The First Time Real Estate Investor Chronology Part III

Here’s the third part in the series from Jeff Brown.  I hope you’ve found it educational and enlightening!

You can check out Part I here and Part II here if you need to catch up. Now we can proceed with what you might expect while in escrow. For those thinking, ‘Hey, we have a contract, what could happen?’ I keep a plentiful supply of generic aspirin available.

It’s far easier to list what can go right in an escrow than what can potentially go wrong. As an understatement, that may rate honorable mention on the annual Top 10 List.

5. Incomplete list of what can go sideways while in escrow.

Numero uno on this list is lender related. Name something in the loan process and I’ll give you a real life experience (we call this empirical evidence) of how it can, has before, and will again torpedo an escrow. Let’s count just a few of the myriad possibilities.

How ’bout an appraiser who insists a development is a PUD, (planned unit development) when the developer, builder, City Attorney, and title company all say he’s embarrassingly wrong? That was a new one on me. Here’s how stubborn the guy was. He didn’t reverse his stance until the lender called him in person and told him his company was just inches away from a formal Fannie Mae fraud investigation. Funny how that can change a fella’s outlook.

If that story illustrates anything it’s this: It wasn’t about whether the appraiser was right or wrong. It was about him never being wrong. There are details to this story I can’t include here ‘cuz I don’t want a problem, plus you’d think I was makin’ it up anyway.

Then there are the underwriters. Does the phrase god-complex ring a bell? It a kinda sorta paradox, ‘cuz though we’d like to adhere to the reality that indeed they’re not divine in nature, they sure seem to have that level of power. Plus, they’re kept insulated from the world. My good friend and mortgage broker extraordinaire, Brian Brady recently told this story.

Two exact properties on the same street selling for the same price, same terms, almost clones of each other. The supervising underwriter gets one, and a 20-something newbie, down the hall, gets the other. Brian will feel free to correct details, but here’s how I remember it. The grizzled old vet had a question, asked Brian, who explained what was up, (what’s known as a re-lo — relocation — buyers of properties had been transferred and companies bought their old places) and the underwriter thought his explanation was eminently reasonable.

The newbie, had never before seen a file in which the funds for the buyer’s closing was coming from the sale of their old home to their current employer. She thought it might be fraud. Really — though to be fair, I can understand how she might arrive at that conclusion. Anywho, Brian patiently explained what a ‘re-lo’ was, and that the guy down the hall, her supervisor, had just bought off on the exact same same set of facts. She returned after a short stroll down the hall, thanking Brian for his patience, and teaching her something new.

Still, had it not been for the rare level of maturity for her age, and Brian’s patience and kind nature, that loan would’ve been deep-sixed, at least until her supervisor rescued it from underwriter hell. And folks’ lives would’ve been interrupted as a direct consequence.

Just last week, and no, I’m not makin’ this up, a client was forced to put more money into his down payment ‘cuz — wait for it — here it comes — his income of a million bucks last year was an anomaly, and that he only made $180,000 yearly. Wow, my bad. How could I ever of expected a serious lender to loan money to a guy only making $15,000 a month, while living on just over half that much? Silly me. Was he tryin’ to borrow half a million for fourplex somewhere? Nope — just a couple attached homes for under $125,000 each. I wouldn’t insult them by pointing out that after taxes, there was over half a million in the bank. That would be crass. Go figure.

Again, file it in the — you can’t make this stuff up, file.

We’ll continue tomorrow with the remainder of the saga of what can go wrong with a simple real estate investment property transaction — after there’s a contract. I’ll end this post with what I was taught by my mentors long ago.

When they were showing me the pitfalls of investment real estate from both the investor client and investment broker viewpoint, they often made one thing painfully clear. Seeing what’s real and what’s not is crucial. Nobody’s perfect, but experience over time, and the application of the experience of wise and diligently stern mentors will usually show the way.

BawldGuy Axiom: The adviser is one who sees the true (real) reason for what needs to be done, and, sometimes more importantly, what shouldn’t be done.

Give me a holler and I’ll show ya what’s waiting for you and your retirement. Creating a Purposeful Plan is literally the foundation of a successful retirement. High quality, high income retirements don’t just happen.

National Association of Home Builders

This is off of their “Eye on the Economy” newsletter:

Fiscal Policy Is Needed to Break the Downward Housing Spiral Falling house prices pose a huge risk to the U.S. economy and to the financial markets. Falling prices decimate the quality of outstanding mortgages âwhole loans and securities structures.
This leads to progressive tightening of lending standards in primary mortgage markets, a process recently documented by the Fed’s Senior Loan Officer Opinion Survey for April.
This tightening process further weakens effective home buyer demand while falling mortgage quality feeds the upswing in foreclosures that dumps more supply onto glutted markets — putting more downward pressure on house prices from both directions.
The diabolical feedback loops in the housing and housing finance markets make it extremely difficult to craft forecasts of housing market activity for the balance of this year and in 2009. NAHB’s current forecast shows very large declines in new-home sales and housing starts in 2008, with only modest recovery in 2009.
NAHB’s downbeat housing forecast actually is subject to considerable downside risk. The Federal Reserve would like to break up the feedback loops that are dragging housing downward, but the Fed apparently lacks the tools necessary to do the job.
A fiscal policy solution is sorely needed to spur home buying, stem the upswing in foreclosures and cushion the downdraft in house prices. There’s a lot of activity on these fronts, in both the Senate and the House, and the President presumably would be hard-pressed to veto well-structured legislation to help current home owners and to help stem the housing market contraction.

Okay, now I ask you to compare that to what Morgan wrote at www.blownmortgage.com about the falling house prices:

The story the press should be telling:

Here’s a story the press should be covering more: housing affordability is rocketing back towards sustainable levels. Below is a graph from the NAR on housing affordability and you can see as the market tanks homes are becoming more affordable than they have been at any point in the last 4 years. They’re also b-lining for a return to more historically affordable levels such as during the 1990’s.
We’ve seen 7 straight months of improvement and here’s hoping for more. While it sucks as a homeowner to see your value tank hard (trust me I know) it is the only hope for the housing market recovery that everyone is trying to eyeball right now. Only affordable homes that naturally increase demand will stop the free-fall. It doesn’t take rocket science to figure this out but the sooner we can get to that affordability the level the sooner the bottom will begin to firm up.

The National Association of Home Builders is advocating for government bailouts. Morgan Brown is saying, “This is a healthy but painful adjustment in the markets to get back to where the housing markets should be.”

My vote is with Morgan, what do you think?

Tom