Have Lunch with Brian Stevens Tomorrow (12/23) in Bellevue

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We are planning a “tweet-up” (meet up) for Brian Stevens of Think Big Work Small tomorrow (12/23) around lunch time in the Bellevue area.   If you attended last year’s RE Barcamp at the Seattle Center,  you may have had the chance to meet Brian and Frank.   These guys have been an asset to the lending and real estate community and they were both recently recognized on Inman’s Top 100 list.Brian

I will update this post as soon as I have the nitty-gritty…since this is on short notice, I wanted to get the word out to all of his fans.

Do you have an idea of a good spot for lunch tomorrow that can handle a crowd and has decent parking (wishful thinking…) for this gathering?  Please let me know!

UPDATE 12/22 10:00 a.m.:  Looks like the event will be at Rockbottom in Bellevue tomorrow, December 23, 2010, starting at 11:00 a.m. – 1:30 pm.

Parking is free or validated and Rockbottom Brewery is away from the mall.  🙂

Real Estate – “Proceeding in Good Faith”

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contract
Real Estate Transactions have long depended on the underlying principle of “Proceeding in Good Faith”. It’s not something that we talk about much, as it is something we pretty much take for granted.

I raise this issue today as Craig has mentioned it a few times this year in his posts and comments, and most recently the other day in his post regarding “Good Faith Home Inspection Negotiations”.

Before we can discuss how “Proceeding in Good Faith” applies to the Home Inspection specifically, we need to discuss how “Proceeding in Good Faith” applies to all real estate transactions, generally. When we are talking about this principle in real estate, we are talking about the Buyer and the Seller who are the “Parties To” the transaction. It is not about agents except to the extent that they represent someone who is acting and proceeding in good faith. Consequently the presence or absence of real estate agents in the transaction neither heightens nor diminishes the importance of the good faith process.

Good Faith BEGINS with a seller who wants to sell and a buyer who wants to buy. One would think this is always the case, but it is not. NO ONE can PROCEED “in good faith” if these two things are not present from the getgo.

While it may be hard for some to believe, not everyone who has their home listed for sale has the intent of actually selling it (at the price at which it will actually sell), and not everyone who makes a written offer actually has the intent of buying (that particular house). Who is and who is not Proceeding in Good Faith…well, that gets a little complicated.

Buyer Says: “What’s wrong with this seller? Is he REALLY going to Let This Sale Fall Apart over a $150 fix to a leak under the sink?”

Seller Says: “Well it’s a good thing that buyer DIDN”T buy my house, He oviously did NOT want it, if he was willing to walk away from it over a $150 fix to a leak under a sink! Anyone who is not willing to fix a leak under a sink shouldn’t be a Home OWNER Period!”

Craig, in his post linked in this one says: ” As a general rule, I think “good faith

2011 FHA and VA Loan Limits for Seattle

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FHA loan limits for homes located in King, Pierce and Snohomish Counties will remain the same until September 30, 2011.

  • 1 Unit – $567,500
  • 2 Unit – $726,500
  • 3 Unit – $878,150
  • 4 Unit – $1,091,350

I have the FHA loan limits for other counties in Washington posted here.   FHA still allows 3.5% down payment, which can be gifted (or loaned) by family; 5% down will provide slightly improved mortgage insurance rates.   FHA insured loans may be assumable which may be a huge benefit for future home sellers when they are able to offer today’s rate in a higher rate environment.

VA Loan Limt effective January 1, 2011 through September 30, 2011 for King, Snohomish and Pierce Counties is $500,000.   This is a slight increase from $481,250 in 2010.  Here is a list of VA loan limits for all counties in Washington.

Qualified veterans can do 100% financing up to $500,000.   If a sales price is above $500,000, the veterans down payment is 25% of the difference between the loan amount and sales price.   

For example, if a veteran purchases home in Bellevue with a sales price of $600,000; their down payment is $25,000.   600,000 – 500,000 = 100,000.  100,000 x 25% = $25,000.   

Any seller should include buyers who are using FHA or VA for financing or they are seriously limiting their potential for selling their home.

Why the Lender may “reduce” Your Gross Income

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Gross Income is sometimes a subjective factor, modified at The Underwriter’s discretion. Most often that is the case whenever ANY part of the borrowers Gross Income is derived from overtime, bonus or commission, or the entire Gross Income is based on hourly wages vs salaried wages.

EVERY AGENT should understand these BASICS, as WE often know our clients longer and better than the lender who is giving you a pre-approval letter to attach to the buyer’s offer. At a minimum, every agent should know that if their client is not purely “on salary”, there may be some bumps along the way that may turn a preapproval into a loan denial.

Even if the lender did a full preapproval process, The Underwriter may require the employer to make a written statement regarding future bonus or commission or overtime income, that the employer will not put in writing. That can happen in any case, and sometimes a few days before closing, no matter how careful the loan originator was in gathering information prior to producing the preapproval letter.

AGENTS should know when the preapproval MAY be based on the “wrong facts”, especially when you are getting a preapproval letter with short notice, and the lender knows the client for 15 minutes prior to giving the agent what they need to get the offer submitted quickly. Fully delegating this responsibility to the lender is inappropriate. An agent should know when to give the lender a “heads up” that $100,000 may indeed be “current” gross income, BUT it is likely that The Underwriter at the end of the day WILL NOT count ALL of that $100,000!

Getting a mortgage is not an “entitlement”…it is a business decision. Below are examples of how Lenders have historically “viewed” Gross Income calculations in most cases. But know that The Underwriter has the discretion to modify “as needed” based on inconsistencies.

First let’s look at the basic chart I made for the purpose of further discussion:
gross income

Column One: Salaried Income is almost always counted at current “face” value. Even if you just got a significant raise just prior to making an offer on the house, the lender will usually count it all. They will require at least one and often two paystubs at the NEW amount as proof that the raise is in effect, and ALL of the monies have to be salary vs hourly or bonus or commission based.

Column Two: If your wages are based on an hourly amount, RARELY will the Lender count it at its current annual amount based on today’s hourly wage. I don’t necessarily agree that hourly based wage earners should be treated differently than salaried ones, but I don’t make “the rules”.

If your hourly rate increased from $16 an hour to $24 an hour over the last two years, you normally need A FULL TWO YEAR HISTORY of earnings at the new hourly amount of $24, for the Lender to use that as your Gross Income. If you earned $16 an hour in 2009 and $19 an hour in 2010 and you WILL BE making $24 an hour in 2011, the Lender will usually average your annual wages of 2009 and 2010 and count your income at only $16 + $19 divided by two at ONLY $17.50 an hour vs the $24 that you are now making. Terrible, but true. They actually average your total earnings (not including overtime) for the two years, vs the hourly number.

HUGELY important for an agent and a lender to know if your wages are based on an hourly amount before issuing a preapproval letter.

Again, I really don’t think that it is fair, as I have had clients with an over 20 year history with the same employer (Boeing) whose income was stated on an hourly vs salaried basis. Why that counts as “lesser” in the eyes of lenders, I don’t know. Just is, in MOST if not all cases.

I also included an odd example in Column Two of The Underwriter deciding that if your income reduced by 20% that maybe that will happen again in the future. Once The Underwriter is in “their discretion” territory, there really is a lot of room for The Underwriter to do pretty much whatever they deem necessary to be comfortable with approving the loan. If there is a declining income vs an increasing income…expect problems and delays and be prepared for a potentially very bumpy ride to the “approved and funded” day.

Column Three: Bonus income is calculated the same as hourly income…a two year average. So if your income is part salary and part bonus, the safest way to proceed is based on the salaried portion only, especially if the bonus income is a small amount. If you do want to include the bonus income, you need to know that not only will the lender require a consistent history of bonus income, BUT may require your employer to put in writing that they expect that level of bonus to continue for X period of time into the future.

In these economic times it is The Underwriter’s Discretion regarding how much to count OVERTIME and/or BONUS income. They may decide not to count it at all unless your employer is willing to guarantee that extra income for several years out from now.

Column Four: There is no Column Four BUT if there were a Column Four it would be for people whose ENTIRE income is commission based. Also in Column Four would be people whose entire income comes from a business venture.

Also, regardless of income source, if you are applying for a JUMBO loan…well, just about anything can happen. The number of hoops one may have to jump through to get a JUMBO loan are many and varied and change from lender to lender and from one minute to the next.

Likely the biggest snafu that can happen unexpectedly is when someone owns a rental property. Maybe one of the Lending Professionals can help with this in the comment section of the post. Suffice it to say that the Lender does not look at rental income the same way that someone who owns a rental does…not at all. They only count 75% of the rent as income, while counting all of the mortgage payment on the rental property as an expense. So if you think that $2,000 rent wipes away the $2,000 mortgage payment and is “a wash”…not so. So if you own a rental property, make sure you make that fact known BEFORE getting a preapproval letter and before making an offer on a house.

Last but not least is you cannot count the Rental Income of a property you are buying as a rental. Yes, we know you will be getting rent, but that rent is not counted AT ALL because you have no HISTORY of rental income from that property at time of purchase. Two or three years from now you can count that rental income when doing a refinance, but at time of purchase…you have to qualify to buy it without considering the income you will derive from it.

Some day when you are wondering why EVERY escrow that had a preapproval does not close…you may want to come back and read this again.

You Should Not Be Buying a House If You Don’t Get This

“Good faith” negotiations and the Inspection Contingency

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One of my great challenges as I build my RE broker practice is learning how to develop positive working relationships with other brokers. I’ll admit, a broker is a different animal than a lawyer. I think the difference flows from the fact that brokers to a certain extent are on the “same team” while lawyers are not. Brokers need each other to keep their clients on track towards closing, or neither broker gets paid. Lawyers, in contrast, get paid whether the deal closes or not. Transactional attorneys are not adversarial per se — at least not the good ones — but they retain their own self interest independent of opposing counsel. I think an absence of this “mutual interest” can foster a degree of conflict between brokers.

Since I don’t have that mutual interest with the opposing broker, I’ve tried to come up with a “work around,” some style that is consistent with what is expected of a broker. In that vein, it has been my understanding and experience to date that everybody expects the parties to negotiate in “good faith.” That term is of course extremely slippery and not susceptible to an easy definition. Its sorta like porn — hard to describe, but you know it when you see it. As a general rule, I think “good faith” requires the parties to negotiate realistically with the understanding that each side is genuinely interested in consumating the transaction on terms that are fair to all. If one side fails to live up to this standard, then the other side will perceive that they are not negotiating in good faith.

To date I’ve operated under the assumption that if I can faciliate good faith negotiations, then I’ll keep to a minimum any conflict between me and the other broker. What does that require in the context of the inspection contingency? Once the inspection has been performed and the defects noted, is that an opportunity to essentially renegotiate the price? Or should the negotiations focus strictly on the specific defects, their respective importance (e.g. safety issue vs. cosmetic), and the costs to repair? Or is even that too aggressive?

Any insight would be greatly appreciated. I just love “RCG University”…

You should NOT be buying a house if you don’t “get” this.

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Why did so many people buy houses they couldn’t afford? I’m not talking about people who bought 5 houses to “FLIP”, or the cash out refinance issues. I’m talking about the basic Buy A House to Live In IT bunch who never did a cash out refinance.

Well…on 2nd thought…let’s leave those cash out refinance people in, as this “study” may explain WHY so many NEEDED to do a cash out refinance, and use their home as an ATM machine.

Let’s start with the basic MODEL and examine where everything started to go sideways.

Qualifying for Mortgage Chart

Qualifying Ratios ONLY WORK well when THE MIDDLE COLUMN is in sync.

Now that the dust has settled and we are not looking for some ONE to BLAME, let’s look at the REALITY of what, exactly, is broken…so YOU can fix it. This is about you, as a buyer of a home, as you are the only one who can proceed on the RIGHT basis. No agent or lender can sort out that middle column for you. You must make the extra effort to QUALIFY YOURSELF!

Here’s what happened, in a nutshell. EVERYONE’S BACK END WAS OUT!!!

Used to be, looking at my Chart inserted in this post, that IF YOUR DEBT PAYMENTS caused your TOTAL of housing payment + Debt to exceed the “back end allowance”, your housing allowance was REDUCED accordingly.

EXAMPLE: Housing payment $2,800 (column one) Debt + Housing $4,000 (vs the allowable $3,600 in the Chart’s middle column) equalled a REDUCTION in allowable housing payment from $2,800 to $2,400. 28% of Gross Income was ONLY the allowable amount IF your housing payment plus monthly recurring debt payments did not exceed 36% on a combined basis.

If you do not understand this up to this point, PLEASE, PLEASE ask questions as you should NOT be buying a house if you do not understand this. If you are not capable of understanding the basic accounting framework of home buying and home ownership, then do not buy a house. It really is THAT simple.

The Middle Column went out of whack when people started using their Credit Cards for Column Three items. Before ATM cards, people did not do that. Credit was for buying a home and LARGE purchases and MONEY was for buying everything else. Front End + Back End assumed that no one would buy a carton of milk or a loaf of bread on a credit card. Front End and Back End assumed that no one would use a credit card to go to a movie theater.

That said, what YOU need to do is look at your Total Credit Card debt and separate the balance into “used for LARGE purchases” vs “used for column three expenses”.

The Lenders and the Real Estate Agents really can not do that for you. So what they DID (which proved to be disastrous) was EXPAND the back end ratio to include the usage of credit cards for column three expenses. This started when people LEASED cars vs buying them. Given you did not OWN the car at the end…this shifted the car payment from a column two expense to a column three expense.

Column Two is for large PURCHASES! Leasing a car is NOT a “purchase”. Seriously…that was the EVENT that created a huge disconnect for Qualifying Ratios, combined with people not making a distinction between when they were using a Credit Card vs an ATM card for minor purchases. Going to the movies is not a LARGE PURCHASE worthy of using a Credit Card vs a Debit Card.

There’s an old saying: “One Step Forward; Two Steps Back”. What I am suggesting here is that we have taken Two Steps Forward, and need to take One Step Back. Reconstruct your Credit Card debt to LARGE purchases only. Do not buy a house until your small purchases and living expenses of Column Three are NEVER “financed”.

If you NEED to buy your food with a credit card…you should not be buying a house. It’s THAT simple.

********

Column Three went out of whack for a number of reasons, mostly related to Column Two events as noted above. The MAIN Column Three disrupt, not associated with Column Two, is about EARMARKED savings.

Used to be people had a “Christmas Club” savings account and a “Vacation Club” savings account and an Emergency Fund Savings account that was never touched except for dire emergency (and then repaid BACK into the Emergency Fund), and a Short Term savings account for “luxury items” and a Long Term Savings Account for retirement.

Buying a boat was a “luxury item” vs a “Large Purchase”. “Large Purchase was a refrigerator, a washer and dryer, a bedroom set, etc. Things you needed long term, not things you WANTED long term. You saved for a Luxury Purchase – a large item that you WANTED and you charged a NEEDED large item to spread out the payments.

Two things largely contributed to the demise of Americans saving money and saving it in an earmarked way. One was the change from the standard 5% interest bearing passbook savings account. The other was the expansion of bank charges per account, that caused people to lump their savings into one account vs earmarking it by spreading it out among several designated purpose accounts. There was never a charge for a “christmas club” or a “vacation club”, and with 5% interest, people saved for those things vs charging those things.

A third thing that changed was the ability for a homeowner to convert their non-deductible charge card interest to deductible “mortgage” interest via a “cash out” refinance to “consolidate” debt. Seemed like a financially “smart” thing to do…until your house was “upside down” and you needed to do a short sale. Ask yourself how many short sales are done to “forgive” the car loan and the student loans that were combined into their Mortgage Amount? That is a frightening thought, and not about a HOUSING Crisis at all!

Is there any hope for a true FIX? The answer is likely HIGH INTEREST RATES are needed. When interest rates are high, people save more. When interest rates are high, people put the right amount of forethought into buying a home.

For that reason I have to say that keeping interest rates low and fixing the economy all at the same time is an oxymoron. I don’t want to see interest rates go to double digits, but until interest rates are back in the 7% to 8% range, I don’t see much hope for an overall “fix”. BUT, hopefully, if you “get” what I am saying here, you can at least fix it for YOU.

Also, an up front Tax Credit to REPLACE the Mortgage Interest Deduction would go a long way to preventing homeowners from creating an Umbrella Loan for their Car and Education and other non housing related debt, in order to qualify the interest paid as a “mortgage interest” deduction.

If you understand the chart above, and keep your “back end from falling out”, you will clearly be a Giant Step ahead of most of your Peers. It’s a NEW Decade. 2011 is the year of One Step Back to Sound Principals and reliable fundamentals. Good Luck with that. If you don’t understand any part of this, please ASK!

Happy New Year!

The 2009 Version of the “same” principals

Can you modify the ratios from those in the Chart?

Half the battle is “won” when you know WHEN you are STRETCHING, and by how much.

Give Warmth – Got Coat?

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The Give Warmth project starts today, December 16th, and coats can be dropped off through Wednesday December 22nd.

The “Give Warmth” project will help to insure that needy families will have proper attire for this particularly wet and harsh Seattle Area winter. Can you say La Nina!?!

1) The coats DO NOT have to be new! Used coats in good condition are welcome and appreciated.

2) Coats brought to the drop-off points will be given to and distributed by Friends of Youth in Redmond

3) Give Warmth – Coats for Christmas drop off points are at Carolann Joy Salon in Redmond AND at Cafe Ladro in its newest location in Bellevue

More details regarding drop off locations and times are in the video and the links.

What I like THE MOST about this particular Holiday Giving Event, is this one does not require YOU to spend ANY MONEY to help others this Christmas. New coats are great, but used ones in good shape are appreciated just as much as new ones!

Who doesn’t have a coat or two that wasn’t worn much and is not being used? A great low or NO cost idea for neighbors helping neighbors.

Thank you everyone, and Happy Holidays!

Social Media Overload = Un Social Skills.

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No Social Media

Shorecrest High School is doing an experiment.   The staff and students are doing what they term a social media “blackout” for a week.

  • No Facebook.
  • No Twitter
  • No e-mail.

Conversing old school.  Homework is getting done.  Chores are being accomplished.  Mothers and sons are talking more in a few days over the phone than in the past six months.  Relationships are blossoming.   Others are finding it difficult to converse, almost like learning how to ride a bicycle all over again.

I wish people in business and, in particular, real estate would give this a try.   People sometimes  hide behind their e-mail and, in my opinion, much is lost when people don’t call and more is gained when you talk on the phone.   Do agents really need to know every single detail of a file in escrow?  Do you want an e-mail when a minor title issue has been resolved or title has been amended?  Do you need to know when a water bill has been received?  Do I need to know when the oil pan screw has been tightened from the serviceman working on my car?  Should they trigger an e-mail to me or text me?   What is a good balance?

Professionally,  I have found that the more I take the time to call and  talk personally to my clients whether they are in Brecksville, OH. , San Diego, CA., First American Title in Clearwater, Florida, or an Attorney in Washington DC,  I tend to build and foster longer term clients.

Talking things over on the phone is also one of the most effective ways in finding resolutions to transaction problems.  On the other hand, total transactional blackout is also a problem that still occurs: that’s code for agents that never respond or converse with escrow,  no matter what social media tool they have at their disposal.

New WA State Short Sale Seller Advisory and Licensee Guidance Bulletins

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The Real Estate Division of the Washington State Department of Licensing and the Department of Financial Institutions have issued two bulletins about short sales. The DOL  Short Sale Advisory is for home sellers but really should be for both sellers AND their Realtors/real estate brokers.  DFI’s companion advisory is titled “Short Sale Guidance for Licensees” and contains many Q&As for both loan modification and short sale negotiation services. 

The DOL Seller Advisory contains basic education about short sales, the deficiency, “walking away” by letting the home go into foreclosure, options for homeowners in financial distress, warnings about predatory loan mod firms and other scams, and where to go for free help. The DOL Advisory also offers a signature page for the seller. There’s not a place for the real estate listing broker to sign the DOL Advisory.  I’d also like to see the Advisory offered in different languages. From the Advisory:

“FIRST, Understand that a Short Sale May not Discharge the Debt. You should know whether you will still owe your lender money (a deficiency) after the short sale. You should know this BEFORE you close the sale of your home. Even if a lender agrees to a short sale, the lender and any junior lien holders, may not agree to forgive the debt entirely and may require you to pay the difference as a personal obligation. This outstanding personal obligation could result in a subsequent collection action against you. For example, a lender may accept the short sale purchase price to “release the lien