Straight Talk About Real Estate

I read in the local paper that a real estate agent was shot when he was door-knocking. This was in Diamond Bar, California, a quiet residential area, part of my service area.

Real estate agents routinely solicit for business by going door to door to introduce themselves to the neighborhood. This is common practice and you can certainly get clients that way. I have done that in the past, but I do not do that anymore, not because I am afraid for my life, but homeowners are usually afraid for theirs. Very few open their doors to solicitors due to horror stories of home invasion, or they are just tired of the bombardment of advertising everywhere. (80% of my mail are junk, both postal and electronic). They don’t need it to come to their door step.

Those of you reading this obviously believe in the use of the internet to get information and possibly do business on the internet. I think it’s the best way now to advertise any type of business, both for the consumer and the company.

Fortunately, this hardworking injured agent is going to recover. The news report said it was a case of “mistaken identity”. Lucky for the person who was meant to be shot! The gunman pleaded not guilty to a felony charge of assault with a firearm. It seems rather obvious that he is guilty since the victim identified him. Perhaps the defense attorney wants to get him off so he can go back and shoot the intended victim…In the meantime, is the judicial system doing anything to help the agent, who is the sole breadwinner for his wife and four children?

The closing date may be different from the possession date.

The closing date is the day title legally changes hands. When the buyer gets possesion of the property is negotiable.

It is customary in our area in Southern California to give the seller an extra 1-3 days to move out completely. Sometimes the seller try to negotiate up to 5-7 days, but I think that is stretching it. Basically, they are asking for the buyer to give them that many days of free rent, in the meanwhile, the buyer has already started making payments on the house. A few days does not seem to matter much, but if your mortgage is $3000 a month, that’s $100 a day you are paying. Five days is worth $500.

Ideally, the buyer gets possession on the day escrow closes. The seller is completely moved out, and all keys and garage openers are handed over. But it doesn’t hurt to allow a couple of days for the seller to clear out. Any more than that the buyer can ask to be compensated per diem by the seller.

At the time of purchase, it is customary for the seller to pay for a one-year home warranty plan for the buyer. Sometimes it is called a home protection plan. The basic plan usually runs about $250-$300. You can also add on optional coverages.

Do not think that everything that goes wrong with the house will be covered by the plan. First American Home Protection Plan is a reputable company and explains what a typical plan covers. Whatever is not listed is not covered.

Optional coverage costs extra, such as central air conditioning, pool and spa equipment, and roof.

I suggest not getting the roof coverage. Read the limitations on it. If you have a roof problem, chances are it won’t be covered.

Whenever you call the home warranty company for service, there is a service charge of $35-$50. If the repair person comes out and tells you it is not covered by the plan, you still have to pay the service charge. So I suggest you describe in detail your problem to the warranty company on the phone, and ask if it is covered. If not, you may as well shop for the best repair company, save the $35-$50 service charge, and not be tied to using the one they send.

For major problems not covered by the home warranty plan, call your homeowner’s insurance. Remember your homeowner’s insurance probably have a deductible of $500 or $1000, so it is only worthwhile if the problem cost much more than your deductible. Fortunately, there is no service charge if the insurance sends someone out to look at the problem.

Just about everything in real estate is negotiable.

Depending on what area you live in, there are customary fees for sellers to pay, and there are fees for buyers to pay. But they are not law. Anyone can pay for anything as long as the principle parties agree. In the Southern California area, it is customary for the seller to pay for title insurance. A one-year home warranty plan is usually paid by the seller. Escrow fees are split so that buyer and seller pay their own portion of the escrow fee. Again, even if it is customary, it is negotiable. I had a case where the buyer was getting such a sweet deal on the price that he agreed to pay all the seller’s closing costs.

On the other hand, I once had a seller say he didn’t want to pay for title fees. But he wasn’t giving up anything in exchange. That won’t sit right with the buyer when he knows another seller down the street will pay the title fees. So it is no use to negotiate unless you are willing to give and take. Otherwise you kill the deal by going against normal accepted practice.

Some sellers will agree to pay a portion of the buyer’s closing cost. How much the seller is willing to pay depends on the price and terms that are offered. If the seller gets what he wants, he may be willing to give the buyer what he wants in closing costs. The assistance with costs can be negotiated as a percentage of the selling price, such as “2% of nonrecurring closing costs.” Or it can be negotiated as a flat fee, such as “seller will credit buyer $5,000 towards nonrecurring closing costs.” Most lenders will not allow the buyer to get more than 3% of the selling price. Otherwise the buyer might end up with money in his pocket.

“If the seller accepted someone else’s offer, should I put in a back-up offer?”

Sure, why not? It doesn’t hurt you at all, if the terms of the back-up are written correctly.

Your back-up offer should require the seller to give you written notice that the first contract is cancelled and that prior to this written notice, you can cancel your back-up offer anytime.

Don’t sit around and wait for the cancellation, which may never happen. Keep looking for houses, and if you find another one, then cancel your back-up.

I had a client as the 3rd back-up offer. The first two didn’t come through, for whatever reason, and my clients bought the house.

A Flag Lot is a lot shaped like a flag on a staff. Imagine the staff of the flag is the driveway that leads from the street up to the bulk of the lot where the house sits. The land adjacent to the staff, or in front of the “flag” part is a separate lot that belongs to someone else. That lot could have another house on it. So if you own a house on a flag lot, your house is behind someone else’s house and not visible from the street. Some people thinks this give them privacy, but most of the time, houses on flag lots are lower in value than a house with street frontage.

My father’s house is the front house, and there is a house behind him on a flag lot. He sees the owner once a week having to push his trash cans a long way down the lengthy driveway to put the trash on the curb for pick-up. Then he has to take the empty cans all the way back. So take that into consideration when you think of buying a house on a flag lot.

Is it better to get one home loan or a piggyback loan?

Let me explain: You want to buy a house for $400,000. You are going to put 5% down payment. You can get a 95% loan of $380,000, or you can get a piggyback loan. A piggyback loan is getting a first loan with a second loan “on its back” simultaneously. The first loan will be for 80% LTV, or $320,000, and the second will be for 15% of the loan, or $60,000. The CLTV is 95%, same as the one loan of 95%. The piggyback loan is also called 80/15/5. I hope you can figure out why. You can do the same if you are putting 10% down. It would be called 80/10/10. Or if you put no money down, you can get 80/20.

What are the advantages of getting a piggyback? No PMI - private mortgage insurance. Whenever your LTV exceeds 80%, the lender requires you to buy PMI. Because a loan of over 80% LTV is considered high risk of default, the PMI company will pay off your loan to the lender if you default. So PMI is an added expense to you. This expense is not tax deductible like mortgage interest.

A piggyback loan does not require PMI because the first loan is not over 80%. The second loan is assuming the risk if you default.

Another advantage is keeping the first loan within the conforming limits. In our scenerio, if you get a straight loan of $380,000, you have to pay jumbo loan rates whereas with a piggyback, you pay conforming loan rates with a loan of $320,000.

What are the disadvantages of a piggyback? Lenders charge an additional $195 to do this second loan. That’s a small price to pay. A greater disadvantage is the shorter term and the higher interest rate. It is usually a 15 year term. The interest rate is about 2-3% higher than the first loan. But it’s a small loan amount, so the difference in payment is not substantial.

I haven’t done a loan with PMI for a long time, ever since lenders began doing the piggyback. Overall, it is usually a good idea to do a piggyback rather than a straight first.

CLTV = Combined Loan To Value
Let’s say you house is valued at $400,000. You have a 1st trust deed of $300,000. You also have a 2nd loan of $80,000, and a 3rd of $20,000. The CLTV is the percentage of all loans to the value of the house. In this case, the CLTV is 100%.

If someone asks you to lend them $20,000 on a $400,000 house, it may sound alright. But if you know the CLTV, and it is 100%, it would be very high risk. Equity is the value of the house minus all the loans. In this case, there is the equity is zero. There is no equity. You may think $20,000 is not a big loan to lend someone on a house worth $400,000, but if you in the 3rd position, with a CLTV of 100%, it’s very high risk.

Let’s say the borrower defaults on any one of the loans. The house goes to sale and is sold for $380,000. The loan in 1st position will get paid off first, then the 2nd loan. There is nothing left to pay the 3rd loan. You are out of luck. That’s why it’s important to know the CLTV.

The higher the CLTV, the higher the risk, the higher the interest rate and fees will be charged to the borrower. Most of the loans in 3rd position or higher make their money upfront with fees because if the borrower defaults, chances are their loan will not get off. They have to cover that risk by charging high points and fees upfront.

Real estate agents and lenders use terms that are common in the business and they assume you know what they are talking about. I will explain a common term and its ramifications.

LTV = Loan-To-Value. This is the percentage of your loan to the value of the house. If you are getting a loan of $300,000, and the house is valued at $400,000, your LTV is 75%. The lower the LTV, the less risk to the lender. If you ever default on your loan, the lender can take your house, and they will be able to sell the house, get back the loan amount, plus a bit more. But mortgage lenders are not in the business of taking back and selling real estate. They would rather you just paid off the loan. With a low LTV, if you can’t make your payment, you can easily sell your house and pay off your loan, and most likely have money left over for yourself. So the lender are secure knowing that you will not allow it to get to the point of letting the lender take your property.

Now, the converse is also true if you have a high LTV. For example, you buy a house for $400,000. You put 5% down payment, $20,000. The loan amount is $380,000, or 95% LTV. After a year, you lost your job and cannot make the mortgage payment. If property value has not gone up, you sell your house for the same amount that you paid. You have enough to pay off the loan of $380,000, but $20,000 is not enough to pay closing costs, plus back payments, and penalties on the loan if you are behind. You would have to pay out of pocket to close escrow. Rather than doing that, you walk away and let the lender take the house. You will have a foreclosure on your record for 7 years.

If your LTV is low, some lenders will give you a little break on the interest rate.

Will homeowners lose mortgage interest deduction in the proposal by the tax reform panel? Don’t worry, I think some kind of tax benefits for homeowners will always remain, whether it’s mortgage interest deduction or credits. But the proposal, IF adopted, will decrease tax benefits for some. CNN Money explains it well.

The task of the tax reform panel is suppose to simply the tax code and make it more equitable. What they are proposing for mortgage interest is NOT more simple. And their definition of equitable seems to be make the rich pay more taxes.

No matter how they eventually reform the tax code, there will always be benefits to owning your own home. If you are still renting, find out what steps you can begin to make towards buying a home. Contact me.