patrick.net

Randy H Says:

> @FAB, no need to get snarky. I was just citing my
> data source and defending my justification for using it.

Sorry if I came off as “snarky”, you might find this hard to believe but you are my favorite poster on this BLOG (I really do disagree with you at times, but you always keep it civil and defend your point)…

> There are plenty of legitimate criticisms of their
> methods and sources.

I don’t see any value in using data that is correlated, but not really comparable to come up with a ratio when it is possible to dig a little deeper and find numbers that is really comparable (say comparing the PITI payment when you bought your home on the Peninsula with the rent someone was paying on the same street, or even better looking at the rent for a 2br condo next to an identical condo that sold the same complex). The HSBC ratios for rent to own are about as accurate as taking the average cost to “buy” a car in the SF area (that includes some of the top selling luxury car dealers in the nation) and the average cost to “rent” a car at SFO (that includes a lot of stripped down American cars) to come up with the ratio (why not use the cost to “buy” the Buick with velour interior with the cost to “rent” an identical model?).

> You were the one that authoritatively proclaimed that
> I had everything backwards by offered up a vague
> reference to realtor.com as support.

I talk to young analysts in the rust belt almost every day and not a week goes buy when the super low cost to “buy” a home comes up. Just last week I was talking to a guy in Michigan who “bought” a home with a lower PITI payment than a friend is paying to “rent” a garage in Russian Hill… The realtor.com reference was vague, but even I was surprised to find over 200 homes in Flint, MI under $10K (that would have a monthly PITI of under $50). If you pick any city in the rust belt and look for the cost to rent I’m betting that you can find lots of similar homes for sale on Realtor.com that will have a PITI payment lower than the rents…

I just re-read where Randy wrote:

> There are many reasons that holding-cost of ownership
> (we usually abbreviate as PITI, but also includes a risk
> factor) is usually about 50%-70% higher than renting,
> and some factors are cultural and differ among countries.

I missed Randy’s comment about a “risk factor” since when I talk PITI it is just the P, the I, the T and the I (when you add in all the actual costs like CapX maint., time to deal with the home and the opportunity cost of not getting a cash on cash return on your money the ratio of own vs. rent will always be over 1.0…

@Michael Holliday,

Was that an account of an actual event or a piece of creative writing? Either way, very entertaining (but even better if it was real).

HelloKitty Says:

> I remember they used to do what is called a ‘loan reset’

And also mentioned some other terms that we have not heard in a while…

Since it sounds like HelloKitty (can we call you “HK”) has a lot more residential lending experience than I do I’m wondering if she knows if DPOs (Discounted Pay Offs) or CDs (Cram Downs) were common in the world of residential lending…

Back in the early 90’s a lot of smart Commercial Borrowers did real well gaming the system knowing that the government would not let a bank have many non performing loans on their books and they would have to sell them at a discount. The Borrowers would just stop paying on their loans knowing that the group that bought their non performing loans for $0.75 on the dollar planning to foreclose would be happy to do a DPO for $0.80 on the dollar the day after they took over the pool…

I never really understood the legal support for the cram down, but every now and then we would have a Borrower go in to BK to stop the foreclosure and the court would make us lower (aka cram down) the loan amount so the Borrower could start making payments again (they never gave us any support, just a court order making us lower a loan form say $9mm to $6mm)…

Michael Holliday Says:

> His girlfriend shouts, “F you, you lazy piece of garbage”
> as she hurls a glass of wine at his car….

And brings back fond memories of the dysfunctional but always entertaining white trash neighbors in my past…

Is it just me, or are the news links boring now? It was neat watching the stuff pop up almost over night, but now they're rushing to repeat themselves again and again about the sub-prime mortgages.

Somebody wake me up when they catch the first whiff of Alt-A going down.

FAB

Thanks for the comment. I consider FAB one of Patrick's most knowledgeable regulars, and a rare chance for many of us to learn about the innards of the industry. I have encouraged him in the past, and again now, to author some articles here of his own. They would be well received, I'm certain. For anyone who hasn't read here regularly for the past year or two, FAB does know of what he speaks regarding the mechanics of real estate, even if one disagrees with some of his related opinions. And he has a top-tier MBA, so he's quite capable of crunching numbers and rendering analysis. Many times he and I debate something like the HSBC data, only to find out we aren't really disagreeing -- like in this case.

But I'd recommend that anyone who might be thinking of making a bona fide living of real estate investment, try your best to get to know him. Over a year ago I was arguing about "how to get rich" with a guy who was superficially invoking Warren Buffet (who FAB has met, by the way, I think more than once). I still maintain that "getting rich" is only practically accomplished for most people by following FAB's father's example, not by worshiping someone else's riches. And if I was in RE, I'd still rather buy in as a partner of FAB's business than put all my money into Warren's fund.

I'm heartened to see the weight of comments on mainstream media newstory blogs has turned decidedly bearish.

I tried to post one, but it's not out of moderation yet. I was perhaps a bit too harsh, lol.

I would second Randy's sentiment, FAB is fab-ulous, we are so lucky to have an insider like him on this blog.

Hymie,

let's not start sucking each other's d*** quite yet, this tsunami of realty crash won't be over for at least 3-5 years, if we are lucky. Since the scale of speculation is so unprecedented, I would rather be airing on the patience side. Perhaps by 2010 you may not be ready to commit to a house if a 1931-style unemployment hits America. There are too many variables down the road, and how your neighbors look at your "good fortune" is so far down the list.

If you have savings piled up, protecting your savings and growing it amidst the turmoil of this unfathomable size perhaps should be the first thing on your mind. It is on mine.

Harm said:

Not much has been said so far about the effects of REFINANCING or HELOCs on the borrower’s no-recourse/anti-deficiency standing. As I recall, when s/he refinances, the borrower generally loses the no-recourse protection –even in CA. Is this assumption wrong?

Is this about right?

With all due deference to those who experienced the last bubble crash, I believe that just as it was "different this time" on the way up, it will be "different this time" on the way down.

In past bubble cycles, there were no HELOCs, people made more substantial downpayments and the number of 2nd mortgages was tiny compared to today. And with NINA and NegAm loans, the number of people with significant negative equity is likely to even greater than prior cycles. As a result, the deficiencies will be much larger and, in many cases, may be worth pursuing.

If you owe $50,000 in credit card debt and it is clear that you are broke, most lenders are not going to chase after you for a $3 or $4000 debt. They know that the cost of pursuing the debt will exceed any recovery and that you will likely just declare BK anyways. They also know that if they try to outsource to a private law firm, even a bottom-feeder collection attorney won't take the matter on contingency because the dollars are so small.

But if you owe, say, $100,000 on a HELOC, it is worth it to pursue you. For every 10 cases of this kind that get filed, even if 5 of the 10 declare BK and the creditor only collects 30 cents on the dollar from the rest, that is still $150,000. If the debtor is employable, then the creditor will garnish his wages. Any assets owned (or later acquired) by the debtor can be seized.

Sure, some debtors will declare BK and skate, but nowadays there are some serious impediments to BK. For instance:
1. If you have other assets, forget it. You don't qualify (that means YOU baby-boomer who just inherited $100K from mom and dad).
2. If your income is greater than the state median income, you can no longer file a Chapter 7 (complete liquidation) and you will likely be stuck with a Chapter 13 (repayment plan).
3. Good luck to you if you lied on your mortgage application about your income, assets, job history, etc.... My wife works in BK and she said that creditors are getting very aggressive in consumer fraud cases (creditors can file a "non-dischargeability complaint" in the bankruptcy proceeding to prevent the discharge of a debt if they can prove fraud. As a practical matter, though, they don't really need to prove it because most FBs do not have the resources to defend such an action so the court can automatically enter a judgment for the creditor). My wife has seen companies pursue non-dischargeability actions on much smaller deals than a typical HELOC (like consumers defaulting on installment purchases of a sofa or a refrigerator.) Apparently the credit department at Sears is ruthless. And a lot of these consumers are broke.

Lots of FBs actually have stable jobs and good prospects, but they will still want to mail in the keys. I didn't personally experience the burting of the last bubble in the early '90s, but I understand that a typical strategy even for people who *could* afford their mortgage (but who had negative equity) was to buy a new house for 25% less than your old house while your credit was still good, then default on the mortgage on your first house and let the lender take it. I don't think it will be so easy to use this strategy this time around.

When I bought my place (1994) I looked at a lot of properties in several neighborhoods in SF. Several of the properties were places where the owners had turned the keys back into the bank and walked away. One of them was owned by a Bay Area small time celebrity. My Realtor (the 'It's a dump. Ugh!' Realtor) would tell me that the properties were bank owned, and that if you really liked the property you could usually get a good deal because the banks don't want the hassle of owning them.

I ended up buying a place from a family that wanted a quite large place with a yard and they wanted to move then because the prices had collapsed on the more expensive properties they were looking at. We told them we wanted to buy the place made an offer, they accepted, and then they went to Italy for a month, we went to Italy for about 10 days, nothing really formalized, and when everybody came back from vacation we finished the deal. It wasn't adversarial, no bidding wars, everybody was really honest. It was very different from what I have seen people go through the past few years.

Now- a stupid question. Does your tax base reset if you pull out equity? I don't think it does if you refi, because I am postive we refinanced both places when the rates were really low a couple of years ago, and our taxes are on the old base. But if you pull out money isn't that like selling the house to yourself?

OO,

We here at Patrick.net will NOT tolerate the "random Zillow spying" on of one's neighbor! YOU sir are beneath contempt!

(But uh... just between you, me and the fence post what exactly did Mr. Boomer and his trophy wife pay again?) :)

SFW,

I'm surprised at you? The time honored tradition of robbing one's own home is as sacred to Americans as farm subsidies and pork barrel projects! Remember it's YOUR money!

Itulip had a great article on "Credit Welfare" linked here and as is most of their material, definitely worth a read.

HelloKitty Says:

> I actually plan on tracking the ‘days on market’ and
> compiling the history of price reductions and list price
> vs final sales price on foreclosures and compare by
> bank. The goal is to try to predict accurately how low
> an offer certain banks will or will not accept and how
> soon after listing they will accept such a low offer.

You will get a lot better info buying lunch for admin. people in the bank special servicing/workout departments…

> I’d also recommend to anyone to get their RE broker
> license and perhaps work under a big name office briefly
> to get experience on how to submit offers/list properties.
> Its EZ but you need to know how to fill the forms out.

I’ve said this before, but I don’t think that it is a good idea for most people to represent themselves in real estate transactions. The main reason is that on the buy side you should always work with the listing agent since they sell almost all their good listings. The main reason on the sell side is that “people in the loop” have access to the exchange buyers and others who need to close fast (and pay top dollar) and when you pay a 4% fee to the selling broker you will have “everyone” trying to sell your property…

> Here is what I have done to prepare for the fantasy ‘bottom of the market’:
>1. have broker lic/mls access…

We are not going to rush out and start buying on Monday, but it will be interesting to discuss this more down the road. Where do you live (since Real Estate is local I like to use neighborhood examples that people are familiar with)? There are a lot of different ways to make money at the “bottom of the market”…

> Hey FAB- do you know John T Reed??? He says only buy double digit cap rate properties that seems impossible now.

I have never met him, but he is a sharp guy. I have read every one of his books (the first on buying apartments about 15 years ago). It has been impossible to “buy” double digit cap rate real estate in California for the past 5 years, but it has been possible to renovate and reposition your way to double digit cash on cash returns…

SFWoman Says:

> Now- a stupid question. Does your tax base reset if you
> pull out equity? I don’t think it does if you refi, because
> I am positive we refinanced both places when the rates
> were really low a couple of years ago, and our taxes are
> on the old base.

In California the tax base does not reset if you pull out equity. The tax base will go up if you use the money you pull out to renovate or expand the home (and pull permits so the assessor knows about the renovation and/or expansion). This is why many people think that pulling money out of a home will increase the taxable value…

FAB, Randy,

I really enjoy the back and forth, and I'm sure others do as well.

FAB said: I don’t see any value in using data that is correlated, but not really comparable to come up with a ratio when it is possible to dig a little deeper and find numbers that is really comparable (say comparing the PITI payment when you bought your home on the Peninsula with the rent someone was paying on the same street, or even better looking at the rent for a 2br condo next to an identical condo that sold the same complex).

Randy said: Many times he and I debate something like the HSBC data, only to find out we aren’t really disagreeing — like in this case.

It may be that you've completely resolved your differences, but I'm not sure I follow completely. FAB's comments imply that HSBC's data is comparing apples (nice for sale stock) and oranges (crappy rental stock), thus inflating the PITO/rent ratio. (FAB--I hope I'm not putting words in your mouth).

Randy, would you agree with this interpretation of the HSBC data, or is your opinion that HSBC normalized (turned their oranges into apples so to speak) by adding the 30% fudge factor I saw quoted?

I understand the warning that my home may not be representative of HSBC's average. This is why I value FAB's experience that PITI/rent can approach 1 even in nice neighborhoods. This has extremely practical implications when choosing when to buy...

The funny thing to me about holding the "HSBC Data" as the gold standard is that HSBC themselves got caught with their pants down in this subprime mess just as much as everyone else!

Boston Transplant Says:

> Randy, would you agree with this interpretation of the
> HSBC data, or is your opinion that HSBC normalized
> (turned their oranges into apples so to speak) by adding
> the 30% fudge factor I saw quoted?

Since there is no good source of single family home rents across the country the HSBC data took 2 br apartment rent data and adjusted to come up with the rents on homes that are usually 3 br (and also usually have garages and backyards). If you want to come up with a report for all markets across the country you need to do something like this.

> I understand the warning that my home may not be
> representative of HSBC’s average. This is why I value
> FAB’s experience that PITI/rent can approach 1 even
> in nice neighborhoods. This has extremely practical
> implications when choosing when to buy…

Most people will remember the rent they paid 5 or even10 years ago so unlike HSBC you can talk to people who have been renting in a neighborhood you are interested in and pull the sale information of similar homes over time from Zillow or the title records. If you plug in the average rate on a 30 year loan at the time of sale and know a little bit about tax rates and insurance cost you can get very close to the actual PITI number with a sale price and a sale date.

Looking at Craigslist on the neighborhoods I have been interested in, I can rent for under 2k a house that would cost north of 650k, rent for 2-2.5k houses in the 700k-800k, and 2.5-3k in the 800-900k, and 3-4k in the 900k-1.2M, and 4-5k in the 1.2-1.5M areas.

*NOT INVESTMENY ADVICE*

(Psst) I got an e-mail for a Reverse Convertible. It happened to be for CFC. Nothing particularly odd there (other than the timing).

15% YIELD!

I suppose THAT answers where they are going to seek funding NOW doesn't it! I guess that's to "sex up" the yld. for the retail crowd. Barclays is the lead underwriter in the syndicate for those w/the stomach for it.

Opinions? :)

Boston Transplant,

Adding on to FAB's explanation, think of the HSBC data as more theoretical and macro, and FAB's recommendations as more micro and practical. The whole reason I brought it up was because we were talking about own-to-rent ratio at a macro level, which I contend you need a method like HSBC used to talk about rationally. But I wouldn't recommend trying to interpolate HSBC's data to specific situations.

What I tried to do with The Bubblizer was maybe more what you're looking for. I took HSBC's methods and conceptual model and adjusted them to help make a more individual buy -v- rent decision. My approach was *not* to compare to this or that macro trend, but instead to simply show you just how much _you_ could afford, how much you gain or lose versus renting, and then how much the _next guy_ would need to buy your home for in X years in order for you to come out break-even as if you had rented over X instead.

The beauty of that, in my opinion, is you can make your own practical judgment about whether you think Mr. Nextbuyer will be making a salary high enough to afford your house in your neighborhood, of if he will even want to. This approach allows you to take in FAB's type of data because you can find out how specific neighborhoods have held up over time, and use that to determine if your purchase is reasonable.

Even though the Bubblizer is fairly generous to the ownership case it still is fairly clear that *house prices are way too high*. It's all about cost basis. Once prices come down maybe 20-25% in more prime areas, over 50% in less prime areas, then the ownership case starts becoming very powerful -- long before PITI is cheaper than renting.

And that was my main point. Don't necessarily try to wait until the decision is automatic. Most folks here would buy tomorrow if renting were clearly and objectively more expensive than owning. Peter P might say that it is this reflective psychology itself that keeps rent from dropping below owning for very long in desirable areas.

Saw a house go on the market and off the market in my neighborhood. So I emailed the realtor rep'ing that property. Take a look at this response:
---------------------------------

Baby is due next month. Also, they may not sell after all.

If you have not bought a unit by May, let me know if you are still interested then. Good luck. With the subprime lending going away, there will be fewer buyers on the market and foreclosures coming. Be patient before purchasing and gather your downpayment. At least 20% if you can.

Let me know if I can assist you in any way.

--Realtor

NewtoBA,

Funny! Good stuff.

I'm curious though. What exactly about having a baby hasn't this couple figured out yet?

I’m curious though. What exactly about having a baby hasn’t this couple figured out yet?

Which end the food goes in.

Very few people I know use buying agents. Those that do use discount agencies like Zip realty, mainly as paperwork processors.

My recommendation, whether you use a buying agent or not, is to always use a real estate attorney. If you have an agent, and (s)he complains or balks at your using an attorney, then fire him/her immediately. It is impractical for normal people to try to read, understand and stay on top of all the technicalities of the transaction. Realtors(tm) don't do much besides fill out the standard forms for your area. The mortgage broker and/or lender give you giant agreements which are longer and more complicated than the Magna Carta. And this is the biggest investment of your life and will most likely determine your future wealth outcome.

A couple thousand bucks for an attorney to actually read it all and talk to you about the real risks hardly seems inappropriate.

And if you use a discount broker or just go to the listing agent yourself, you can easily offset the cost of your lawyer's billings.

I'm also worried about rising "funny business" risks. We've all heard stories about hidden rent-back clauses or conditional vacate clauses that buyers miss because they just don't bother to read and trust their buying agent is protecting them. As the correction gets worse, sellers might try to get away with ever more crap.

Randy :

Good advice on using an RE attorney. When I decide to buy, I will definitely ask you for recommending an attorney.

Randy H,

I'm not sure just how much more the atty. is going to "pour" over the material either? The big difference is, now you have someone you CAN actually hold accountable. If you're like me you've heard of more than ONE atty. that's gotten his boo-boo in a wringer over that!

But you're right, some of the posts sellers have on C/L are "loaded".

SFBB,

I just can't deal w/the bad karma that comes from saying anything but the truth for wriggling out of a business deal. I don't know how much of NewtoBA's realtor "friend" fabricated or how much of it the couple came up w/but either way, it's BAD JU-JU!

HK,
I think what FAB is saying is that the selling agents fiduciary responsibility is to -- guess what -- their comission! Would you rather get 2% of the sale kicked back as the buyers agent, or 5% off the total price of the property? A 4% commission will tend to focus the selling agent on what is important: making the sale (to YOU) happen. Obviously, you would still be performing the due diligence of the buyers agent (so that re license would not be for nought).
Or maybe I am misrepresenting FABs point?

HelloKitty Says:

> FAB- When you say “The main reason is that on the buy side
> you should always work with the listing agent since they sell
> almost all their good listings.”
> I’m not sure what you mean. Most people only buy three
> homes or so in their whole life so representing themselves
> is probably not a good idea.

If you are looking to buy real estate most of the property available for purchase will be listed for sale with a real estate agent.

Every real estate agent wants to get the full brokerage fee and will usually do anything they can to get it.

Let’s say Broker X has a nice eight unit building listed for sale in Simi Valley asking $1mm. If I buy it for $900K (and let him take the buy side fee even though I am a licensed broker) he makes $54K (6%). If you buy it for $1mm (acting as your own agent) he makes $30K.

When you represent yourself on the buy side the only deals you will be able to buy are the overpriced piles of crap that the listing agents could not find anyone to buy…

It's been nearly 10 years now, but a colleague I was working with at a SF startup got royally screwed when he bought a SFH with a rented out inlaw unit in Bernal Heights. He was a very smart guy, UM EE/MSE, and he was the type who actually read a lot of his papwerwork before signing, and asked questions. Still, he somehow ended up with a rent-controlled transfer renter he couldn't evict, and sellers of the primary residence who didn't vacate for about 7 months after closing, rent free (well, for $1 a month for some reason). He took them to court, won a judgment against them (long after finally moving in), but alas, they were nowhere to be found by that point.

It was from his experience, actually, that I first learned that winning a lawsuit doesn't mean you won a thing. It's all about having someone to collect from.

. It’s all about having someone to collect from.

It's all about having somone with assets to collect from.

The story is yet another proof that rent-control is evil.

Randy H,

I've heard of rent-back clauses (which have become quite common these days, as sellers naturally seek to avoid either bridge-loans or having to rent for short periods), but I'm not familiar with "conditional vacate". Do you have any links?

Randy,
Tying in your RE attorney advice with your horror story of that friend who bought in Bernal Heights, the good thing about having a RE attorney is that they presumably would be able to pick up on those "glitches" that screwed him over. Almost as importantly, if the attorney doesn't, they may be liable for malpractice - you'd be more likely to recoup at least something.

I have a couple of friends now involved in a lawsuit because they purchased a house that they discovered had $1m worth of dry rot and termite damage. They used the selling agent as a buying agent, and he used the inspector's report that some previous people who had look at the property had arranged for. Of course it was the report that showed no problems.

I think using the selling agent as the buyers agent is a blatant conflict of interests. It would be like a couple both using the same divorce attorney.

I just had a Realtor(TM) encounter at Whole Foods. The Pierced Guy at the check out was making small talk with the customer ahead of me. She mentioned that she was a Realtor(TM) and he said 'Bummer about the market, huh? I keep seeing news about how bad real estate is now.' To which she replied, 'Oh no, it's actually doing very, very well here. Maybe it's a problem in other parts of the nation.' I had to chime in, 'Yes, look at Sacramento, it's absolutely just collapsed over there, and they said that can't happen in California.'
She then looks at the cashier and says 'It's different here. There is little inventory in the city. That can't happen here.' So I said. 'It's amazing, it went up 2.4% year over year.' She smiled and said 'I know, it's doing so well.' Then I said 'But the inflation rate is higher than that, so it is actually a real decrease in value.' Of course she said 'No, it went UP 2.4%', to which Pierced Guy said 'Oh yeah, that would be a real decrease.'

I think part of the Realtor(TM) boosterism might be incomprehension of basic math or economics.

And did you guys pass this along to your friends who says real estate never goes down?

http://money.cnn.com/blogs/generationrisk/2007/03/real-estate-can-only-fall-10-to-20.html

Harm

I'm not sure "conditional vacate" is any kind of term of art. If I recall the situation, the sellers were required to complete some kind of contingencies, but they managed to make those contingents contingent on him doing something like approving the work in progress.

He was very upset he missed the gotcha. It wasn't secretly buried in a footnote. It's just that no one read/understood what some clause somewhere meant. When it first happened he was saying his realtor was telling him there was "nothing to worry about, they can't do that". But, after some weeks, he learned they indeed could and were. And, he signed it attesting that he read and understood, so shame on him.

It would probably be harder to pull this off today with the more standardized forms, now that I think of it. But even our last purchase in 2002 had something like 15 pages of attached contingencies and other junk we and they added, that wasn't on any form.

SFWoman

I commented in the maelstrom below that article (and plugged Patrick.net).

skibum

That is my understanding regarding your attorney's role and obligation. With all the standard forms today, a decent attorney should be able to very quickly parse through to anything exceptional. If they're experienced, they know where the trouble spots are. And not only do they risk liability, but more importantly, they risk referrals. To this type of attorney, referrals and client satisfaction is gold.

Nothing should be bailed out. Liquate everyone as Andrew mellon prescribed!