Options, options, Bad options! Very bad! Bad Options…

Since when did having options become a bad thing? Aren’t options part of becoming a responsible adult? As a child you have options; eat your vegetables or you won't get dessert; do as you’re told or get a size 6.5 sling-back across your bum. Becoming a teen affords more choices; although the choices of adolescence have changed somewhat from when I was a teenager. Never do I recall, tattoos and piercings on my carte du jour; none the less – options.

Over the past decade the media has become a smorgasbord of doom and gloom especially when it comes to this monstrous bubble that has been rumored to implode and swallow anyone in a pay option arm – never to be seen again! Recently I asked members of a mortgage clinic what they thought of the pay option adjustable rate mortgage, commonly referred to as “pick-a-payment”. Yikes! It’s true, opinions are like noses – EVERYBODY has one.

One I’d like to emphasize is that the pay option is especially risky; or as one proboscis pointed out, “bad, very bad.” The general nature of the pay option is to allow the borrower to have different options to choose from, a minimum payment, which has deferred interest; a low payment that is interest only; and two fully amortized payments, one at 30 years and the other 15. What’s wrong with having options?

The greatest risk that I can see with this product is that the interest rate is only fixed for 3, 5, 7 or 10 years. I don’t care what anyone says, interest rates are still low. Come on people! Unless you refinanced into a 5.5%, 30 year fixed rate a few years ago, you either have been paying 8% or, are going to have to refinance at some point and have a bump in your rate. Stop crying and see it for what it is, a mini vacation from an 8% to 9.5% mortgage loan. The problem is for the individuals who have been paying the minimum payment option - that was only one of your options; if you chose to pay the least amount every month for the past 12 to 24 months that is the consequence that you unfortunately have to deal with.

The opinion is that the dirty real estate agent and their sinister mortgage counterpart are the ones responsible for creating this tsunami of negative amortization; all the while the consumer, charging gasoline to fill their leased BMW’s and Mercedes buries their head after crying out, they screwed me! Well, with options comes responsibility. It amazes me how many individuals will impulsively make choices without considering the outcome. We as a society ignore reason to satisfy our addiction to instant gratification.

To rap this up, there are plenty of loans to choose - from the 30 and 40-year loans; hybrid ARMs to the plain-vanilla 30-year fixed-rate mortgages our grandparents were so keen on. Despite the negative press, I prefer options; having a commission-based income; my life isn’t fixed and a fixed rate hasn’t been appealing to me until recently. There is a new fixed rate product out with options! I can have the comfort and security of my grandfather’s loan with the option to pay one of four payments, cool. I’ll keep my options, thank you very much.

To buy, or not to buy, that is the qustion...

Yes, interest rates are going up; and there’s an upside to that, prices will come down accordingly but that is not the gist today. I don’t understand when consumers, and we are all consumers; say that it’s not a good time to buy. It’s always a good time to buy; you just have to buy smart. Skeptics will say I’m propagandizing because I’m a real estate agent. “Real estate agents only make money if they sell houses”. So, in turn they always have an optimistic spin to a dismal forecast.

For the most part that’s true, primarily because most buyers’ agents are one-dimensional thinkers with little fiduciary responsibility to the buyer. I liked the old days, when there was just seller agency, face it, the seller pays the commission. Call a spade a spade.

The real estate market is changing again, as it does and will continue to do so. I was taught to see it as circular like a clock; not up or down like a ladder. As a matter of fact I teach a clinic called, the right time to buy emphasizing how it is always a good market; it just depends on what is the right time for you. Typically, sellers like to sell when demand is low; they keep more money. Buyers like to buy when there is a lot of inventory and prices are better; they keep more money. Here’s a hypothesis to shoot that theory all to H –E double hockey sticks. If you can’t find what you are looking for at Nordstrom, go to the Rack, they carry the same stuff!

We as consumers’ only see the premium priced cereal; you know the stuff on the shelf that’s at eye level. Have you ever taken a look at the cereal on the bottom shelf? Not only is it more affordable, in most cases is pretty darn tasty too. So why doesn’t the real estate community put the hay down where the goats can get it? I personally think it’s because most real estate agents deem they hold the primordial secret to successful real estate transactions; or maybe it takes more ingenuity than the typical house hostess can muster to negotiate outside of the box. Regardless of the explanation, there are countless opportunities for buyers with good credit and low income and buyers with poor credit and high income.

Which brings us back to why someone would rent and not buy the home they are living in. Of course there are reasons for short-term rentals, but I can think of few other legitimate reasons to just renting. Rationalizing that renting is cheaper than purchasing is just that, rational lies. Renters are purchasing, they’re just purchasing for someone else. The key is to purchase wisely. As we are approaching one of the largest foreclosure waves in history, I can’t think of a better time for creative financing opportunities. It makes me crazy when I hear someone say they can’t afford to buy. I say you can’t afford not to buy.

FICO got you down?

Housing inventories are up, prices are leveling and individuals wanting to buy homes have a selection to choose from. This sounds great, so why the long face? Oh, you were expecting to make $100,000 this year in equity appreciation. Bummer.

It took my grandfather 40 years to sock away $100,000; mom worked for the telephone company for 40 some odd years to save for her retirement. Why are we so opposed to following the footsteps of those before us, is it an antiquated way of life to finish school, get a job and work your way up the ranks? Although there have been significant improvements, I don’t know of anyone who has reinvented the wheel.

I’ve been following the story line of a young individual that has gotten himself into trouble trying to fast track his success through real estate investments – not a bad way to make money; it’s a stable investment, contrary to the doom and gloom reports of the bursting bubble. I’m not even sure what that is. Last time I blew a hole through a bubble it was G – O – N – E gone and it didn’t come back. Anyhow, this guy purchased the get rich quick pill and bypassed us all. Or did he?

At 23 or 24 years old there’s little life experience and not much hindsight to reflect on. Except in my case I knew everything there was to know at 23. Unknowing if my annoyance with his story stems from him cutting in line ahead of me; after all, I have been waiting longer than he has; or because of the overpriced lemonade he’s trying to sell the public made from his sham lemons. I smell another investor book deal down the pike. After all, most of the get rich quick charlatans have made way more money on the products and seminars than they ever did in real estate investing.

Man have I gotten off track! Back to the storyline, the good news is that property ownership is still attainable and available for most people regardless of credit. Think back to the early 80’s; remember when interest rates were 17 percent? Buyers and sellers had to be creative and if you were a real estate agent who survived it was because you knew how to negotiate. Unlike most agents today, who make a living just being licensed. Yeah, I said it; most real estate agents today are terrible, even a blind pig can find a truffle now and again.

There are many ways to buy property with poor FICO scores; by the way, a great FICO score is totally over rated. Hey, life happens! A large percentage of borrowers are sub-prime and even more are sub sub-prime; it’s circular. Investors buy trustee sale properties at prime rates; sell them through land contract to sub sub-prime borrowers at sub sub-prime rates. After a year or so the land contract borrower, with the benefits of homeownership restores their credit rating to a sub-prime status and refinances paying off the land contract freeing the investor money to purchase more trustee sale properties and so on and so forth…
So the good news is the market is still strong. Maybe your property won’t appreciate 33% in one year but what’s the hurry? Real property isn’t going anywhere.

And then there were none...

Recently I had the opportunity to work with one of the more unusual characters that I have come across - EVER! This guy really has a different perspective about most everything. I've never seen anyone manipulate the system to such extremes and then hold everyone else accountable to a higher standard.

A little history - He came to this country - got a great job and purchased a home. After about a year or so he found that his home had appreciated considerably more than his honest $75,000 a year job had earned him; so he pulled out some equity and purchased a few more homes to rent out. WOW, great story so far, huh?

18 homes later... Yup, this can be done if you know how to manipulate the system. 18 homes, most with interest only loans, some differed interest to keep the payments low; all rented out. Although the rental market hasn't been considerably strong this individual was getting above market rents - I bet at this point you are wondering how the heck he's getting above market rents and has 100% occupancy?

I'll let you in on his little secret - build a wall, separating the family room from the kitchen, and another wall separating the dining room from the living room; you can increase the number of bedrooms from four to 6 maybe 7 bedrooms - Now, place a dead bolt on each bedroom door; rent them to illegal immigrant families as studio apartments with kitchen and bathroom privileges for $700 to $800 per month. Oh, I forgot, when the master bedroom has a large walk-in closet, that room is then considered a 1 bedroom apartment with kitchen and bath privileges. That yields about $900 to $1,000 a month.

Let's do some math - 18 homes with a minimum of 6 bedrooms; averaged at $700 per month each = $75,600 per month; subtract expenses; netting approximately $310,000 annually. Not too shabby. That's just a little better than the $75K year he was making the year before. OK, so it's illegal, who's going to care. Now, call it a church or some religious group home and now it's tax exempt as well. Are you still following me?

This guy gives new definition to slum lording; he busted down doors, entered residences when ever he wanted; rented to drug dealers - didn't maintain the properties and when he needed to evict someone - he would dismantle the power and shut off the water, if they still didn't leave he'd call the city and tell them to remove the trespassers, now that's knowing how to work the system! All that's left is to get new renters and start the cycle over again.Pretty good, eh?

Wait, there are other ways to earn money, when he had to evict the entire house for not paying or because he found someone who would pay more, he called the insurance company, claiming the tenants destroyed the houses, ruined the carpeting, broke the doors and stole the appliances... He'd collect a check for vandalism and put the appliances back in the house and voila, ready to go!

The various city and county officials got wise to him after about a year and tried to shut him down; they told his tenants they didn't have to pay rent, so they didn't - this time he hired an attorney to do the evictions and got new tenants - by this time he stopped paying the mortgages, taxes, water, garbage, HOA dues...

His exit strategy - This was the perfect time for him to cash out his equity and run with his chubby little fist full of money. He listed the properties at high market value with several Realtors over several months with no activity, primarily because they were trashed, had 20+ people living in each one and were levied by the county for various fines and penalties. Not to mention any potential buyer was greeted by the torch wielding villagers - AKA the neighbors.

This is where I come in. He gives me this song and dance about how everyone has taken advantage of him when he was just trying to help these poor illegal immigrants have a roof over their heads; blah, blah, blah - what ever - So, we negotiated purchase contracts for an investor to buy all his properties giving him a fair return - Although he wanted much more and solicited other purchasers into contracts at the same time trying to string both along all the while trying to get cash in advance - huge drama... The little greedy stopped all the escrows because I wouldn't lie to the lenders about how much money he was to make, or deceive the investors about how much he actually owed on the properties...

End result, he's losing all the properties to foreclosure and can't understand why EVERYONE is out to cheat an honest businessman like himself. His business ethics should come in handy now that he's opening his own real estate office.