Monday, December 28, 2009
Thursday, December 17, 2009
I am still working on the blog posts. I will make another post when these grades have been posted to BlackBoard.
Monday, December 7, 2009
Ethics of Subprime Mortgages
By James Smith
There are few individuals throughout the United States and in worldwide business who do not know what Subprime mortgages are and what effect they have had on the worldwide economy. Subprime mortgages can essentially be defined as loans given to individual with insufficient qualifications with an impossibility of being paid back. When the world started to realize these mortgages were going to have detrimental effects on the world’s economy the loans couldn’t even be distinguished because they had been bundled and sold so many times (Barnes). Why were these loans made? Why did people accept them? Was it ethical to make these loans?
These loans were given and accepted for many reasons; in 2002 the economy began to rapidly expand, home values began to rise dramatically and interest rates were very low. It also seemed that the American dream of owning a house was attainable for anyone willing to sign on the dotted line, even for those with little or no down payment and often less than ideal credit. These mortgages were often lent with the adjustable rate attached to the loan, which showed low monthly payment; unfortunately it was only temporary. Many banks made these loans without enough hesitation because they were securing most of their profits on the front end of the loan; the individuals taking out the loans figured the value of their home would never stop increasing they had nothing to loose (Barnes).
Thomas Kostigen from marketwatch.com states “Exploiting those in need never gets any one ahead of the game in the long run. Sure, short-term profits are there to be made, but ultimately repentance prevails.” He said this in an article he wrote about subprime mortgages and the ethics involved around them. This statement seems to sum up the whole cycle of the affects of these types of loans, yes there was much money made on these loans, but now, in the long term many people and entire companies are paying the price. Kostigen also warns about companies that scheme for quick money typically do not have a solid ethics base vs. good performance comes from good ethics throughout companies.
In contrast to poor ethical decisions made by many banks John Allison, recently retired CEO of BB&T ( a bank based in NC with around 1,500 branches and 143 billion in assets (Hemingway)) explains “Subprime mortgages were bad for the people who took them out. That went against BB&T’s philosophy.” This bank has been able to stay out of financial trouble and away from government money by following its solid time proven philosophies. Allison is still out to make money and is a supporter of capitalism but he has shown through his actions that one is better off in the long run being honest; and looking out for both the company and the clients yields better profits and relationships in the future.
Now that the dust has settled perhaps individuals both involved and those who watched from the sidelines will take another look of how important ethics are. People are in business to obviously make money and it seems that those who had strong principles and ethics did just that.
Barnes, R. (n.d.). The Fuel That Fed The Subprime Meltdown. Retrieved November 18, 2009, from Investopedia.
Hemingway, Mark. "Objectivist Philosophy for Fun and Profit." National review online. 30 Apr. 2009. Web. 5 Dec. 2009.
Kostigen, Thomas. "No surprise here Shaky ethics of subprime lending lead to shaken investors." Market Watch. 27 July 2007. Web. 6 Dec. 2009.
Wednesday, December 2, 2009
Property Management-- Mike Kremko, Mark Silva, and Daniel Fiero
Real estate can be used for its investment value including apartment complexes, offices, or shopping centers. For property owners it is often necessary to hire a property manager to supervise the operation since it can be tedious and the property may often be located in a different city. The property manager has duties including: accounting, maintaining equipment, accepting rent, and responding to any issues a tenant may have. A property manager may be a licensed real estate salesperson, but generally they work under a licensed real estate broker. They act as a buffer between property owners and tenants. Should any issues arise, the property manager will more than likely bring them to the attention of the property owners in an attempt to remedy the issue, but some issues can be easily resolved without the owner’s involvement. We will be discussing property management from the landlord’s point of view covering such things as possible income properties, the job of a property manager, perspective tenants, and contracts with tenants.
Residential Property Management
Screening prospective tenants is an important thing a landlord should always do to protect their investment and to also prevent any unnecessary problems. Since the turnover rate is typically high in the residential market, it is best to do a thorough check to prevent a vacant unit and any legal issues. One of the first things to do is have them fill out a rental application. Be sure to get full names, copy of their driver’s license/identification card, social security numbers, and employment history with a recent check stub. A small fee should be charged to cover the expense of checking their credit report, which can now be done easily on various websites at a small fee. Getting a credit report will determine if the prospective tenant has been consistent about paying their bills and their debt to income ratio is not too high. If they have met your criteria, it may be reasonable to think the perspective tenant will be able to pay you the amount agreed for the duration of the lease. If they have not been responsible in the past, it may be a risk to assume they will pay you and will either require you to choose the next applicant or require a cosigner for the current applicant. Next it is crucial to get fairly recent references. If possible, get numbers to old landlords and speak with them. This will be a good way to get their rental history or learn of any issues they may have had in the past (Haupt & Dorsey). At this point you would want to schedule an appointment with the prospective tenant to explain your expectations of them. This will provide a way to see how they react to those expectations. Also, it invites questions from both sides to clarify any ambiguity. Once terms have been agreed on and the interested party decides on the property, it is time to sign a lease agreement.
A lease agreement must comply with state and local laws. Depending on the area, lease agreements may have some differences. It is a good idea to have an attorney review your lease to make sure it is compliant with local and state laws, as well as enforceable in court. The lease will all have some major components such as: name of tenants, lease term (typically one year), payment of rent, deposit, fees, user responsibilities, pet clause, security deposit clause, and access to premises (Lopez). The lease will also include information on what will happen if the tenant is late on a payment or if they refuse to pay.
In California the eviction process is complicated and sometimes costly. The eviction process begins with a 3-Day Notice to Pay or Quit, 30-Day Notice to Vacate, or 60-Day Notice to Vacate (Marsh). If the tenant doesn’t move out by the specified times, the landlord may file an unlawful detainer. In an unlawful detainer, the landlord is the plaintiff and the tenant is the defendant. Usually within 1 to 10 days the tenant is served with summons papers. At this point it may be a good idea for the tenant to seek legal advice. The legal process is very complicated and lengthy. In the end the court could rule in favor of the tenant. In which case, the tenant may continue to reside in the rental unit and the courts may award the tenant his legal fees as well as damages. The court could also rule in favor of the landlord. In this case, the court orders a “writ of possession” and awards the landlord legal fees and unpaid rent. The court clerk will issue the order to the Sheriff. Within 1 to 3 days a peace officer will deliver a 5 days’ notice to vacate the property or be evicted. If the tenants do not comply the peace officer will physically remove the tenants and return the property to the landlord’s possession. Although the eviction process rarely occurs, it is best to understand how to handle the process.
Commercial Property Management
Screening perspective tenants in commercial real estate differs for the process done in residential. Unlike residential properties, there is a fairly low turnover rate in commercial properties because businesses become synonymous with a certain location. Property management companies usually will put together a detailed packet of information for potential renters, which include traffic studies, demographics of the area, and land reports. Due to the troubled economy the turnover rate has gone up in commercial real estate and there are more vacant storefronts and office buildings in cities across the country. When applying for a commercial space a few more factors are taken into consideration. A typical application will have you include a full balance sheet of the company, any liquid assets or collateral possessed by the company or their owners in the event that the rent is not paid, and information on any cosigners of the property. Additionally, the perspective tenant will have to have either enough cash or a loan from a banking institution in order to complete any work on the property. Once the application has been processed and accepted, the lease agreement is covered.
Unlike residential leases, a commercial lease will be a long-term contract with various different clauses. One main difference between residential and commercial is that the commercial property is leased out by total square footage and could also have additional monthly fees based on their monthly income. Another clause in the lease is a tenant improvement allowance or TI allowance for short. Many commercial properties are leased as an open floor plan, which allows for tenants to design their property in a way that is beneficial for their business. A tenant improvement allowance is usually given once the work is complete and is paid out by the owner per square foot. The tenant improvement allowance covers the construction costs of any fixed items that will continue to be in the property after the tenant leaves (Schwellinger). Typically with a commercial lease, the repercussions of defaulting are much greater. The property owner could keep the security deposit, restrict you from entering your property, and will more than likely sue you for all rent for the duration of the contract.
California Eviction Guide For Tenants and Landlords
Prepared By: Melissa C. Marsh, Los Angeles Landlord-Tenant Attorney
Schwellinger, Brian. "Questions and Answers about Tenant Improvement Games." 20 APR 2005. Web. 20 Nov 2009. http://www.realestatedec.com/artman/publish/article_49.shtml
Haupt, Kathryn, and Megan Dorsey. California Real Estate Practice. 4th. Rockwell Publishing, 2009. Print
Lopez, Carrie. "A Guide to Residential Tenants’ and Landlords’ ." July 2006. California department of consumer affairs, Web. 18 Oct 2009.
James Dallas Smith
The overall health of the economy is gauged by many factors; growth, unemployment, interest rates, the economic environment of individual business sectors and many other components can all impact the economic constitution. The current economic crisis was a perfect storm of interdependency within business sectors that eventually lent itself to a worldwide economic down turn.
The sub-prime mortgage crisis was the result of a blend of low interest rates, inflated homes prices, excess foreign capital, deregulation of lending markets, and ultimately, poor lending decisions made my banks leading to poor borrowing decisions made by consumers. With the use of sub-prime lending vehicles -like adjustable rate mortgages, zero down lending, and stated income loans- banks lent money to people that could not afford the given terms, and consumers were often sucked into loans they did not understand or took on more debt then they could actually afford. We will review the impact of sub-prime lending on the current economic climate and lending markets and examine loan qualification requirements, ethical lending standards, consumer education, and the impact of these cornerstones on the economy as a whole.
When the real estate market was booming it was too easy to obtain a mortgage; on the other hand, when it is down in the slums -as it has been for most of the country through these recent tough economic times- you may have to jump through hoops before seeing any satisfying results. One of the biggest reasons for driving the real estate market down was the extremely loose lending standards and requirements practiced by many mortgage lenders over the past decade. No longer is that the case since the tightened pre-approval lending requirements and unstable economy have put a lot of people looking to purchase a home in a bad position.
In an article written by Lisa Scherzer on SmartMoney.com, she goes through what she calls her, “7 Tips for Getting a Pre-approved Mortgage.” At the top of the list she explains the importance of obtaining a letter of pre-approval, which is simply a letter from a mortgage lender stating they have verified that the would-be borrower is approved for a mortgage for a certain amount over a given period of time. Most real estate agents, and sellers for that matter, won’t even deal with potential buyers unless they have been pre-approved. It’s pretty simple, the letter shows exactly how much the buyer can borrow and lets them know right off the bat what houses in what price ranges they should look for. When it comes to the seller, the letter proves that the potential buyer can indeed afford their home should they decide to purchase and therefore the seller and the seller’s agent can put forth more effort in attempting to close a deal.
One of the next “tips” that Lisa Scherzer has to offer is for the buyer to prepare their financial biography. This step would obviously come before the pre-approval letter since it includes the documentation a lender would need to see in order to pre-approve, but nonetheless a very important step. What this biography allows the lender to do is review and confirm the borrowers income, credit and assets to ensure that they will be able to make the necessary monthly payments in order to fulfill the mortgage requirements. It is most important in times like these to have the proper paperwork put together to allow your potential lender to conduct a thorough pre-approval analysis. Although your lender should let you know what paperwork is necessary, Ms. Scherzer included 5 absolute musts to include: W2 statements, federal tax returns for the past 2 years, bank statements for the past few months, recent pay stubs and proof of any other income, and finally proof of investment income (Scherzer, 2009).
Converse to the construct of traditional lending standards, sub prime mortgages are essentially loans given to individuals with poor credit and little or no down payments; in which many instances the individual with the loan only pays towards the interest for several years. This was the main reason for companies lending the money in the first place because they are securing most of their profit on the front side of the loan. Due to the struggling economy pre-2001 after September 11, 2001 the Federal Reserve cut interest rates, which in turn expanded the economy and encouraged borrowing. Soon after this, the economy and property values began to skyrocket with no end in sight. Because of this companies and Wall Street were eager to purchase and or sell packaged loans even if they contained less perfect, higher risk, subprime loans.
In 2002, mortgage rates were at a 40-year low, which yielded a very cheap source of equity enticing borrowers (Barnes). More and more people were purchasing homes whether they had the money or not throughout 2006 and into 2007. These subprime mortgages were very appealing because of the low or no down payment required, low interest rates, and a temporary low payment. At the time, another appeal was if the payment did rise an individual could pull equity out of their home to pay it down because of the drastic increase in value that was expected. Ethics play an important part in this situation because lenders were giving money to individuals who could not afford to pay it back. Today there is a concise opinion that millions of people did not know what they were getting into; the blame lies not only with the home buyer but also with irresponsible lenders. This situation lead to the current status on many people losing their homes and or filing bankruptcy because they were too upside-down to ever pay back their mortgages.
On a larger scale these sub prime mortgages yielded a worldwide economic slowdown. All of these loans were bundled up with A+ ratings and sold to investors around the world so when the bottom fell out it affected everyone. The banks/lenders sold these loans in order to free up their capital so they could lend even more money to people via sub-prime adjustable rate mortgages, and with home rates doubling who could blame them. As long as home values kept increasing these sub-prime mortgages would not have a negative affect on anyone’s liquidity. When interest rates began to rise and home purchasing began to slow, individuals with adjustable rate mortgages began to see their monthly payment dramatically increase which lead to defaulting on mortgages. This turn of events also presented problems for the companies who purchased bundled loans, as they were not able to collect on their A+ investments. These subprime loans became toxic to the portfolios they were in although they could not be identified because they had been bundled and re-sold so many times. The subprime mortgage seemed to have collected the whole world economy and millions of people rode it all the way up only to come crashing down.
As the economy continues to recover and the lending markets continue to tighten, more emphasis will be placed on ethical lending standards and conservative mortgage qualifications guidelines. A balance between profits of mortgage brokers and banks is necessary for a stable financial market place and for the financial health of consumers. It is also the responsibility of the buyer, to understand what they can afford, versus what a mortgage broker may offer them. The mortgage crisis created a demand for ethical, quality lending standards and guidelines, as it proved to the entire economy is tied to the success of the lending industry and with that comes responsibility of stability.
Barnes, R. (n.d.). The Fuel That Fed The Subprime Meltdown. Retrieved November 18, 2009, from Investopedia.
Collins, J. (2009, October 3). O.C. property investor seeks bankruptcy rescue: Mammoth Equities' defaults are just the latest development in mounting commercial real woes. The Orange County Register.
MSNBC.com. Fed says banks tightening mortgage standards: Both traditional and non-traditional loans are harder to qualify for. http://www.msnbc.msn.com/id/30563498/
Scherzer, L. SmartMoney.com. 7 Tips for Getting a Preapproved Mortgage: http://www.smartmoney.com/personal-finance/real-estate/7-tips-for-getting-a-preapproved-mortgage/
London, A. (2009, August 8). Fed offers mortgage search tips. News Journal,B.2. Retrieved October 1, 2009, from ProQuest Newsstand. (Document ID: 1825954401).
CAN ETHICS BE TAUGHT?
When making a purchase the buyer and seller enter into something that is called a negotiating process. Both parties want the best out of the deal knowing that they are making the right decisions. On a daily basis we negotiate everyday but theirs certain fields in where negotiating goes deeper. In real estate every party wants to get a fair deal with several parties wanting more and not going by the rules. Ethics and merit in real estate can be consider to be the primary source to negotiating successfully while on the other hand dealing several parties might argue that if you don’t have good ethics you may not be successful. Professionals say that ethics is important and that indeed it is something that can be taught. Many say that individuals that are entering college are known to have ethics within them at this stage. With good ethics good decisions follow and with that a successful negotiation process will follow.
Negotiating is the key to a successful deal and many parties may want to negotiate and others may just look around it and avoid it in the best way that they can. If a seller wants to sell a property and not include merit while negotiating the buyer might see that he is not fair with him and might not want to come back to make deals with him again. “Ethical considerations of real estate investing do not get much airtime, but they're hugely important on many levels, both altruistic and pragmatic” (Smith). This is very important when dealing with real estate because it’s important to have great ethical behavior when negotiating merit decisions. For example many can argue that ethics can’t or can be taught but can they for those that argue that it can be. “You’re either born with ethics or you just don’t have them” is what many individuals might argue but believe it or not several professionals say that ethics can be taught. There have been several organizations that teach ethics in their facilities because they want the best out of their workers so that they can be more productive. Ethics consist of what we ought to do in order to be successful. There was a recent article in a famous editorial, the Wall Street Journal where there it stated that ethics courses are useless because ethics can't be taught. For an article to state this, this can be very important in many ways because with this publish many would say that only proof would solve this conflict. In an article by the Santa Clara University it states that, “Almost 2500 years ago, the philosopher Socrates debated the question with his fellow Athenians. Socrates' position was clear: Ethics consists of knowing what we ought to do, and such knowledge can be taught” (Velasquez). “History tells us that over 2,000 years ago, the philosopher Socrates debated this issue with his fellow Athenians. Socrates believed that ethics consists of “knowing what we ought to do,” and that this knowledge can be taught” (Carroll).
STEP BY STEP OF NEGOTIATING WITH ETHICS:
In negotiating with ethics there are a few steps you want to take into account. The first is to separate the people from the problem by focusing on what’s fair for both parties as opposed to one side. One might say, “To walk a mile in someone else’s shoes would give you better perspective on why they see things the way they do.” This requires taking a neutral position on negotiations by promoting a position that is better for both parties as opposed to one. Looking for the maximum outcome for each party using compromise presents a win/win. Selecting a neutral position requires developing objective criteria.
While using objective criteria in negotiations you will begin to invent options that have mutual gain. Using market value can ensure that the buyer is not being over charged and can also provide the seller a quick sale. Inventing options for mutual gain is when you suggest common solutions that can benefit both parties. Using this strategy can not only provide for a smooth and happy negotiation but can also lead to increased and repeat business. Consider the homes that sit on the market for longer than preferred, they typically are either over priced or do not convey a value to the buyer. If the seller consider reducing the price to something the buyer sees more reasonable or even add some features like including furniture, they are more likely to sell the home. Otherwise they may not sell the home if they are insistent on not reducing the price of the home.
NEGOTIATING WITH ETHICS PROS AND CONS:
There are numerous advantages or pros that could be derived from negotiating with ethics or, also called, principle negotiation. For starters, separating the people from the problem allows more energy to be focused on the actual problem rather than the people involved. It also keeps the parties involved from mixing in any relationship aspects while negotiating (Funken). Principle negotiation’s focuses on the interests of the parties and therefore provides a path for mutual adherence along with creating more results for the parties’ interests. It challenges each party to think outside of the box by looking for more options to solve the root cause of their problems (Funken). In addition, principle negotiation builds a foundation to enhance the party’s relationship, getting each party to take into account emotions and future involvements amongst the parties involved. Moreover, it takes into consideration legitimate standards (Funken). By providing authoritative standards the parties do not have to compromise but rather conform to the bylaws. Enforcing such authoritative standards distinguishes any conflicts and cohesively meets one or both parties’ interests. However, principle negotiation does have some disadvantages also.
Cons or arguments of principle negotiation include being to generalized, interest focused and the hard bargainer. Generalization is having a general idea with a general application (merriam-webster, 2009). The parties are being constricted to the four principles outlined in the principle negotiation process, and not allowed to venture in other possible negotiating steps or styles. There may be incidents when the negotiations could be concluded in more efficient ways than those listed in principle negotiating. For instance, by allowing the parties to be creative or by incorporating other negotiating styles (Funken). “Moreover, Provis warns that the focus on the concept of ‘interests’ flattens out the complexity of human interests, values and beliefs. He points out that often negotiations hinge on people's values and perceptions, rather than on their interests” (Funken). If the parties tend to focus on the interest alone and not the perceptions and values of the people then there may be possible barriers that may arise. Furthermore, principle negotiation states to use negotiation jujitsu when dealing with a hard bargainer, but what if the other party has other motives. Some possible motives can be revenge, an intelligent advantage, or the thrill of negotiating (Funken). I understand these may be a tad extreme but they do exist in some cases and should not be completely omitted going into a negotiation. The stated pros and cons discussed are only a few presented by experts in the negotiating field, and are not intended to discredit principle negotiation, but rather provide information to better assist individuals while negotiating.
Smith, Christopher. “Ethics play important role on all fronts for real estate investors.” Bizjournals.com. Houston Business Journal, 27 Oct. 2006. Web. 17 Oct. 2009.
Hejl, Roselind. “Top 7 Ways To Negotiating the Real Estate Contract”. top7business.com. Christopher M. Knight’s Top7Business, n.d. Web. 17 Oct. 2009.
Single taxpayers: $125,000
Joint taxpayers: $225,000
Single taxpayers: $75,000
Joint taxpayers: $150,000
-You have to be a US resident to claim tax credit
-You can go to the state housing finance agency to access the money allocable to the tax credit more rapidly instead of waiting to file their tax return; this fund can then be use as a down payment for the home and/or for closing costs
-You must be over 18 years old
-You may also qualify for the tax credit, if you construct your own home-If you are married and if either you or your spouse has previously purchase a home, the tax credit does not apply (IRS, 2009).
• Increases housing starts by 8,000
• Create nearly 350,000 jobs
• Generate $16.1 billion in wages and salaries and $12.1 billion in business income, and
• Yield tax revenues of $8.4 billion for the federal government and $3.2 billion for state and local
Governments (NAHB, 2009)”
1.IRS. (2009). First-Time Homebuyer Credit. 2009. www. Irs.gov. Retrieved on 11/28/09 at http://www.irs.gov/newsroom/article/0,,id=204671,00.html.
2. Mullins, Luke. (2009). Expanded First-Time Home Buyer Tax Credit Becomes Law. Retrieved on 11/28/09 at http://www.usnews.com/money/blogs/the-home-front/2009/11/06/expanded-first-time-home-buyer-tax-credit-becomes-law.html.
3.Realtor. (2009). The Basics: Extended Home Buyer Tax Credit 2009/2010. 2009. http://www.realtor.org/. Retrieved on 11/28/09 at http://www.realtor.org/home_buyers_and_sellers/2009_first_time_home_buyer_tax_credit. 4. NAHB. 2009. Homebuyer Tax Credit Proposal: Economic Impact Analysis. 2009. http://www.nahb.org/. Retrieved on 11/28/09 at http://www.nahb.org/fileUpload_details.aspx?contentID=127117.
5. Netchaev, Irina. 2009. $8000 first time homebuyer tax credit extended…awaiting Obama’s signature. Retrieved on 12/2/09 from http://www.irina4realestate.com/8000-first-time-home-buyer-tax-credit-extended-awaiting-obamas-signature/.
There are many different ways to finance your home and in today’s economy it is key that you find the best mortgage that will fit you. First you must asses what type of loan you are looking for or if you qualify for government aid when financing your home. You must take in consideration the time duration that you plan on living in your home or if it is just a business investment.
The first loan that we will be discussing is an Adjustable-Rate Mortgage loan. These types of loan’s have interests rates that are adjusted based on the current financial market. You have the ability to sometimes set how long the current interest rate will be in the beginning of the loan which are usually of 1,3,5,7 or 10 years in which the interest rate is then adjusted annually from then on. You may have the option to have the first few years of the loan locked into a fixed rate and once that time period is up the Adjustable-Rates will then begin in affect.
The next type of mortgage that is typical when financing a home is a fixed mortgage. This is a more appealing loan for home buyers because your interest rate is fixed which gives the buyer an idea on what the cost of the home will be for the duration of the loan. This type of loan typically is for a 30 year mortgage in which monthly payments are made for the life of the loan which are fixed at one rate. This type of mortgage allows for the home buyer to plan financially for the future because they can estimate their total cost of the loan as to where an adjustable rate mortgage does not have such a luxury. A very similar loan like the 30 year fixed rate mortgage loan is the 15 year fixed mortgage but with slight differences. The payments for a 15 year fixed mortgage will be higher but this then allows for the buyer to have a lower interest rate because the loan will be paid back to the lender in half of the time of a typical 30 year fixed mortgage. It is good to asses if you can afford this type of loan and pay off you home sooner rather then caring out your loan for 30 years.
Another government loan that requires qualifications by the buyer is a VA loan which stands for Veterans Affairs. This loan is through the Department of Veteran affairs and can be combined with a second mortgage. The payment for a VA loan are typically lower than your average loan and also may or may not require a deposit in order to purchase your home. These mortgages are typically for 30 years and can also be passed on to another person who meets the Veteran requirements of the loan. After taking a look at their website which is http://www.homeloans.va.gov/ , the Veterans Affairs can offer other help to veterans who are searching for a mortgage loan such as educational benefits, survivor insurance and traumatic injury insurance.
If you have the extra money there is a type of loan which allows you to pay extra money to the lender which then lowers the interest rate of the loan. This type of loan is called a Buy Down Mortgage Plan. This loan may have high initial cost but it gives the buyer the option for having lower payments during the life of the loan which is also typically 30 years for this type of loan. This may be an appealing loan because it allows for more flexibility financially for the buyer in the future than a typical loan because you would not have the burden of a large house payment as you normally would in a standard loan.
In order to finance your home you must take in consideration your main goal as a buyer. This will then allow you to pick the right mortgage loan for you. You might want to asses the current market rates and research before you commit to one type of loan over another. In times such as these where the country is economically on a low many people are looking to save more money than ever and finding the right mortgage is a good way to start. Purchasing a home is a big commitment which takes a lot of time and effort by the buyer so educating yourself in the different mortgages will give you an upper had when approaching a lender for a loan.
NAMING YOUR PRICE
How to Evaluate and Price Your Home
Michael Efird, Patrick Darnell, Kathy Xiong
You need to sell your home and you have no idea what your house can sell for. Deciding on a selling price for your home is not an easy task in any market. In a seller’s market you might be nervous of “leaving money on the table”. In a buyer’s market you might be concerned with overpricing that could result in not selling at all. Even in a stable market there is the balance of maximizing price with how fast you want to sell. However is there really such a thing as a stable market in California? It tends to be traveling one way or the other.
There are several different methods that can be used to calculate your home’s value and selling price. There is the eyeball method, website calculation, and a CMA (Comparable Market Analysis) from a real estate professional. All of these are methods that are used by homeowners to sell their home. We will discuss each of these and provide explanation on which method you should use and how to insure that method is done correctly.
In the Eyeball method a homeowner does a survey of their surroundings. They take inventory of the houses in their neighborhood for sale. They make a rough assessment on the condition of the houses for sale. Then the homeowner compares the listing prices of the homes in the area along with their condition and derives a value of their own home in relation to the other homes. This method is flawed in many ways. This method only takes into account what houses are listing for and not they are selling for. This method also is based more on personal value and not on what the market will truly produce. Most importantly this method is not being performed by a professional in real estate. In this method there is high probability that your home will not be correctly priced due to the subjectivity involved.
The website method has become widely used. The age of the internet and information now has driven several websites to do the calculation for you. A popular website for this is Zillow.com. Zillow.com provides you with what is called a zestimate. This is Zillow’s estimate of what your home’s value is. These websites take the personal aspect out of home pricing which is dominant in the eyeball method. The website methods take a straight statistical approach to home values. They take the most recent sales available within a reasonable distance and populate those into a data base along with their square footages. This gives them a price per sq ft. this price per sq ft is then applied to homes of similar size. This method has some perks. The first is time; you can have a “Zestimate” in seconds. You literally can drive around neighborhoods with your IPhone and research home values instantly. This method also uses actual home sales where the eyeball method uses listing price. This method is purely objective not subjective. It merely takes the statistical data of actual events and calculates what your home is valued at. There are some pitfalls to this method. Typically these methods undervalue the property because they do not take into account items that can increase the value of the home. These websites do not take into consideration pools, garage sizes, R.V. parking, condition of home, or other items that will directly influence the amount the home will potentially sell for. In the example given below three houses next to each other have the following values, $241,000, $240,000, and $212,000 (http://www.zillow.com/homes/2814-W.-Newton-Ct.-Visalia,-CA_rb/). The least expensive home is 1,869 sq ft. with price per sq ft of $113. The other two houses are both 2,675 sq ft. with a price per sq ft of $90 per sq ft. The house priced for $240,000 has a large lot, fire pit, R.V. parking, custom cabinets, and many upgrades. The home priced at $241,000 does not have these features yet is valued at a $1,000 more. There is also the difference of $23 per sq. ft. between the other two houses. This method typically does not have the most current data. This method is typically three months behind, according to Marc Paolella of trulia.com. Which in a fast changing market could turn out to be disastorous? This method is getting better as technology and GIS systems improve. However at this time it is not the most accurate best way to price your home. (Paolella, 2008)(zillow.com, 2009)
The third way is to have a Realtor provide you with a CMA (Competitive Market Analysis). This method is the most comprehensive way of calculating a pricefor your home without paying an Appraiser. This method takes into account all of the processes of the other two methods and expands on it. The CMA is broken into four steps:
· Collecting and Analyzing information about the sellers property
· Choosing the Comparable Properties
· Comparing the sellers property to the comparables and adjusting values accordingly
· Estimating a realistic selling price.
When collecting information about the seller’s property the Realtor will begin by analyzing the seller’s property, neighborhood, and the structure itself. The Realtor will be looking for things that may increase or decrease the value of the home. These items may include the location in regard to schools and shopping, the condition of the other homes in the neighborhood, the condition of the property, and the condition and layout of the home itself. The Realtor will then locate comparable properties both for sale and sold within the same neighborhood. These comparables are adjusted to match the subject property. This is done by adding or subtracting the value of the different amenities and or features that create value. (National Association of Realtors, 2009)
Once this is completed the Realtor provides an estimate of a realistic selling price. At this point the homeowner can make an informed decision on what they would list their home for. This process incorporates not only statistical information but also takes into consideration the subjective information. In interview with Jayne Wills, a Realtor in Visalia, she stated:
“The key to this approach is using both sold and for sale comparables. You need to make sure you price your home competitively but also at a price that is line with homes that are actually closing on the back end.” She went on to say, “it is important that you are using all information that is available to Appraisers. You have to be able to appraise the home for what it sells for or you could lose the sale when the appraisal is less than the selling price.” -Jayne Wills, 2009
This means that the CMA will need to most likely include any foreclosures or short sales. All comparables need to be used with caution. You will not want to use sales that are not typical of the other sales. For instance if the neighborhood has a significant amount of foreclosures and short sales, it would be necessary for them to be included. If there are few of these, then they might be excluded as comparables but still included as part of the CMA.(Wills, 2009)
The Realtor CMA is the best method for pricing your home. However it is not without its own potential drawbacks. The CMA is reliant upon the Realtor performing ethically and in the best interest of the Principle. Sometimes a Realtor might be more interested in a quick sale or in a large commission. In these cases it is possible for a realtor to act unethically by including comparables that slant the CMA one way or the other. This can be avoided by having several Realtors provide you with a CMA before you decide which one you want to sign a contract with. By doing this you can get several perspectives and decide which one works best for you. At the fallowing web address you can find a good example of what to expect in a CMA, http://www.homepricelv.com/SampleCMA.pdf.
Selling your home is not an enjoyable task for most people. It is important that we avoid unnecessary pitfalls and stress during this process. The best way to do this is to use a Realtor and have them provide a CMA so that you will be well informed when deciding how to price your house.
NATIONAL ASSOCIATION OF REALTORS CODE OF ETHICS-evaluating and pricing, Chicago, IL. 2009 http://www.realtor.org/MemPolWeb.nsf/pages/COde
Paolella, Mark 2009 http://www.marcpaolella.com/
Wills, Jayne: Remax Real Estate Agent, Interviewed by Patrick Darnell, 2009
The Upside of Intimidating Disclosure Requirements for Real Estate Professionals
By: Randy Jones, Valerie Harper, Jenna Vander Weerd
It seems obvious that if a seller has information that influences how much a buyer will pay for what they are selling; the seller should make that information known to produce a balanced transaction. But what if the seller is never going to see the buyer again? Then the seller is forced to weigh the potential personal, continuing effects of a diminished sales price against future plight of the buyer that the seller will never know about. This dilemma is why everyone knows not to sell a used car to someone they know. If you sell a used car to someone you know there is the potential to know about and feel responsible for problems following the sale. If you sell a used car to someone you will never see again, the potential to even know about problems is diminished if not dissolved.
This principle can be applied to real estate markets. As populations become increasingly mobile and complex, we can no longer rely on participants’ potential to face the intrinsic consequences of their actions in others’ lives as motivation for moral behavior. Increasingly mobile sellers may feel decreasing incentive to disclose material facts to transactions in markets where they will no longer have a vested interest. Conversely, real estate professionals need fair transactions in their market to increase their ability to do their job. While statutory real estate disclosure requirements expressly burden sellers and their brokers and can be intimidating, they are critical tools for real estate professionals to emphasize the importance of ethical behavior to sellers and reminders for brokers to act in the long term best interest of the profession.
Changing Seller Behavior
Problems with real estate that should be disclosed are not a new invention, so the legislature’s perceived need to expressly change the format of real estate transactions must be a response to some other new phenomenon. Historically the courts embraced the idea of caveat emptor, let the buyer beware; however, coming into the 1980s the courts experienced an influx of homebuyers suing sellers under the common law fraud of failure to disclose. The question then becomes, did allocation of responsibility truly change, or did changing attitudes or behaviors of sellers mandate a new response.
In studying the capacity of individual men to act, Niebhur explains, “ethical attitudes are more dependant upon personal, intimate and organic contacts than social technicians” (Niebhur, p. 28). In the same text he explains that as the complexity of societies, or groups of men, increase, and these personal relationships decline and with them the directly correlated ethical attitudes. As there are more participants in real estate markets, and participants are increasingly able to live more of their lives outside the markets where they do transactions, sellers showed their preference of monetary gain over fair real estate transactions, by hiding (via fraud, misrepresentation, and negligence) material facts that should have been considered in calculating the price of the house. It is in the best interest of real estate markets for prices to be fair and accurate, representing the value with all pertinent flaws and information. So this problem’s growth lies in the growing ability of market participants to disassociate their interests from those of the market. This shift is likely what led to the flood of fraud cases in the courts.
Demographic Roots of the Change
It is not an accident that California, one of the largest and most diverse states in the nation, is pioneering the shift toward legislated morality via statutory disclosure requirements. In 1985 California was the first state to expressly require sellers to disclose their property conditions to buyers (CCC section 1102), shortly followed by an agency disclosure requirement in 1987 (CCC 2079.14).
California’s size is one thing that makes real estate sellers increasingly unlikely to know their buyer. In 1980 California had 23.67 million residents, by 1990 that number had grown to 29.22 million residents, and in 2008 the census counted 36.55 million people living in California (Census Bureau, 2007). Immigrants account for a large amount of California’s population growth. In the 1960s and 1970s foreign born individuals represented a low percentage of total population, about nine percent. Coming in to the 1980s that number began to rise, estimated at 15% in 1980, 22% in 1990, and up to 26% in 2000 (Public Policy Institute, 2008). According to Niebhur’s explanation of man’s capacity for morality, increasing diversity not only decreases the chance that a seller will know their buyer, but also decreases the chance that the seller will relate to and feel moral obligation toward the buyer.
Increasing distance between home, work and social networks further demonstrate the complexity of California’s markets. In the past three decades, as housing prices have increased, workers have move to suburbs farther and farther from where they work and socialize (FHWA, 2006). Census data suggests that the number of times people move might actually be decreasing, but for those who do move, the ability to move long distance is increasing as well as the ability to travel long distances. For real estate disclosure, the critical factor is how likely the seller is to have future interaction with their buyer, and if the seller is moving a long distance away, the answer is not likely.
Common Law Roots of the Change
In their first attempt to legislate incentive for sellers to disclose, the California Legislature acknowledged the preexistence of “obligations of the parties to a real estate contract, or their agents, to disclose any fact materially affecting the value and desirability of the property” (CCC 1102.1 (a)). This broadly encompassing requirement already in place leads one to question what the legislature hoped to accomplish in writing this and subsequent codes.
Case law further demonstrates that the courts, in fact, previously deemed disclosure an important requirement for brokers, agents, and sellers in transactions including real estate. The California Supreme Court’s1968 majority opinion cited six previous cases establishing an “agent is charged with the duty of fullest disclosure of all material facts concerning the transaction that might affect the principal's decision” (Batson v. Strehlow, 1968). This case speaks specifically to the responsibility of an agent to disclose to their principal, but the courts expand the responsibility to of reasonable care to all parties. In Easton v. Strassburger the California First District Court of Appeals upheld the notion that "A real estate broker is a licensed person or entity who holds himself out to the public as having particular skills and knowledge in the real estate field. He is under a duty to disclose facts materially affecting the value or desirability of the property that are known to him or which through reasonable diligence should be known to him." (Easton v. Strassburger, 1984).
The Easton court upheld the 1976 decision in Cooper v. Jevne that a real estate broker/agent must disclose all known facts on behalf of the seller that affect the desirability, value, or buying decision related to the property and established that the broker and seller are responsible to disclose those facts that should have been known. This rule expands the scope of the disclosure problem past fraud to include a seller and their broker’s responsibility to avoid negligence by full disclosure. The majority went further, to say that the purpose of the Cooper rule established in 1976 was to protect buyers from unethical sellers and their brokers. To offer brokers ignorance as a shield from the requirement to disclose would be contrary to the implication of a specialist in the field and would reward under skilled brokers (Easton v. Strassburger, 1984).
While the courts established, enforced, and even expanded the burdens on sellers in or earlier than the 1960s, continuing and increasing lawsuits evidenced that these common law requirements were insufficient to deter sellers from acting unethically by misrepresenting the condition of the property they were selling. The California legislature began to act in the 1980s, expressly and publicly warning sellers of the consequences of unethical behavior.
A Tool for Brokers and Agents
The roots of the problem reveal a critical reason for real estate agents to use embrace rather than shun disclosure statutes. Real estate agents often specialize in a specific geographic area and are likely to do multiple transactions in an area over a long period of time. While a seller socially uninvested in an area may be willing to act in a dishonest or uncooperative manner, an agent who has the potential to do business with these people again will be more motivated toward collaboration and disclosure, and needs their seller’s cooperation in that. For these agents whose ability to do business on an ongoing basis is greater than an isolated transaction, there is a tendency toward equality, which in real estate can only come from full disclosure of material facts (Halpren, 1994, p. 5). A real estate professional, broker or agent, has an additional vested interest in fair transactions, representing all available information from sellers. When a real estate professional needs market information, he will look to past sales prices in the market, if these prices are based on nondisclosure, they will skew the market.
Batson v. Strehlow. Supreme Court of California. 3. June. 1968. Web.
California Department of Real Estate. Disclosures in Real Property Transactions. Sacramento: California Department of Real Estate, 2005. Web.
Halpren, Jennifer J. "The Effect of Friendship on Decisions:." Center for Advanced Human Resource Studies: Working paper Series (1994). Web.
Easton v. Strassburger. Court of Appeals of California, First Appellate District, Division Two. 22 Feb. 1984. Web.
Murakami, Elaine. "Understanding LEHD and Synthetic Home to Work Flows in "ON THE MAP"" Understanding LEHD and Synthetic Home to Work Flows in "ON THE MAP" US Department of Transportation:Federal Highway Administration, 24 May 2007. Web. 28 Nov. 2009.
National Association of Realtors. "Milestones in Residential Real Estate: 1900-1999." Realtor Online Magazine. 01 Dec. 1999. Web. 16 Nov. 2009.
Niebuhr, Reinhold. Moral Man and Immoral Society. New York, New York: Charles Scribner's Sons, 1932. Print.
U.S. Bureau of the Census. "1981 to 1989 Intercensal Estimates of the Resident Population of States,." Sept. 1995. Web. Nov. 2009. http://www.census.gov/popest/archives/1980s/8090com.txt
U.S. Bureau of the Census. "Annual Estimates of the Population for the United States, Regions, States, and Puerto Rico: April 1, 2000 to July 1, 2007,." 2007. Web. Nov. 2009. http://www.census.gov/popest/states/NST-ann-est2007.html
 Duty of care established by Merrill v. Buck, 1962, upheld in 1981 Earp v. Nobmann
http://miamiangelproperties.com/blog/short-sales-101.htm for image on the right.