Archive for the 'Lending' Category
Most real estate agents want two things: more money and more time off. The challenge is that they are doing things that (a) are not dollar productive and (b) are time consuming. Add in more regulatory burdens, market shifts, and industry participants which are staffed by people who are incompetent, lazy, and/or stupid and it makes an agent’s goals harder and harder to reach.
Don’t let this gloomy scenario bring you down. Here are four action-oriented things, agents can do right away, which have built empires, created wealth, and sparked business revolutions.
1- Own everything about your business. You are responsible for EVERYTHING even if it’s “not your job”. We live in a world where any question can be answered by a smart phone and still I hear agents get confused about where to find answers. Your broker isn’t calling you back with an answer to that question? Ask Siri the question and read a few of the thousands of answers offered, by other brokers, on Trulia, Google, and Zillow. The lender seems stuck? Call a well-rated lender and get another opinion.
Stop bitching about problems you can’t control and fix them anyway.
You are the captain of your ship. If the crew screws up and the ship runs aground, the captain is fired. Your client doesn’t care about the lender, your broker, your transaction coordinator or the seller/buyer. They want action and they hired you to get it for them. Own everything.
2- Surround yourself with congruent rather than competent people. It’s not enough to have a great lender, proficient escrow officer, and proactive transaction coordinator. You must have people working with you who are on board with your goals. If your goals is to make more money and save more time, you need to focus on dollar productive activities so you want affiliates who have suggested solutions to problems when they call with problems. A lender should call you and say “we ran into a problem but this is how I will fix it”. The escrow officer should be thinking about chasing down your client for signatures rather than emailing you. The TC should call your client before calling you. Competent brokers, TCs, lenders, and escrow companies are basically fungible. Congruent affiliates are something special. Find and keep them.
3- Make marketing your number one priority. I need to repeat this one because it’s the most important one; make marketing your number one priority. The single most important function, to a well-oiled, profit producing brokerage practice is lead generation.
Lead generation has to be the first thing you do in the morning. If you have nothing going on. pick a listing from the MLS and try to sell it to your contacts. For example, find a home in a hot market in your town (in my market, that would be Cardiff-by-the-Sea). Pick one which is fairly new to market. Start by calling people you have sold to in that zip code then work your way out to clients who have bought within 10 miles of that zip code. After that, call everyone you know who lives or works in that zip code then work your way out to people who live and work within ten miles of that zip code. Call them and ask one question:
“Do you know anyone looking to buy a home in XXX? I found a great deal for them if they are.”
Make 25 calls tomorrow and ask that question 15 times and I think you’ll find 1-2 prospective clients. Sure, the home will probably be sold out from under you but you will generate a list of potential buyers for the NEXT hot listing which appears in that zip code. Your contacts won’t hate you for that call because they know that XXX is a “hot market” (especially if they live there). They will probably think that you are an agent who closes deals.
4. Sell smarter and you won’t be selling. It’s not enough to get a name and number from your IDX website– you need so much more information and advantage when you call a potential client. When I receive a referral, or lead, or just a name and phone number from a website, I spend more time researching them than I do on the phone with them. When I finally DO call that name, I usually know what they do for work, where they live, and who our mutual friends are. I research them. Let me give you an example by using fellow Bloodhound (whom I really don’t know):
Assume a San Diego agent called me and said he was going to represent this Bloodhound in a purchase of a Carlsbad home–all I have is a name and phone number. The first thing I do is find the prospect on LinkedIn. Here, I learn where he graduated college and that he served as an Army officer so I’ll be talking about why he should use his VA benefit…. even if he THINKS it isn’t for him. I am going to have a financing comparison ready for him so I can show him the math behind my recommendations. If the prospect knows the PROCESS I use, he is going to trust my recommendations. If I find the prospect on Facebook, I will know that we don’t share the same taste in football teams, probably share the same politics, and do share the same affection for Tarantino movies.
My initial call is going to start like this: “Hi, this is Brian Brady and (agent name) asked me to call you about a loan for a home in Carlsbad. He didn’t tell me that you are VA-eligible, you were in the Army?” As we talk, I’m going to ask him if his commissioning source was ROTC (he will tell me about his college days and I’ll talk NCAA hoops with him). If all goes as I think it will, I’ll tell him about my involvement in San Diego politics and invite him to meet his new Congressman when he moves here. I will close by telling him to open the financing comparison I created for him and review why I like VA better than conventional for a jumbo loan.
I imagine the perfect introductory call, prepare for it, and make my time on the phone with the prospective client count. Preparation = higher closing ratios.
Let’s review these four ideas in reverse: (1) Be prepared for every opportunity to gain a new client so that the call is “perfect” every single time (2) spend most of your time generating new business (3) make sure your affiliates are not only competent but congruent with your goals. and (4) be responsible for your own success.
The market may shift soon and business will SEEM tougher. If you implement these four practices today, 2018 won’t seem as difficult as it is for the other agents in your market.1 comment
Debra Brady and I are experts at VA-financing. One of the things we do very well is secure a VA condo complex approval for condominiums which aren’t agency approved. Some comments from a recent YELP review:
I started the home buying process while still on deployment, and Brian graciously worked with me across 13 time zones to begin explaining the ins and outs of home buying.
This is actually kind of fun for me. With technology, deployed service members can communicate with me well in advance of buying. Many times, when deployed, they have free time with little to do. They use Gchat, Facebook Messenger, Skype, and email to communicate with me. Sometimes it makes for some weird hours but I enjoy finally meeting them when they return to the States.
I googled VA home approval, and his was the first name to pop up. Brian is an absolute master at working with the VA.
That’s what I love to hear–that we come up first on Google Search for this topic.
This is how Debra and I work. I spend most of my time “selling” real estate agents and educating clients and Debra gets the loan done. When we’re clicking properly, I am “Mr. Outside” and she is “Mrs. Inside”. Clients know that she is in the office, every day from 8AM until 230PM each day and available on the telephone. This frees me up to: (a) find more business for us and (b) properly educate home buyers about the process. We pride ourselves on “no surprises” during the loan process.
That’s what I hope to hear on every VA loan we close. It doesn’t ALWAYS happen but, I’m proud to say, it does happen more often than not.
1- We funded a $900,000 Orange County purchase with just 6.5% down payment and no mortgage insurance
2- We funded an Orange County condo, with a VA loan, and got both the Master Association and Condo Association VA approved in 30 days
3- We funded a $600,000 San Diego County purchase, with just 5% down payment and a seller-carry back second mortgage and a conventional first mortgage.
4- We funded a 7-unit San Diego apartment property, $820,000 purchase price with just 10% down and a 20% seller-carry back second mortgage.
5- We funded an “underwater” property with loan values at 135% of the appraised value in Los Angeles County.3 comments
Many veterans in California purchase properties which are classified as condominiums. Some are large complexes, with professional HOA management, some are small complexes (under 6 units) with no monthly HOA fee and an informal cost-sharing agreement, and some are townhomes. All share on thing in common–they are listed on the county records as a condominium. This, the VA loan can not be funded until the condominium complex is approved.
The Southern California market has shifted, seemingly overnight from a buyer’s market to a seller’s market. Many listing agents are presenting multiple offers to sellers. Sadly, sellers leave some money on the table because the best offer is one using a VA home loan. The sellers believe that the VA home loan can not be used because the condominium complex does not have a VA approval.
Buyer’s agents jobs then, are to present the VA offer with an eye towards minimizing the risk associated with it.
First, the buyer’s agent would do well to present documentation which demonstrates that the veteran is a strong buyer. Some successful agents go so far to present my automated underwriting findings along with asset and income documentation (with the veteran’s permission, of course). Demonstrating that the veteran has the credit, income, and asset requirements, to be approved for the loan amount, shows that the veteran is “bankable”.
Second, the buyer’s agent might address the three common concerns, sellers have with VA loans in the cover letter. The cover letter should highlight that the veteran earned the no-down payment loan as compensation for his or her service to our country. I sometimes call this “wrapping the offer in the flag” and the buyer’s agent should not be shy about doing it. If the veteran served overseas, highlight it. If the veteran earned a distinctive award, highlight it.
The buyer’s agent should be clear about whether the seller is being asked to pay for the VA non-allowable costs and specify the dollar amount. If the offer does not include seller-paid costs, the letter should state who is paying for those costs (usually the lender) and reference the section in the offer which states that. I generally recommend that agents use this language
“VA non-allowable costs to be paid by lender. Seller not required to pay any of the veteran’s non-allowable closing costs”
The buyer’s agent should discuss the condominium approval process in the cover letter, too. The lender’s name, email, and number should be included, along with 2-3 references who can confirm that the lender knows how to get the complex VA-approved. This point is important. The lender should be able to demonstrate proficiency in the complex approval complex and should state that the appraisal can be ordered before the complex is approved. Not all lenders will do this. Many lenders state that the complex has to be approved prior to ordering the appraisal–that just ain’t so. The loan can be processed, underwritten, and approved before the complex approval comes in. Ultimately, the lender should have a full approval with one condition remaining; the complex approval.
Finally, the buyer’s agent should confidently present the VA Amendatory Clause with the offer. The VA Amendatory Clause is nothing to hide. Sellers should understand that the appraisal will be performed conditioned upon the complex approval. Ultimately, that means that the veteran buyer’s deposit is refundable if the complex can’t be approved. If the buyer is bearing the cost of the attorney opinion letter, that should be disclosed as well–it shows that the veterans has “skin in the game” and a vested interest in a quick closing.
VA home loans are a great tool for buyers who have served our country. Sellers can get top-dollar for their properties if they address the “risks” a VA offer might present, have a game plan for how to mitigate those risks, and help the agents, veteran, and lender to close the loan quickly. Communication is key to a successful VA home loan transaction and that communication starts with a prepared buyer’s agent.
You just can’t make this shit up: Obama administration pushes banks to make home loans to people with weaker credit. Why not? It worked out so well the last time.
The Obama administration is engaged in a broad push to make more home loans available to people with weaker credit, an effort that officials say will help power the economic recovery but that skeptics say could open the door to the risky lending that caused the housing crash in the first place.5 comments
President Obama’s economic advisers and outside experts say the nation’s much-celebrated housing rebound is leaving too many people behind, including young people looking to buy their first homes and individuals with credit records weakened by the recession.
In response, administration officials say they are working to get banks to lend to a wider range of borrowers by taking advantage of taxpayer-backed programs — including those offered by the Federal Housing Administration — that insure home loans against default.
Housing officials are urging the Justice Department to provide assurances to banks, which have become increasingly cautious, that they will not face legal or financial recriminations if they make loans to riskier borrowers who meet government standards but later default.
Officials are also encouraging lenders to use more subjective judgment in determining whether to offer a loan and are seeking to make it easier for people who owe more than their properties are worth to refinance at today’s low interest rates, among other steps.
Obama pledged in his State of the Union address to do more to make sure more Americans can enjoy the benefits of the housing recovery, but critics say encouraging banks to lend as broadly as the administration hopes will sow the seeds of another housing disaster and endanger taxpayer dollars.
“If that were to come to pass, that would open the floodgates to highly excessive risk and would send us right back on the same path we were just trying to recover from,” said Ed Pinto, a resident fellow at the American Enterprise Institute and former top executive at mortgage giant Fannie Mae.
I’ve been a vocal critic of Ben Bernanke. I thought his Quantitative Easing schemes would eventually create a bubble in the Treasury and mortgage-bond markets. Bernanke has committed to keeping rates low for another 18-24 months.
I was wrong. I violated the first rule of market prognostication (from the late Marty Zweig): Don’t Fight the Fed
Let me give you some background. Mortgage rates are driven by the secondary market (which is a fancy word for bond buyers on Wall Street). I offered an abbreviated history of secondary mortgage marketing , six years ago, here on Bloodhound Blog. Essentially it works like this:
- Home buyer applies for a loan with a mortgage originator
- Originator processes the loan for submission to a lender
- Lender underwrites the loan to agency guidelines (FHA, FNMA, FHLMC, VA)
- Lender funds the loan
- Lender secures guaranty from agency
- Lender retains servicing rights but assigns rights to principal and interest to an investment bank
- Investment bank packages loans in a pool, carves up the pool into bonds, and sells them to individual investors
Two things are important in secondary marketing: the agency guaranty and the ability to sell the bonds. The agency guaranty offers a sense of security to the investors and the demand for the bonds must be there. When I thought rates would rise, because of runaway inflation, I posited the the Federal Reserve Bank’s power was quickly deteriorating. What I hadn’t anticipated was that central banks, all over the word, were in even worse shape. The Fed might be ugly but she’s the prettiest gal at the dance.
Last month, I asked Alan Nevin, economist with the London Group, “What if the buyers run away?” To which, he replied, “Where will they go?”.
This is not a pollyannish answer. Where WILL investors go? I offered these options: Hong Kong, Australia, and Canada
Then it hit me–the world wide capital market is huge and the options for capital investment are limited. Imagine the global capital market as a 64-gallon trash can. The Hong Kong, Australian, and Canadian bond markets are like a shot glass, a pint bottle, and a quart can. Even if you tried to dump all that trash into those three little receptacles, you’d have at least 63 gallons of trash which needed a landfill.
The domestic treasury and mortgage-backed securities markets are that landfill—a great place to dump all of that trash. Maybe Hong Kong, Australia, and Canada can pull some capital away from the domestic bond markets but The Fed-controlled landfill is still a good place for investment. For now…
How often had you heard real estate agents complain about “the inventory problem” this past year? I used to think their complaints were farcical until these past 3-4 months. I have about a dozen pre-approved buyers out looking for homes. Interest rates are low and the foreclosures are getting snapped up as soon as they hit the market. Not one of those dozen has been able to get an accepted offer since Labor Day, 2012.
Clearly, there must be an inventory problem.
It’s time to change gears real estate agents. A few years back, I suggested that buyers would be controlling the market and the listings side of the business should be de-emphasized. All the properties being offered were short sales or foreclosures. Paperwork-intensive transactions didn’t sound so appealing to me and I recommended that agents focus all their efforts on finding buyers and getting them into contracts. Those who followed such advice didn’t get rich but earned a darned good living these past few years.
I had breakfast this morning with Mr. Oceanside, Don Reedy. We discussed the local market and “the inventory problem” when it hit me; there is no shortage of homes. In Oceanside alone, there are thousands of home owners, with equity, who can sell their properties to ready and willing home buyers. This offers the ambitious real estate agent a great opportunity. Too often, real estate agents (and loan originators) forget that we are paid to add value to transactions. If we’re simply acting as gatekeepers, we are no different from everyone else. We need to “create personal inventory”–find sellers for the buyers who want their homes.
Here is my ten- step plan for real estate agents, for a great 2013…with PLENTY of “personal” inventory:
- Attend your local caravan meeting each week. Pay close attention to the agents who speak during the “buyers’ needs” segment.
Call a dozen local agents weekly who work with buyers. Find out where the inventory problem is. At this point, you will see a glaring opportunity in your town/market area. If you know that those agents have 2-3 buyers, for a certain price range, in a certain area, you have identified “half” a market.
- Look at the property tax records in the “problem” subdivision. Choose only properties with owner’s equity. Generally speaking, you’ll look for homes bought prior to 2006 or in 2010. If you’re doing a search with the local title company, and you know the homes are worth $350,000-$400,000, you could also search for sales which had recorded mortgages under $250,000 (that can eliminate a lot of problems). Compile a lit of potential “equity sellers”.
- Visit those equity sellers on a Saturday morning or Sunday afternoon. Don’t mail them. Don’t call them. Don’t email them. Bang on their door and tell them that you KNOW where 2-3 willing buyers of their property are. Ask to meet with them to discuss the idea of “equity transfer” to different property.
- Meet the now interested seller and explain that, when they look at their original mortgage payment (before they refinanced), and add the expected equity from the sale of their home, they might be able to buy a “better” (bigger, nicer, closer to work) home. It might be useful to have some listings printed out, in the “better” homes’ price range, to whet their appetite. Recommend that they speak with America’s #1 mortgage broker, to get pre-qualified for the “equity transfer” program, with mortgage payments which were equal to their original (before they refinanced) payment. Schedule a follow-up visit and tell them you’ll have the mortgage broker call them in the morning.
- Speak with the agents who have willing buyers for the home. Verify that they are still in the market and that you might have a property about to hit the MLS. Explain that you’ll give them a “heads up”, right after the listing agreement is signed, and tell them that you’ll let their buyers “preview” the property the day the listing is entered into the MLS. Estimate when you think that will be.
- At the follow up visit to the interested seller, start the meeting off by showing them the available inventory for the pre-approved amount (you’ll have a pre-approval letter from the mortgage broker). Sell the fact that you are transferring the equity from the existing property. If they seem excited, offer to list thee property for 30 days only. Explain that this market is a bit of an anomaly and, if you can’t get them the price they need, to affect the “equity transfer” in 30 days, it may not make sense to sell at that time. Have the seller sign a 30-day listing agreement along with a 60-day buyer’s brokerage agreement.
- Instruct them to be out of the property from 2PM-7PM on the next Friday and out of the property from 1PM-4PM on the next Saturday. Schedule time to review offers, at 6PM on that Sunday evening.
- Plan to enter the listing into the MLS on Friday morning (or late Thursday night). Schedule an open house for that Saturday. Call the agents with buyers, and instruct them to schedule a showing on that Friday (from 2:30PM until 6PM). Tell those agents you plan to hold it open that Saturday and that quick offers are the wisest policy. Explain that you expect to be presenting offers all day Sunday.
- Find your seller a new home. Collect commission checks for adding real value to a lopsided market. Celebrate.
It really is that simple. If there are more buyers than sellers in a market, find more sellers.17 comments
“Americans will downsize and live multigenerationally, in order to offset the fraud they know exists in real estate. Until there is wage growth, and that could be years or decades away, people will not trust any upward movement in real estate values.”
A searing indictment of The Bernanking System in Business Insider:
Once people start to come out of negative equity, even more of them will sell and try to get out from under the cloud they are under. So, the housing bubble orchestrated by the Fed and by the hedge funds and by the wealthy could free up massive inventory. The average person fears negative equity. The Fed will not erase that memory.19 comments
The only way people will risk negative equity is if their house prices are cheaper than rent. But the artificial inflation of housing prices will do nothing but push the average Joe away from housing.
Keep in mind that about 4.4 million houses were sold in 2011 and only 2.4 million mortgages were taken out for purchase. That is a mortgage depression and the rise in house prices has not changed that mortgage depression.
People are learning that the uptick in prices is a scam, both by banks withholding massive inventory, and by the Fed making more easy money available to the rich. Once they own most of the inventory, they will be forced to initiate a housing bubble or they will be stuck with the properties.
We just lost our house to foreclosure. Negotiations with the bank fell apart and we spent the last seven days bugging out. This was our third Notice of Trustee’s Sale. We had managed to redeem the note twice before, and we thought for sure we could thread the needle a third time. No joy. We didn’t know until yesterday morning that the bank had actually foreclosed, but we had to operate on the assumption that we could lose our pets and our personal property without notice.
That’s bad, but it’s not the end of the world. We are solvent even if we are not terribly liquid just now. We have business assets, art and artifacts and intellectual property, all of which we were able to conserve by acting quickly. Was I the bank, I would have hung in there for another month or two, taking account that we live on a cash-flow roller coaster and that we had managed to cling to the home twice before.
Over the past three months, we have cut our monthly nut by two-thirds, so we are well-situated to weather the economy we are living in. Had we done this seven years ago, things might be different, but we live with the consequences of our choices. We loved our home and we are sorry to have lost it, and sorry, too, to have defaulted on our promise to the bank, but life is suddenly a lot more joyous without that anchor around our necks.
Our real estate business is secure and solvent. All of the rental properties we manage are leased to solid, performing tenants, and our corporate bank accounts are all in good order. Our personal finances might be chaotic — this for many years, alas — but this has had no impact on the funds we hold in trust for our landlords and tenants.
And our marriage is stronger than it has ever been — literally as the consequence of these events. Cathleen had some teary moments, because we loved the El Caminito house, and because we spent many happy, loving years there, minus a few rough spots. But I’m happy with everything, so far, most especially with our marriage. It is the shared commitment to overcoming adversity that makes families, and we have lived through a lot of commitment in the past week.
All of this is offered up as news: This is what is going on with us. We are living out of boxes in our new abode, but the office is up and running, with me keeping the paperwork flowing while Cathleen stages and lists a home for sale today. We’re running behind, obviously, but we are catching up with alacrity. In a week’s time, all of these events won’t amount to a speed-bump on a sleepy side-street.
We are hale, well and happy — and so should you be. FannieMae is taking another hit, but that seems to be what they’re good at. Meanwhile, we pick ourselves up, dust ourselves off — and press on regardless. We have each other, and everything else is just so much stuff.
September 13, 2012
The American Enterprise Institute on the premeditated assault on the prime mortgage:
When it comes to a government centered society and its deleterious consequences, our Government Mortgage Complex is the undisputed poster child. There has been no greater economic failure than the collapse of the housing market due to decades of government intervention and crony capitalism.4 comments
Voters need to be reminded about how this disaster came about. It began with the premeditated assault on high-quality, credit-worthy prime mortgages. The perpetrators were Fannie Mae, community groups, and Congress, each of which had the means, motive and opportunity for undertaking this assault.
As early as 1991, community activist Gale Cincotta, was laying the path for undertaking such an assault in her testimony before the Senate Banking Committee. “Lenders will respond to the most conservative standards unless [Fannie Mae and Freddie Mac] are aggressive and convincing in their efforts to expand historically narrow underwriting,” she stressed.
Using Fannie and Freddie as the means to expand underwriting standards caused an immediate problem for existing subprime lenders and insurers. In 1992, about 14% of new mortgages had impaired or subprime credit with a FICO credit score below 660. Virtually all these borrowers were already served by private subprime lenders or those using FHA insurance. As Fannie and Freddie expanded into subprime, something had to give-subprime lenders would have to abandon the field or move further out the risk curve. They chose the latter, with the result that both prime and subprime lending got into much more risky loans.
The motives of Fannie, community groups, and Congress were clear. Fannie wished to protect its valuable federal charter by using trillions of dollars in flexible loans to woo and capture its regulator: Congress. Community groups like ACORN relied on flexible lending to create multiple revenue streams from banks, lenders, Fannie and Freddie, HUD, and others, since they made money from counseling homebuyers, assisting in loan originations, and counseling defaulting borrowers. Members of Congress viewed the many trillions of dollars in flexible lending announced by Fannie and Freddie as a superior form of pork to help them get reelected. It was off-budget, costless, and seemingly inexhaustible. This virtue was extolled by President Clinton in 1995: “Our home ownership strategy will not cost the taxpayers one extra cent.”
The opportunity was provided for by federal legislation and initiatives. While there were many, three from the 1990s bear special mention. The first was the ironically named “Federal Housing Enterprises Financial Safety and Soundness Act of 1992.” At the behest of ACORN and other community advocacy groups and with the support of Fannie Mae, Congress imposed affordable housing (AH) mandates on Fannie and Freddie. HUD was established as their AH mission regulator. Within 18 months after passage of the 1992 Act, Jim Johnson. Fannie’s chairman committed the company to “transforming the housing finance system” and vowed to “provide $1 trillion in targeted lending.”
This was followed in 1995 by President Clinton’s National Homeownership Strategy in which HUD formalized and greatly expanded a long-standing policy goal: the reduction of down payments. It asked “[l]ending institutions, secondary market investors, mortgage insurers, and other members of the partnership [to] work collaboratively to reduce homebuyer down payment requirements.”
Also in 1995, the Community Reinvestment Act (CRA) regulations were revised to be more quantitative and outcome based. Banks were now measured on their use of “innovative and flexible” lending standards, and their performance was compared to market competitors. As pointed out by Fed Chairman Bernanke in 2007: “Further attention to CRA was generated by the surge in bank merger and acquisition activities that followed the enactment of the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994.” CRA’s stick of denying a merger application was now combined with CRA’s carrot of announcing a big CRA commitment to flexible lending standards to help assure merger approval. The result was trillions of dollars in CRA commitments, largely “negotiated” by community advocacy groups.
By 2004, HUD would extol its, and Fannie and Freddie’s, role in its self-described “revolution in affordable lending:”
“Over the past ten years, there has been a ‘revolution in affordable lending’ that has extended homeownership opportunities to historically underserved households. Fannie Mae and Freddie Mac have been a substantial part of this ‘revolution in affordable lending.’ During the mid-to-late 1990s, they added flexibility to their underwriting guidelines, introduced new low-down payment products, and worked to expand the use of automated underwriting in evaluating the creditworthiness of loan applicants…. Between 1993 and 2003, conventional loans to low income and minority families increased at much faster rates than loans to upper-income and non-minority families.”
There is ample evidence that these lending flexibilities accomplished Ms. Cincotta’s desire for “aggressive and convincing” loosening by Fannie and Freddie. For the revolution to succeed, the Five Cs of Credit – capital, credit, capacity, collateral, and confidence – had to be abandoned.
Pre-2007, I am not sure this topic would have even been controversial; people not only regularly utilized their home as their “primary investment”, but often, treated it as their personal piggy bank. In hindsight we can all judge others as we secretly lick our own wounds from a vicious downturn no saw coming, but that experience left a visceral taste in many mouths.
Most experts would suggest that your primary residence is not an investment. Why, you ask? First, you purchase a home based on need. Your buy and sell decisions rarely spring from analytical thinking around market timing. Instead, most times, they are rooted in your changing life needs. Second, investment strategy wages a secret war with your personal desires. For example, I want a tricked out man cave equipped with a full wet bar, bathroom and other appropriate amenities. Am I thinking about the return on my investment, or the endless joy my friends and I will have watching football on Sunday, Monday and Thursday? Sure, I will likely increase the value of my home with these upgrades, but the anemic return on investment, if any, would never be worth the money. Said differently, would you make the same upgrades to your rental property; probably not.
If it was that easy, I wouldn’t write the article.
I will start with a question. Is it easier to invest in stock or buy a house? Right now, Berkshire Hathaway Inc. (NYSE: BRK.A) trades at $128,175 per share. Its five year performance has been strikingly similar to the performance of many real estate markets. If you have a job making $50k and $7k in the bank, do you think you will ever in your lifetime own a share of Berkshire Hathaway A outside of a very lucky lotto ticket? The answer is unequivocally no. You don’t qualify for the right to buy on margin and even if you did, where would you get the 50% required to do a margin buy? And how would you live on the prison food when the margin call comes? All important questions to consider…
Now, let’s take that same fellow and put him / her into a working class neighborhood. He sees a for-sale sign and the asking price is $130k. He walks into his local bank branch gets a pre-approval letter and in 30 days, he is the proud owner of a similar $128k asset. Interesting… Are these two assets really that different? Sure, the risk profile is different, but not as different as people would have thought 4 years ago.
The real difference is access. Leaving aside the risk of foreclosure and the costs associated with credit repair, moving, etc., this person has $7,000 at risk and unlimited upside. Additionally, there is no other investment available to them with a lower risk profile or higher upside. This person probably could not even qualify for a real estate investment loan, but interestingly, they can get one chance to basically play with house money.
I would humbly submit that your primary residence is what you make of it. You can treat it like an investment, moving to an up and coming neighborhood every 4 – 7 years, investing in only the Spartan renovations that meet a certain return threshold, or you can treat it like your home, “investing” in renovations that make you smile a little bit every time you walk in the door. The choice is yours, but importantly, it is a choice. If you treat yourself as you would a tenant and you make sound investment decisions, you very well could do well with your primary investment. Given the easy access to financing, it may just be the biggest, safest investment in your portfolio. Or not, its really up to you.14 comments
If you are like me, you have a random sampling of news websites to keep you abreast of the happenings of the world every hour or so. It’s the age we live in; every data point, story, press release, blog post triggers a monsoon of pundits and analytical analysis that either sends you running for the hills or tripling down on your latest investment. If you don’t believe me, scroll through this reputable blog and tell me how I should be the most confident in years on Tuesday then be disappointed in home sales twice only a week later. With everything out there, how do you find the truth?
First, understand the underlying data. As it relates to real estate, one needs to be especially cautious. Data may or may not be adjusted for seasonality, it may or may not be a selection of particularly poor or particularly good markets, it may be new homes vs. existing homes, etc. With the need for new headlines every hour, data can and will be manipulated to tell whatever story is the flavor of the moment. Personally, I always start at one of the sources.
Second, understand the basics of real estate. Unlike the stock market, real estate is slow moving, plodding, and a hyper-local asset class. Despite what the headlines might say, you have not missed the bottom in many locations. If you are looking to buy a single family home, tomorrow will be just as good a day as yesterday, as will six months from now. Interest rates tend to move on a quarterly basis and rarely increase more than 0.25% in that time span. Sure, your neighbor might have a 3.75% interest rate, but your 4.25% will put your payments close enough and will still be historically, the lowest in our history.
Investors will likely need to act with more urgency. In most of the hardest hit markets, institutional investors (i.e., private / public corporations with lots of money to spend) have quietly been buying up homes at a breakneck pace. Trying to find a bargain in Florida or Nevada is no longer a slam dunk. Additionally, finding lenders that will do anything beyond the bread and butter multifamily investment will also be a challenge. Small investors had a great window 12 months ago, but now that window is closing rapidly. Rapid in real estate could mean six months from now, but it could also mean yesterday.
Last, but most importantly, understand your market. National real estate statistics rarely add value to a local buyer. Real estate is cyclical everywhere; however, the size and length of the peaks and valleys can vary dramatically. If GM moves a plant in your neighborhood to another state, you can bet prices will move aggressively downward no matter what the national real estate market is doing. Understanding this differentiates great realtors from the rest of the pack.
Amazing realtors don’t parrot pseudo-facts from newspapers or websites; they utilize stats to enhance their local market knowledge. Acting as the knowledgeable voice of reason to clients inundated with misinformation will only serve to build trust and respect for your craft.11 comments
“But we’ve got to have some regulation!” How else are insiders going to get their mitts onto sweetheart mortgage deals?
Regulation is rent-seeking, Rotarian Socialist graft, and that’s all it ever is. Who sold out the housing market? The regulators, of course.
I love this bit from the AP story:
Among those who received loan discounts from Countrywide, the report said, were:
—Former Senate Banking Committee Chairman Christopher Dodd, D-Conn.
—Senate Budget Committee Chairman Kent Conrad, D-N.D.
—Mary Jane Collipriest, who was communications director for former Sen. Robert Bennett, R-Utah, then a member of the Banking Committee. The report said Dodd referred Collipriest to Countrywide’s VIP unit. Dodd, when commenting on his own loans, said that he was unaware of receiving preferential treatment but knew his loans were handled by the VIP unit.
The Senate’s ethics committee investigated Dodd and Conrad but did not charge them with any ethical wrongdoing.
—Rep. Howard “Buck” McKeon, R-Calif., chairman of the House Armed Services Committee.
—Rep. Edolphus Towns, D-N.Y., former chairman of the Oversight Committee. Towns issued the first subpoena to Bank of America for Countrywide documents, and current Chairman Darrell Issa, R-Calif., subpoenaed more documents. The committee said that in responding to the Towns subpoena, Bank of America left out documents related to Towns’ loan.
—Rep. Elton Gallegly, R-Calif.
—Top staff members of the House Financial Services Committee.
—A staff member of Rep. Ruben Hinojosa, D-Texas, a member of the Financial Services Committee.
—Former Rep. Tom Campbell, R-Calif.
—Former Housing and Urban Development Secretaries Alphonso Jackson and Henry Cisneros; former Health and Human Services Secretary Donna Shalala. The VIP unit processed Cisneros’s loan after he joined Fannie’s board of directors.
—Rep. Pete Sessions, R-Texas, was an exception. He told the VIP unit not to give him a discount, and he did not receive one.
—Former heads of Fannie Mae James Johnson, Daniel Mudd and Franklin Raines. Countrywide took a loss on Mudd’s loan. Fannie employees were the most frequent recipients of VIP loans. Johnson received a discount after Mozilo waived problems with his credit rating.
The report said Mozilo “ordered the loan approved, and gave Johnson a break. He instructed the VIP unit: ‘Charge him ½ under prime. Don’t worry about (the credit score). He is constantly on the road and therefore pays his bills on an irregular basis but he ultimately pays them.”
Johnson in 2008 resigned as a leader of then-candidate Barack Obama’s vice presidential search committee after The Wall Street Journal reported he had received $7 million in Countrywide discounted loans.
The report said those who received the discounts knew the loans were handled by a special VIP unit.
“The documents produced by the bank show that VIP borrowers received paperwork from Countrywide that clearly identified the VIP unit as the point of contact,” the committee said.
The standard discount was .5 waived points. Countrywide also waived junk fees that usually ranged from $350 to $400.
You insist, contrary to all evidence, that Batman will rush in to save you from the harsh, cruel world. Now you know the market price of Batman’s “integrity” — 50 basis points.
There’s a clue in the air. If you breathe deeply, you just might catch it.7 comments
Lunchtime links: Will the robo-signing settlement fail? Will Western Civ collapse to ruins? Who cares? Sheldon Cooper lives!
From good friend of the dawgs, Jim Klein, comes this grim reminder of the times we live in: SurvivalRealty.com.
Todd Zywicki finds the robo-signing settlement unsettling.
But despair you nothing: There is a real-life Sheldon Cooper going to high school in Nevada.
Limited lunchtime? Give it all to the third article. It’s the best read, and the most inspiring. The world runs by itself, but your spirit does not. Feed it wisely.1 comment