Lending Woes: A Deeper Consumer Analysis

This may seem like an odd analogy, but I remember this story about my Mom when she was having her 7th baby.  She was in “a ward” with only curtains drawn around each bed.  She overheard some people telling the lady in the bed next to her that she should have “her tubes tied”.  They were explaining the procedure to her.  My Mom jumped out of bed, ripped open the curtain of the woman next to her and yelled  “I want one of those!!!”  The people were embarassed and said, “I’m sorry but we’re only allowed to offer these to single women on welfare having their third child.  You weren’t supposed to hear that.”

Yes…I’m suggesting that to some extent The Information Age is in part responsible for the Subprime Crisis.   Subprime loans did not come into being in late 2003.  2003 is the year more people said “I want one of those!!!”

Couple that with the fact that the World as it IS has come to the conclusion that spinning words (like Death Tax vs. Estate Tax) is a persuasion tool. We used to say, “You can’t get a good loan, but we can find you a BAD loan, if that’s what you want.”  Most people said, “No, thank you…we’ll wait.”  Loans had letters that were easy to understand.  A Paper  = most lenders.  B through D Paper was a different lender for buyers with one or a few correctable issues over the short term.  Z Paper was basically the Mob with a license to lend.

People understood the alphabet, and they knew that a C-Mortgage was not as good as an A-Mortgage.  Life was more Transparent back then.  The need for Transparency today is largely due to the fact that professionals hide truth behind more persuasive language.  Don’t get me started on Listing Agent vs. Agent for the Seller.  Everytime I hear a buyer say “The listing agent was MY agent, looking out for me (and I heard it twice in the last 4 days) I want to scream. How the heck can you believe that “the agent for the seller” is looking out for you, the buyer? Maybe because they use the words “listing agent” for that reason. But that’s a different, though related, subject.

Couple that with small businesses (who only offered Sub-Prime loans) getting gobbled up by larger “one stop shops”.  All of a sudden the lender could give you an A Paper loan or a C Paper loan without a loan denial in between. When there was a loan denial in between, the buyer had a legal out with the Finance Contingency.  When the approval came…but it was for “a bad loan”, the buyer was locked into the transaction with no legal out.

Couple that with Real Estate Agents only caring if the buyer could get a loan, period…without caring on what basis.  Couple all of THAT with the fact that many Finance Contingencies did not give a buyer “a legal out” if they could not get a conservative “A Paper” loan, but could qualify for a SubPrime loan.

There are many factors that contributed to this mess.  Perhaps a fuller understanding of how the world changing in many and small ways led do the catostrophic consequence, will help all people who played a small part in the Country’s demise, change their small part in The Crime of the Decade.  In the end it was mostly No victims; no villains, just a lot of small tweaks and changes that snowballed into a Crisis Situation.

Let’s go back to the world as it was for a minute. 

1) Conventional Loan = 20% downpayment, 28% of gross income for housing payment, 36% of gross income for total recurring debt including the housing payment.  An 8% spread for debt payments.  If debt payments equalled 10%, then the housing portion was reduced to 26%.  There were no Credit Scores.  All credit issues were underwritten by hand and each and every negative item was explained by the buyer, in writing.  A separate letter for each negative item.

2) FHA Loan = slightly more lenient terms and dramatically reduced downpayment requirement.  The biggest reason to use FHA vs. Convential being the downpayment requirement, not the looser standards as to ratio and credit issues.  Almost no downpayment – 3% vs. 20% at the time. 

The first change was a long time ago! It started as a quiet whisper, like the people talking behind the curtain in the next bed from my Mom.  Some people were getting loans with only 5% downpayment, conventional.  When I started in real estate in 1990, most people’s perception was that they needed 20% downpayment or FHA.  Few knew that they could get a 5% down conventional.

The beginning of all of these problems goes all the way back to there.  Conventional lending guidelines made FHA less desirable.  The primary purpose of FHA was low downpayment…no longer a big spread between the two.

THEN in the early 90s, the lenders started stretching ratios from 28% to 33% of gross income on “the front end”  BUT the back end was only stretched to 38%, at first.  Stretched ratios entered the scene ONLY for people with little or no debt payments (just like tubal ligations being only for single women on welfare).  It had a stated and targeted “appropriate” audience.

When cars started costing more, lenders had to start figuring out a way for people to buy a house who already owned a car.  In many cases in the early nineties (before car leasing became popular, and probably why car leasing became popular) most young couples who each owned a car, could not buy a house.  The two car payments sucked up their whole back end ratio and subtracted from their front end ratio.  “I thought we could get a mortgage for 28% of our gross income or 33% of our gross income?”  “Well, yes…but the combined value of your two new cars is almost as much as the house you are trying to purchase!”

Everyone agreed that people needed both cars and houses…so ratios grew and grew and grew.  So, Sniglet, the changes in FHA are NOT fascinating at all. In fact FHA hasn’t changed all that much.  What’s happening is that lending standards on the Conventional side are creeping back to “The Way We Were”, putting the spotlight back on FHA, which is closer to the way IT was IF you cut out “automated” approvals.

Before you even think about buying a house, get your “other debt” issues down to no more than 10% of your gross income.  If you make $45,000 a year and your wife makes $25,000 a year, and you each have a car with a $400 monthly payment, you are spending 14% of your gross income on car payments!

Of course this Rise and Fall story would clearly fill a book.  But until everyone understands that a bailout or bandaid in ONE area only (or two) is not going to fix what ails this Country, we cannot have HOPE…and HOPE is what we need more than bailouts and fixes.

As I said in one of my previous posts: “2009 will not be a year of great change.  It will be a year of Great Hope for Change, one small step at a time, via you and me acting the best we can in each moment.”  Falsely creating hope with “Talking Points” and “Good News” articles is NOT the solution.  Expecting any one source to be the Messiah, is NOT the solution.  Every single person doing their part to improve the situation…is the only long term solution.  That means YOU!

Stop looking for someone else to come up with an answer.  Get out your teacup, and start emptying out your own little piece of the ocean.

I kissed a girl once. I was almost 50 years old and was in the middle of a divorce from a 20 year marriage.  I just wanted to make sure before I started over again, that I wasn’t starting out on a faulty premise that had been “fed” to me.  2009 is the year to test your foundations…so that when “The Rocovery” does come…it isn’t the old mess wrapped up in a bright shiny red bow.

112 thoughts on “Lending Woes: A Deeper Consumer Analysis

  1. “I kissed a girl once. I was almost 50 years old and was in the middle of a divorce from a 20 year marriage. I just wanted to make sure before I started over again, that I wasn’t starting out on a faulty premise that had been “fed

  2. You don’t specify how long ago a long time ago was on the change from 20% down on conventional, but I seem to recall getting 10% down in 1978 with PMI. That the property was a condo rather than a house seemed to be much more of an issue than only putting 10% down.

    As to car loans, years ago a bankruptcy trustee commented to me about his perception that the average bankrupt debtor had a car (or cars) less than 2 years old. I’m not sure that’s accurate, but new cars clearly are one of the leading causes of bankruptcy. One problem that popped up from time to time was big lenders (e.g. FMCC) making loans to people in Chapter 13 bankruptcy that they shouldn’t be making loans to at all. So what did Congress do? They gave car lenders even more preferential treatment the last time they amended the bankruptcy code. That change was actually one of the major reasons I decided to get out of doing bankruptcy law.

  3. The “big” change that society is going through is a complete re-assessment of savings and debt.

    I notice that recently US savings has actually increased for the first time in ages. By the time this recession is over I expect to see us return to all those traditional views of debt which have become so passe.

    It’s not just that lenders are tightening their standards, but individuals are deciding that it just might not be so wise to shoulder massive debt loads. I am just amazed to see shows like The View and Oprah go on and on about cutting up credit cards and living frugaly.

    2009 will be the year that society finally realizes that debt is a bad idea. 2015 is when debt loads have been reduced to traditional norms (through masses of defaults and reductions in over-all spending). All that is left is the journey to get there.

  4. Problem with mantras is that they are too short lived. We heard all this before, in the last recession.

    The only thing that is succesful at making people save is higher interest rates on the savings. People want to make money when they save it. When the savings rate turned to less than the cost of living increases, it became buy it now time.

  5. Kary,

    It’s not about when it happened. It’s about when the majority of people knew they could do it. Just like my Mom’s story. The procedure may have been around since the 20s…but everyone knowing about it as an option is “The Tipping Point”.

  6. My experience was that it was word of mouth. I started my mortgage career on April Fools (I’m not kidding) 2000. At that time, I was all FHA and VA as a newer LO…I was lucky to have a strong real estate agent base because of my 14 years in the title industry…my first loans were first time home buyers. 🙂 I still love working with them. At that time, we (at least at my company) didn’t do subprime loans.

    My first subprime loan was a total fluke. Someone was referred to me to review the GFE and the name of the lender it was being brokered to was on the estimate. I called them and asked “you’d really do a 100% 80/20 with a 600 credit score” the answer was pretty much “all day long”. For the record, this client has done great–they refi’d out of this loan and have corrected the things that caused them to have a subprime mortgage. At that time, it was rare.

    After a while, as Ardell says, people would contact me and say “well my so-and-so w/bad credit and/or no-down payment can buy…then why can’t I!”

    I do think there was a significant amount of “word of mouth” or at least, people BELIEVED that someone got “x deal” for their mortgage.

    And I’m sorry to say that I did see some agents tell me “what, it’s not your job to say IF they should buy a home…it’s your job to just get them approved”.

    I’m glad those days are GONE!

  7. Ardell, thanks for this thought provoking post. As hard as I try to resist my cynical perspective of American “financial” culture, I keep coming back to the same conclusion: most Americans are “stuck on stupid” when it comes to their economic lives. The multitudes of merchants, the banks and credit card companies exploit this by creating the uber-fantasy that “you too can be rich and famous.” It’s human nature run amok in a tragic, Hollywood sort of way.

    Recently, I heard former Secretary of Labor, Robert Reich, say that we all need to demand reform both from our institutions and ourselves. He said that we convince ourselves it’s a “CYCLE” when a huge crisis (such as the current recession/depression) occurs. “Oh, we’ll eventually come out of it and everything will be peachy!” Unfortunately, he believes that our problems are structural. If business, government and individuals only see problems as cyclical, then they never have to change.

    Hope then, is found by facing the truth: We Americans have deceived ourselves. We act far richer than we are. We spend far too much time being right, and far too little time being realistic about our lives.

  8. Ardell, when it comes to this mantra short will be good enough for most. Once you learn to live without debt you will not go back. Most of us will need some debt for college and a home but that should really be it with weight on some, don’t go crazy on the mortage, leave a lot of room for continued savings.

  9. I don’t know, tj. There’s something to be said for the fun you had while it lasted. Like hot romances 🙂 That guy on his motorcycle that he can’t afford looks awfully happy “running down the road”. A lot happier than “the king in is counting house, counting all his money”

    Consumerism will have its downfall…but lots of people enjoyed themselves.

  10. I really like that my girls didn’t buy into anyone’s “you have to” mind set and pretty much made their own decisions. I remember Andrea having a different boyfriend every week when she was 13. I’d say, “Who’s your boyfriend?” Every week a different answer. Ryan, Todd, Jason…one day it was Alyssa! I said, that’s nice…and went off to think about that for a minute. LOL!

  11. CRE Investors who over-leveraged and made bad bets can just suck it. I don’t see how them taking a bath should have any substantive impact on the overall economy.

    “No bailout for you!”

  12. Ardell – I never thought about car leasing like that – brilliant! Mindset is a powerful thing…. About 5 years ago the mindset was “it’s not how much you have, it’s how much you can borrow.” In 2005 when I felt this crisis coming through the prism of the appraisal industry and the crazy unethical pressures and hand in the cookie jar logic that was prevalent, my wife and I made a conscious decision to get debt free, paid off all our car loans (I have four kids and a bunch of old used cars ;-), homeequity, credit cards, etc. At the time, it seemed kinda of obsessive compulsive since we were doing “fine” but now we have only our mortgage and it feels really good to have de-leveraged. In fact, we are paying cash for a lot of purchases that we would have put on our credit card to get the points then would pay off the balance at the end of the month. Interest charges all over the place became savings. I am liking your “kissing” mindset. (sorry) 😉

  13. Jonathan, what you’re saying about your experience is similar to what I say about car payments. Once you go without car payments it’s hard to go back, because it’s really nice not to have them.

  14. Just last night I was talking w/my husband about how I used to love having new cars…I used to lease and just keep trading them in. I do love cars (especially older-vintage…you can find me at the local historic races w/a big grin on my face). It’s been about 5+ years since I’ve had a car payment and my favorite car to drive now is our Honda Fit. I always thought that I was simply maturing or growing up with how I view my finances. Plus…seeing peoples personal finances day after day makes you want to get rid of your personal debts.

    I think many folks have been caught in the “must have” or “I deserve” or “if so and so has that, then I should” mode with little to no regard about how it will catch up to them. I’d say it’s a sickness…or at least sick.

    A silver lining to this economy is that people will have to learn to do with less…and this “less” is probably more “normal” than the living high off the hog many of us have done.

    Our Christmas this year was really scaled back. It seemed odd how quickly we were done opening presents at my Sisters home (we did a gift exchange for the first time) but what was great was that presents were opened one at a time and everyone had more time to talk to each other and engage–instead of wrapping paper flying everywhere in a race.

    I hope regardless of the economy, our family keeps the gift exchange vs the pile of presents.

  15. 70Ford,

    We were driving back from the airport last night, dropping off DJChloe (Kim’s daughter) at the airport for her gig in Aruba (nice life). When we were in range of Bellevue, I enyoyed the view at night of Downtown Bellevue from that vantage point.

    While I had not seen the article regarding Commercial Real Estate in your link above, I said to Kim “Won’t it be nice when the dozen or so tall cranes are out of the mix in this beautiful Downtown view? In fact, it seemed there were already fewer.

    There’s always a bright side.

  16. I consider a new car just an opportunity to get something that will be unreliable. I stick with the known quantity. My truck that I drive will be 20 years old in on Jan 4. It’s only stranded me once in all those years. I’ve seen other people trade in perfectly good cars because they were out of warranty, only to have ample opportunity to use the warranty on the new car.

  17. Going through the pre-approval process recently, I was struck by the distinction made by the lenders between debt and other near-essential monthly payments.

    The AUS is extremely interested in my couple hundy a month in student loan payments, but cares not one wit for my 1000/mo daycare bill.

    Similar to the borrow vs. lease issue.

    That seems like a flaw to me.

  18. It’s not a flaw, biliruben. There are certain things in the front end/back end ratios. the spread between the two is “recurring debt”. Debt is a previous “expense” being paid for today. Daycare is an ongoing (operating) expense as are utility bills.

    When the back end was 36% of gross for all housing payment plus recurring debt…the remaining 64% was for everything else including child care.

    The one single item that has become a staple in our society that may not be included in the age old ratios is the expense of cell phones. You don’t meet too many people who don’t have cell phones these days, and the cost is much more than the old landlines.

  19. Remember the wooden puzzle of all of the States in the Country we used to buy our children so they had a sense of where they were in the Country, and the various states that make up the Country?

    I’m thinking of a similar puzzle with 100% of gross being a circle and each component of debt and expense being a puzzle piece. Training brains from an early age would be of great value.

  20. I understand that, Ardell. I just don’t see the justification for the distinction.

    If a lender is looking to see whether a borrower will be able to pay back the loan, the AUS misses the mark if it only looks at debt. For example, a DINK couple has significantly fewer expenses, ability to work multiple jobs etc… than a couple with children.

    If a lender were smart, they’d see that the DINKs were a better bet.

    Just a flaw in automated systems that don’t look holistically at a borrowers financial condition.

    That leasing appears to make you a better risk than someone borrowing to buy one is absurd.

  21. Bili, just the fact that they use credit scores for home loans shows that the system is absurd. Credit scores are more designed to show whether a credit card issuer will make a profit prior to the cardholder defaulting. And they have similar absurd results, like getting a new car loan with lower payments and amounts owing lowering your credit score.

  22. biliruben,

    As you can tell from my post(s), I am not a big believer in automated systems, and have not been each time they have been instituted during my real estate career. The original automated systems were good. They crunched the best…gave an automated approval…and spit out more than they approved to the underwriter. To streamline their pocesses lenders automated more and more and more.

    Originally the system worked well. Only stellar examples passed the automated process. Going back to the early 90s here. A pre-approval meant something at one time. But then EVERYONE wanted “a pre-approval letter” and they became as useful as…well LESS useful than…toilet paper.

    I remember when it happened. I was selling my sister’s house in Langhorne PA. The pre-approval came in. I called the lender for the buyer and asked “did you do a credit check”. She said no. I literally yelled at her “Then this is TOILET PAPER!” and hung up the phone. We could do those things on the East Coast…think West Wing 🙂

  23. “If a lender were smart, they’d see that the DINKs were a better bet.”

    I’ve known many a DINK couple who were not planning to have any childen, to change their mind when the biological clock started ticking faster. Remember a loan is for 30 years..the decision to make one is a 30 year projection. Looking only at immediate circumstance is BAD.

    Say someone has no car payment (like Kary). Eventually the car will die and he’ll have to buy a car cash or have a monthly car payment. Basing everytHing on “the today of it” is not how it works.


  24. Note: VA has a broadened check on where you spend your residual income. I once had a VA loan denied at the last minute because of the buyer’s “train fare” to work each day.

  25. ALSO IMPORTANT 🙂 Shouting a lot this morning.

    If you have 50% down, the loan process is quite different than if you have less down. The Loan Process protects “the lender’s interest” and the lender’s exposure is much less with 50% down than 20% down. At 50% down and an 800 credit score, they may do a drive by appraisal…or no appraisal at all.

    The process changes by the overall qualifications of each individual buyer/borrower.

  26. I still find it absolutely amazing, that in a time of ultra-conservative underwriting, massive mortgage losses and turbulent real estate markets, that a drive-by appraisal is still in the conversation by mortgage lenders. Truly amazing to me.

  27. Agree, Jonathan. But I recently had the experience. Called the lender to see why the appraiser hadn’t called for an appointment yet. They said, “oh…the appraisal is done already…we didn’t need to go inside.

  28. Jonathan:

    I enjoyed your blog.

    Since you are an appraiser, I thought I would find your thoughts on the newly adopted code there.

    Are you planning on updating that (last entry Mar 07)?

    I read it as the end of the independent appraisers and small appraisal companies, as virtually ALL appraisals will be through appraisal management companies, selected by the lender at the national level. I am an LO, wholesale/correspondent, and do not think this bodes well for anyone, EXCEPT appraisal management companies.

  29. Thanks Roger! – I am going to update. The agreement was signed just before Christmas and I have been taking a breather. Bottom line is that the original “Havoc” agreement as we lovingly call it had the unintended consequence of empowering appraisal management companies which have a far more adverse impact on valuation integrity than mortgage brokers ever did. The changes don’t change much in the process. I have a lot of thoughts on this and will be posting this weekend so check back in and Happy New Year.

  30. The one thing that I have learned or at least forced myself to accept is that loans are not approved because they make sense. The sooner you realize this, the easier it is to understand mortgages and why we are in this mess.

    Loans are approved because there is a value to them on the secondary market. However, if you have one piece of the puzzle missing, no matter how illogical and how stupid, that loan’s value on the secondary market is dramatically affected hence no one wants to make the loan.

    This is why every loan originator can share water cooler stories of seemingly common sense mortgage being denied – millionaire can’t get a mortgage over a technicality such as the lender doesn’t want to be the first to close on a condo unit in a new development, but yet that same lender will approve a borderline deadbeat for a loan all day long without batting an eye because the AUS likes it or we are some how able to squeeze it into Fannie guidelines.

  31. America is figuring out that debt is not the same as wealth. Although the difference is indistinguishable to your neighbors, you can tell, and the game isn’t as fun anymore.

    Like the proverbial frog in a pot of water, we enjoyed/endured the rising heat… until we found ourselves cooked.

    For the record, I’ve never kissed a boy. I’ve often wondered about other aspects of my life though. 😉

  32. LOL Scotsman. You know the song…”you Catholic girls start MUCH too late.” Thinking back it was L.A., she was 6’7″ with fake breasts. May have been a “Tranny” 🙂 Happy Near Year!

  33. Working on some stats. This is hysterical. High end condo on market for 800 days. Next door neighbor comes on market for $50,00 more! LOL…he’s worth more than the neighbor, I guess. Now neither will sell.

    When will people stop pricing for more than the neighbor that isn’t selling?

    Going to bed.

  34. BTW, my mom DID get them to tie her tubes. Once the cat’s out of the bag…the professionals lose control. Subprime was for “the few” as agents and other professionals didn’t “spread the news” about those loans for many years. Kinda like weed being around in the 20s, but the kids didn’t know about it.

  35. The biggest mistake lenders made was making what were once niche products available to everyone. The funny thing is that option arms have been around for decades. the catch was they were only used by rich folks and sophisticated borrowers who understood leveraging debt and risk to better their financial position. The minimum payment was merely an option.

    When Countrywide, WAMU and the like started pushing them on Joe Six Pack is when all hell broke loose because the minimum payment was no longer an option, but THE payment that made the loan attractive.

    I hope that somehow banks can figure out how to ween themselves off of secondary market constraints and really get back to true community lending where every file is evaluated on its merits and truly underwritten as opposed to trying to stuff square pegs in a round holes. For the life of me, I don’t even know why we need underwriters these days. All they do is fill in check boxes. It isn’t like they really have any power to make logical decisions about mortgages anymore.

  36. Ardell wrote: “Working on some stats. This is hysterical. High end condo on market for 800 days. Next door neighbor comes on market for $50,00 more! LOL…he’s worth more than the neighbor, I guess. Now neither will sell. When will people stop pricing for more than the neighbor that isn’t selling?”

    Some people think that is how you should price. I’ve had to discuss that multiple times with people.

    Other people think sellers don’t need agents when there are a lot of people out there that don’t understand the basics, but think they do because they can access the Internet. 😀

  37. Russ wrote: “I hope that somehow banks can figure out how to ween themselves off of secondary market constraints and really get back to true community lending where every file is evaluated on its merits and truly underwritten as opposed to trying to stuff square pegs in a round holes.”

    The problem is they make the loans not really caring about the risk. I think perhaps the solution is selling them on the secondary market on a recourse basis, or perhaps only selling a percentage of the ownership interest. There has to be some sort of risk to making the loan.

  38. Kary,

    I’m sure you’ve seen that look in the eye of a seller that says, “But if I price less than them, that’s like admitting they are better than me.” It seems to be an ego thing.

  39. Maybe ego. It seems to be a strongly held belief in those that have it.

    Somewhat related, the certainty that a certain feature of the home or property makes it much more valuable than the neighbors’ properties. Sometimes that it true, but often it is not.

  40. Kary,

    Reminds me of the time I valued a house for a guy that was being transferred out of state and he said, but you didn’t notice the ceiling fan. I said how much was it? He looked down at his feet and mumbled $29.99 at Home Depot.

    Still amazes me how someone things a $30 item should make a difference on a many thousands valuation.

    Just saw a house listed at $650,000 “lot value”. Kinda like does a tree make noise if it falls in a forest with no one to listen. If no one is buying lots to build new houses on…is there such a thing as “lot value”?

  41. I have a question about “lot value” – if there is a vacant lot next to my house (and I have reason to believe the owners would be interested in selling it) how do I determine an appropriate price to offer? Should it only be based on the additional value that would accrue to my house by being on a bigger lot (the vacant lot is 3x the size of my current lot)? There are no comparable lots that have been sold in my neighborhood in years that I know of. The owners did have this one on the market for about a year (dropping the price periodically) before they pulled it off. They never dropped the price below what they bought it for 3 years ago though. When they bought it, it had a house on it, which they demolished.

  42. Veggie, the lot is probably worth a lot more as a separate lot than what it would be worth if you somehow bought it and “submultiplied” (made the two lots one). I’ve seen instances where being on a lot twice the size made no significant difference in value where the zoning prevented further subdivision.

    Also it would depend on where you’re located. But as Ardell mentioned, building lots are not a hot commodity right now.

  43. Seattle Veggie,

    Here’s what I think. The average sized lot in your neighborhood is .11 acres. Yours is .06 acres and the neighbor’s vacant lot is .19 acres. Roughly. He obviously can’t make two lots out of it, as he thought. That means he won’t get more than the going rate for it, which is about $225,000, whether it’s 5,000sf or 8,500 sf. It makes not much sense for you to pay much for it, nor do you need all 8,500sf. You need enough to get up to the same .11 acres as the majority of your neighborhood.

    So suggest a price for a lot line adjustment that gets an approval for the 2 lots (yours and his) to remain two lots. Maybe pay him $35,000 or so for the lot line adjustment that increases your lot and leaves him with a saleable lot.

    This way if he can sell it for $225,000, plus what you pay him for increasing the size of your lot, he ends up with his money back as to what he paid for it. Probably the best case scenario for both or you.

    That’s my $.02

  44. A couple of cautions.

    1. Doing a lot line adjustment isn’t just creating a legal description and attaching it to a quit claim need. It will need to be approved by some governmental authority (e.g. the city or county you’re in). I’ve only been tangentially involved in one of those, so I don’t know much about the process.

    2. The existence of a deed of trust could complicate things.

  45. Ardell:

    That’s an interesting solution for Seattle Veggie.

    But why is it obvious that the lot owner cannot make 2 lots from his .19 acre, when it is 3x larger than Seattle Veggie’s lot?

    Is it obvoius only because he hasn’t, or is there city lot minimum’s that come into play?

    And, would adding .05 acres to SV’s lot increase it’s market value by the $35K or so to acquire it?

    Of course, if it is a matter of enjoyment, that’s a whole ‘nother evaluation.

  46. LOL, Kary. You crack me up. I wasn’t suggesting they do it on a cocktail napkin.

    The way I have seen it done is at time of sale. First you get approval for the lot line adjustment. Then you put the lot up for sale as the smaller lot at 5,000sf or so, BEFORE you actually do the lot line adjustment. Seattle Veggies’ money and the buyer of the lot’s money go to escrow at the same time (especially if the owner of the lot has a big mortgage).

    The 5,000sf lot is recorded as a 5,000sf lot at time of sale along with Seattle Veggie’s lot getting bigger. You have to work up the paperwork through escrow, and likely an attorney. But that’s the basic framework.

  47. Roger,

    Basically based on what she has told me. But also from my experience in other Seattle neighborhoods with smaller lots than current zoning.

    On my sister’s street there are several 2,500 sf lots, but now the zoning is sf5000 and they won’t allow those lots to be subdivided anymore. So someone can’t look at the 2,500 sf lots with houses on them and think they can just buy a 5,000sf lot, tear down the house, and turn it into two lots, even though they see that on the street.

    There are 16 lots in the Seattle Veggie plat and the majority…about 13 of them, are all .11 acres. Hers is only one of two “short” lots.

    There are issues that Seattle Veggie and I discussed briefly by email and I pulled the plat up on my computer after we exchanged a few details. The lot forms an L around her house and has some wetland issues and some other future construction impediments on portions of the lot.

    I envision Seattle Veggie would get the portion of the lot that wraps around behind her house, and possibly a bit on the side, leaving the owner of the lot with a building envelope and yard.

    Without seeing it in person, it’s a “blog answer” FWIW.

    The reason I suggest this is she wants it…she doesn’t want to pay what he needs to get for it (he hasn’t owned it that long)…he won’t get more for it because of the extra sf due to the wetlands and construction issues and neighborhood norms and values. And she indicated the owner tried to subdivide it but was not successful. Doesn’t mean he can’t…but maybe not worth it as the second lot would not be a buildable lot.

    Also almost EVERY time I have seen a person want the next door neighbor’s lot, this is what happens. They do a lot line adjustment. Because the person never wants to pay the full value of the lot price just to have some extra land, and they often don’t need all of it, and the diminished value of the shortened lot is not great.

    If Seattle Veggie’s lot were the same size as everyone else’s in the neighborhood, it likely would not be a good idea. But her lot is excessively small, even by Seattle standards.

  48. Ardell, you weren’t really suggesting any procedure, so I wasn’t being critical of anything you said. But I’ve seen people try some crazy things, so that’s why I made the warnings I made. It’s not as simple as just coming to an agreement on price and doing it. But some people try that.

  49. Ardell,

    Thank you for looking up the lot and giving me that evaluation. The answer to whether the land would add $35,000 of value to my house is definitely not immediately (it is in a very raw state right now…not pretty), and probably not in any kind of short term (less than five years). It’s value would come more from our enjoyment of increasing our living/gardening area – as Ardell noticed, we have a small lot. This is something I’ve been going around and around about in my mind for a while now – it’s good to hear some concrete suggestions, because I didn’t really know what the options were.

  50. Starting in the business in 87 I can really relate. For to many years people have been living way beyond their needs and wanting everything. Maybe now they can see that you can’t always get what you want.

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