "They don't really do that do they?" side in Part Two

Scarcity is a Value

Over the weekend we held our Investing in Real Estate: 101 seminar.
We filled the big room of the Walnut Creek Marriott.
150 people if I heard right.
No room for walk ins.

I heard nothing but good comments so far.

One of the best things (I think) in doing these seminars is that each and every person has a card they can turn in before the end and have their question answered. They don't have to stand up, they can ask anonymously, and get a real answer to maybe something they were afraid to ask.

The question came up, "Where would you suggest investing in?"
It's an open dialogue in this part of the session.

Rob handled the question originally and rattled off some far away cities in NC, WA and then mentioned Sacramento. Charlie Krackeler didn't have much to say about it, but I did.
I objected!

Rob's point was that since Sacramento was the Capitol, it was the hub of the state.
There will always be jobs because they are not going to up and move the Capitol to Walnut Creek. Jobs equal good housing appreciation.

My point was that he is part right.
Jobs, schools, and roads all add to healthy appreciation and a good overall economy.
That's true enough.
But the world is driven by supply and demand.

I argued that pretty much anywhere in the central valley there is plenty of cheap land.




I used the area by the Arco Arena where Hwy 80 intersects Hwy 5 as an example.
I have a very good friend who bought a new house, in a new division, for 1/3 what he could have down here in the Bay Area.
By the way, the Arco Arena was originally built back in 1988 in the middle of farm land. This area is now called Natomas. and it literally is right next to the Arco Arena. It even has it's own school district!

Important Point
When we as a society need more housing we build horizontally not vertically.
That means "Out" not "Up".
That's housing - not office space.
Office space builds up not out.
We want to live in our own home, our own little homestead that we can stake out with a white picket fence.
When we go to work, we want to go to the hustling bustling towers with the corner office.
Your mileage may vary, but you can see my point.

As more Sacramento housing was needed, developers simply bought the cheapest land available (farm land) and built OUT.

Some of the most expensive residential land in the bay area is where?
In places where they can NOT or will not build out.

Case in point - the SF Peninsula.
Surrounded by water on three sides and SJ on the other where can they go?
So there is a finite amount of houses able to be built.
That means suitable housing is scarce and not plentiful.

Or look at CA coastland. Want to buy a house overlooking the ocean?
This also a good example of a limited amount of spaces available.
You and I both know you'll either pay the big bucks, or have to settle for somewhere obscure.
"Cheap coastal homesites are available in the Aleutian Islands - Call Now, Operators are Standing By!"

Looking at Natomas as an example.
I went looking for a picture of before and after.
I found a whole page on the CA website dealing with the growth in this area:
LINK
Oh, and here's another good page: LINK

Here's a picture of the area showing 1999 and then again in 2003.





The red squares are farmland, bluegray housing.
It's easy to see, we converted lots of farmland to housing.
And you know what's outside of the picture?
Even more farmland!

Tree-hugging aside, here's the point:
If Sacramento housing is or becomes expensive, the developer just turns around and buys more farm land and builds more houses.
Don't blame the developer, he's just doing what the market dictates he do.
he sees the demand and increases the supply.

Macro economics say...
With a diminishing supply and rising demand, prices will increase.
(Think Oil and Gas)
What do you think gas would cost if oil was plentiful and all we had to do was turn on the tap?

While the conversion of farmland to houses isn't as easy as "turning on the tap", and limited growth or no growth initiatives may stand in the way of rabid builders plowing under the fields of corn, the general idea remains.

I met yesterday with the person who posed the original question.
As it turns out they may not be able to afford a place in the bay area.
Sacramento may fit their price range.
They are First Time Home Buyers and have limited buying power.
If they buy smart, and with a good exit plan, I see no reason why not to buy where they can.

DISCLAIMER:
I am not advocating Growth or No Growth.
I am not down on Sacramento.
Farmers vs. Builders.
Golden State vs the Kings.
Arnold vs. ?
I'm simply making the case that scarcity builds value.

Buy, Hold or Sell

We're doing another Investing in Real Estate 101 seminar this weekend.

This one will be at the local Marriott in their largest room.
And guess what?

I just found out we're overbooked!
Not only are we sold out, we're really oversold!
"I'm sorry Mr. and Mrs. Smith we're going to have to bump you to a later flight, Oooops, I mean seminar."
Room capacity is 120.

Let's just say, we're going to be cozy in there!

The good news: More than 100 people are going to get some solid education in investing.
The bad news: You are probably not going to be one of them.

So just in case, here's a quick synopsis of what we're covering and why.

One of the cornerstone ideas in investing in RE that we push is cashflow.
You must have proper cashflow.

Investment in anything means looking at your ROI, "Return On Investment".
If you don't get a good ROI, why invest in the first place?

How do you get a return in RE?
Only two ways I know of:

1. Cashflow
2. Appreciation

Think about that for a minute.

What do we see in the marketplace these days?

Flippers?
Let's talk about appreciation in terms of flipping.
Flipping is, buying low, then turning around and selling higher.
It's not that easy of course.

Sometimes you need to buy low, invest big $ to fix and fluff, just to be able to sell higher - right?
We'll that's "Appreciation".
The cashflow in flipping comes into play when the first mortgage payment is due.
No rental income means total negative monthly cashflow.
That's ok for the short term if the flip yields enough appreciation.

The greatest ROI comes from the strategy of Buy and Hold.
You know this. Look back over the years and during good times and bad, property just keeps on chugging along.
Yeah, we're in the bad now, but take a step back and look at a wider view.
Somebody somewhere said ( I can't remember right now) that property values at least double every ten years, as an average, since the 1930's.
Never less than double.

As a real example let's look purchasing a $500,000 income property and holding for 10 years.
Let's assume you put down 100,000 (20%), have good cashflow, and you never pay a dime towards principal.
Let's also assume we have a dismal appreciation rate over the course of those 10 years of only 5% each year.

Now let's look at the numbers:
Present Value would be what you have in it now - $100,000
after 10 yrs appreciation the market value or Future Value would be $820,088
subtract the loan amount of $400,000 and you'll have $420,088 in equity right?

Now go put that in a calculator and see what your ROI was.
Oh, here's an online one I found: LINK
What did you find out?

Your ROI was 15.43% right?
That's each and every year and at a very dismal 5% appreciation rate.
Still don't believe it?
Take any regular calculator, or an 8th grade math student (Hey Emily, i have a project for you...),
and start by adding 15.43% of 100,000 to itself.
The first one is going to be easy $15,430 added to 100,000 is 115, 430.
Now add 15.43% of that to the total and so on and so on.
Do it 10 times and you'll come up with $420,088 give or take a penny.

But is 5% appreciation too small?
You might think so. Most professionals would agree with you.
We may never see triple digit appreciation again, but what about double?

Go back and do the same at 10% a year.
Now at year 10 the same property is worth roughly a cool $1.3 Million!
Subtract the loan amount of 400,000 and that leaves 942,355 to be exact.
Pop that in the ROI calculator.
WOW!
25.15%

And that folks, is why Buy and Hold makes so much sense.

Yeah, I know.
I left out Inflation, Taxes, 1031 Exchanges, Realtor Fees, and so much more.
Let's not cloud the issue, the point is more about the "WHY".
Why anyone would want to buy and hold RE.

But there's a catch.
To properly buy and hold, you need to be able to HOLD.
Anyone can buy.
I have 107% financing to prove it.
This is where the Cashflow comes in.

Proper cashflow allows the investor to hold.
It may provide anywhere from a decent or minimal income each month.
But the real returns are usually found in the appreciation, not in the cashflow.

That in a nutshell is the seminar presentation you are probably going to miss.

FOMC Tomorrow - Busy week

As you may know, the Fed's are meeting today.
It's a two day meeting where they'll announce tomorrow.
Statement will be released at 11:15 Pacific time.
I'll post a copy of it here.

So there's a pause in the markets today.
We've seen the 10 yr. react in a general upwards direction.
It opened this morning at 4.87%

It's still a matter of supply and demand but a simple and general rule to remember when it comes to rates is this:

Good economic news = Higher rates
Poor news = Lower rates

It's a gross generalization, and it still boils down to supply and demand, but it's something to put in the back of your head and think about.

There's a bunch of info hitting the markets this week.
Not only is it still Earnings Season, there's a ton of data to be reported this week.
Here's a cut and paste from a mortgage newsletter I get.
Most all of these play into what happens to rates!

Week of January 29 - February 03

Date	ET	Release	For	Actual	Briefing.com	Consensus	Prior	Revised From
Jan 30	10:00	Consumer Confidence	Jan		110.5	109.5	109.0
Jan 31	08:30	GDP-Adv.	Q4		3.0%	3.0%	2.0%
Jan 31	08:30