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Subject: Buying a House in the Economic Crisis rss

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Recently, my wife and I were able to buy our first home. For the most part, I am not too much of a gambler in life (games are a different story), so we had waited five years to save the 20% down. Then, at the beginning of a year, my wife found a house that she loved but that was overpriced, and the sellers were unwilling to come off the price at the time. Then, in May, the sellers came off the price by 10% and we were able to lock in our loan at 5% -- not too bad at all.

The buying experience was quite interesting and a mild fiasco. No doubt, my super-human filing skills (as David claims) came in handy. We had to have a laundry list of documentation that was apparently not needed before the mortgage crisis hit:

-Copies of W2's (I am surprised this hasn't been required forever)
-Copies of Tax Returns issued directly from the IRS (somewhat irritating to obtain)
-Notarized letters verifying our names (more irritating to obtain)
-Original copies of Social Security cards (expected)

During the process, it was easy to see how the market self-inflated itself, and I strongly believe that it is through collusion of the bank and the so-called "independent" appraisers.

Common Practice: An agreement is reached between the buyer and seller. The bank contacts and hires an appraiser whilst showing them the agreed upon contract price. The appraiser then conducts their appraisal based on the contract price, and usually is within 1-2% either way (often on the higher end to protect the bank).

Why this is messed up: First, looking at appraisal data (at least from our bank) it is easy to show that there is a wide variance in appraisal values for nearly identical houses. Second, I think that this should really go one of two ways:

-the market sets the value by being what someone is willing to pay for it. This is likely to become too speculative though.

-the appraiser appraises the house without knowing the contract price. This seems like the most "fair" manner in which business should be conducted.

In our case, the bank sent the appraiser the intial contract offer, which was about 3% lower than the final price. So the appraiser appraised the house for that value instead of our offer price, effectively making us come up with a 23% down payment because the bank will only finance up to the appraisal price. The whole ordeal cumulated with the realators screaming at each other and pseudo-unethical practices by the appraiser disclosing his appraisal process to the selling agent (who is not his client, thus tight-rope walking on the edge of violating his fiduciary responsibility to the bank).

In the end, we just ponied up the extra money because changing lenders was the only other option, and by that time the interest rates had risen from 5% to 5.75%, making the up-front charge of 3% with a 5% interst rate a more attractive prospect than 30 yrs at 5.75% for the entirety of the loan.

Long story short, the process worked well for us. However, I expect it is because we had: (a) 20% down, and (b) the best level of credit rating. I imagine getting a loan will be very difficult for people otherwise. And, the appraisal process needs to be fixed.

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In my view there are a considerable amount of unethical practices going on between appraisers and banks/RE agents.

My last two properties were purchased with owner financing and I highly recommend that method for anyone who doesn't have A1 credit. In each case I paid a little more than the best rate available for pristine credit and in each case I was able to negotiate other conditions favorable to me in exchange for the rate and the roughly 20% down payment.

The last property I owned was 10 fenced acres with a 2600 sf house and a 1200 sf outbuilding. The owner didn't even list the property and it was available only via two different realtors who were friends of his. He would only sell it if he carried the mortgage and if he "liked" the buyer.

There was no credit check, no proof of anything, no W2 or anything other than my $25K and the RE agent's vouching for me. Anyone who has bought a home knows the considerable fees involved through traditional lenders. We shared the stripped down title insurance and title fees and I paid for my own independent appraisal and inspection before negotiating.

I sold the property to my GF's parents when her and I parted company - they bought it for her and her children to live on - and that was a nightmare. Mainly because of the bank/appraiser relationship. Their bank pre-approved the parents for a set amount of money and then sent out an appraiser who, lo and behold, returned an appraisal of exactly the amount they were approved for.

Convincing her parents that the property was worth considerably more than I sold it to them for was difficult after the collusion between BofA and the appraiser. In fact, I sold the property for $25K less than it's value because I had offered my GF either $25K cash or a $25K reduction if her parents bought the property. Add to that no RE agent fees and a price of under $300K and they were getting closer to $40k in value... still about $30K less than similar properties in the area.

Two things screwed the process up and almost blew it for my GF. One, they knew I'd paid under $200K for it and two, the appraiser's valuation. I finally told them, nicely, take it or leave it. Either way worked for me because I could just put the thing up for sale and fork over the $25K upon closing. I was not obligated to give her anything to begin with because I was the sole owner. They took it.

I could get into how appraisers and banks working with favored realtors have made other RE purchases of mine difficult but I'm certain almost anyone who has bought more than one house or property understands how a reasonably simple process is made torturous by the oddities that have developed over the last 30 years.

My daughter asked me if I was in the market now that RE has tumbled. I told her I most likely will never again buy property unless I have the bucks to buy it outright. Too much of a hassle and too much of a ball & chain unless you're a young family.

Congrats on the new house. Now have some kids to fill it up with.
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Marshall P.
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SpaceGhost wrote:

-Copies of W2's (I am surprised this hasn't been required forever)
-Copies of Tax Returns issued directly from the IRS (somewhat irritating to obtain)
-Notarized letters verifying our names (more irritating to obtain)
-Original copies of Social Security cards (expected)


I bought a house at the height of the bubble (2005) and didn't need any of that stuff. Basically, walk in, check credit, sign.

Although, even though it was the height of the bubble we did it right. 20% down. 30 year fixed (no variable rate loans for us), a monthly payment we could afford, and we didn't buy in an inflated market. We actually moved away from Washington DC after looking at housing prices there and realizing it was crazy. We bought in Wichita Kansas where our house has continued to appreciate every year since then.
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Drew1365 wrote:
mdp4828 wrote:
30 year fixed (no variable rate loans for us).


In the coming months (years?) that will probably be the key. Interest rates are likely to skyrocket, and those will variable-rate loans are going to get screwed. Lock it in now, folks. Lock it in, now.


I think you are correct; however, it is going to be hard for people to "lock it in". Our real-estate market is much like Marshall's; however, there are small neighborhood's of houses within the $150k - $200k range where prices have dropped by about an 1/8.

Our banker told us that many of their client's have tried to lock in at a lower rate, but they owe more than their house is worth, meaning that to lock in they have to come up with the difference in cash -- which for most people who went the variable interest rate route is likely to be more of a stretch.

In my opinion, the real estate market is far from healed and is likely to continue to beat people harder as they get more down and out. All part of the misguided notion that everyone should own a home as soon as possible.
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DWTripp wrote:

Congrats on the new house. Now have some kids to fill it up with.


Thanks. As for your suggestion, I'll get right on that.
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Like three years ago I got a fixed 30 year at 4.75 %, but I only put 10% down.

I'm stuck in a PMI that won't go away for like another 5 years. And it's 100 bucks a month 1200/year totally down the drain to make sure the bank is covered.

I was wondering if I reappraise and the house is valued at more if I can get it taken off early because it will hit 20%, since I'm pretty sure my house is undervalued on it's appraisal at the moment.
 
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SybotCB wrote:
Like three years ago I got a fixed 30 year at 4.75 %, but I only put 10% down.

I'm stuck in a PMI that won't go away for like another 5 years. And it's 100 bucks a month 1200/year totally down the drain to make sure the bank is covered.

I was wondering if I reappraise and the house is valued at more if I can get it taken off early because it will hit 20%, since I'm pretty sure my house is undervalued on it's appraisal at the moment.


That depends on the actual "fine print" in the loan. Some banks structure it where there is a minimum number of years that PMI must be paid. For our bank, it was 5 years -- I would definitely suggest looking into getting it removed. 1200/year is quite a bit of money.
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SpaceGhost wrote:
SybotCB wrote:
Like three years ago I got a fixed 30 year at 4.75 %, but I only put 10% down.

I'm stuck in a PMI that won't go away for like another 5 years. And it's 100 bucks a month 1200/year totally down the drain to make sure the bank is covered.

I was wondering if I reappraise and the house is valued at more if I can get it taken off early because it will hit 20%, since I'm pretty sure my house is undervalued on it's appraisal at the moment.


That depends on the actual "fine print" in the loan. Some banks structure it where there is a minimum number of years that PMI must be paid. For our bank, it was 5 years -- I would definitely suggest looking into getting it removed. 1200/year is quite a bit of money.


Thanks, I'll check it out.
 
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Quote:
All part of the misguided notion that everyone should own a home as soon as possible.


Truth.

I bought my first house in California in 1973 for the simple reason that it was cheaper than renting an equivalent home.

Despite the fact that over the ensuing decades I have done well owning houses, buildings and bare land, the reality is I could have done probably 100-300% better if I'd just remained a renter and invested the money conservatively in the market.

My personal view is that owning a home to raise children in is a terrific idea. Especially if you can stay put for 10-15 years. I bought a house in 1987 and kept it for 15 years... while my older two children went through the same schools, graduated and went off to college. I made money for sure... but I also spent money keeping the house up. So as an investment it was lackluster at best. And that's despite a 100% increase in value over the 15 years.

It's true there we have been blighted as a culture with this "dream" of home ownership as an investment. There are many valid reasons to own your own home but my opinion is that making a profit is not one of the better ones.
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SpaceGhost wrote:


That depends on the actual "fine print" in the loan. Some banks structure it where there is a minimum number of years that PMI must be paid. For our bank, it was 5 years -- I would definitely suggest looking into getting it removed. 1200/year is quite a bit of money.


Thank god for VA loans.
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DWTripp wrote:


It's true there we have been blighted as a culture with this "dream" of home ownership as an investment. There are many valid reasons to own your own home but my opinion is that making a profit is not one of the better ones.


Can't agree more. A house isn't intended to be a vehicle for profit. In my opinion, it should just be viewed as a place to live and, if you are going to have kids, a place to create a stable environment for your children.
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SpaceGhost wrote:
-the appraiser appraises the house without knowing the contract price. This seems like the most "fair" manner in which business should be conducted.


This is how it worked when I bought my house. I hired the appraiser, and then I had to find a mortgage lender that would agree to that number, not the other way around. FWIW, this is how it went with the dozen or so other people I know who've bought houses in the recent past as well.

Of course I didn't start by dealing with the bank, so maybe it depends on how you go about it?
 
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WhiteKong wrote:
It takes a month to buy a $100,000 house, but only a couple of hours to buy a $100,000 car.


Not lately.

I do a lot of work with billing agencies.

Those cars require just as much paper now.
 
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Drew1365 wrote:
Quote:
All part of the misguided notion that everyone should own a home as soon as possible.


It may be wrong advice for some people. But renting a house would cost us far more than our monthly mortgage payments, and with no equity building up.


I think that is true in some cases. However, until the recent bubble housing prices have been pretty flat (once adjusted for inflation) for the past 30 years -- so there really isn't true equity.

The bigger benefit is having a "home" and a stable environment for children.
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Gecko23 wrote:
SpaceGhost wrote:
-the appraiser appraises the house without knowing the contract price. This seems like the most "fair" manner in which business should be conducted.


This is how it worked when I bought my house. I hired the appraiser, and then I had to find a mortgage lender that would agree to that number, not the other way around. FWIW, this is how it went with the dozen or so other people I know who've bought houses in the recent past as well.

Of course I didn't start by dealing with the bank, so maybe it depends on how you go about it?


Same here. We got an independent appraiser, and I believe we paid him ourselves. (120 bucks?)

A couple years later we refinanced and the bank sent out an appraiser, and his number came back higher.

BTW, lots of numbers can now be gotten online. In our area (Ohio, near Dayton), you can look up previous sale prices for properties in pretty much all the counties around us. There's also property tax info, but I can't remember if they give appraisal values. I don't think so, just tax appraisals which are always way low.
 
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SpaceGhost wrote:
However, until the recent bubble housing prices have been pretty flat (once adjusted for inflation) for the past 30 years -- so there really isn't true equity.


I don't get you. If I pay $100,000 into a house (after interest) over, say, a 15 year period, and the house's value stays flat (adjusted for inflation), and then I sell the house, I get my $100,000 back. That's equity. If I payed $100,000 in apartment rent over 15 years, at the end of the 15 years, I've got $0.
 
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BoB3K wrote:
SpaceGhost wrote:
However, until the recent bubble housing prices have been pretty flat (once adjusted for inflation) for the past 30 years -- so there really isn't true equity.


I don't get you. If I pay $100,000 into a house (after interest) over, say, a 15 year period, and the house's value stays flat (adjusted for inflation), and then I sell the house, I get my $100,000 back. That's equity. If I payed $100,000 in apartment rent over 15 years, at the end of the 15 years, I've got $0.


There are always exceptions. Generally speaking it's pretty much undeniable that a family home, as an investment, fairs poorly when compared to traditional (conservative) investments.

It's rare that an apartment or rental would be as costly as a home and even then it's kind of apples and oranges. Where I live (and probably most of the nation) there are good rentals of very high quality available at 50-70% the monthly total investment of a similar home.

Once you factor in interest, upkeep, insurance and any of dozens of variables ranging from property tax to assoc. fees home ownership is not really a bargain as an investment.

On top of which most people don't pay their homes off in 15 years, which more than doubles the interest. It's kind of like the new car versus the year old used car. It's indisputable that the year old car is a hugely better deal in almost every respect... yet there is always going to be a strong market for new vehicles because one size does not fit all.

So here I can buy a reasonable tract home for say $1,000 a month total investment but lease an identical home in the same tract for $700 (this isn't theory, it's a fact locally). Just do the math on what that additional $250 per month will be worth in 30 years over the house... even if the house doubles from say $140K to $280K.
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Interesting thread, I'm navigating the home-buying minefield right now. I'll be going the VA loan route, so some of the headache is lessened, but this whole experience is pretty much a pain in the butt.
 
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DWTripp wrote:

So here I can buy a reasonable tract home for say $1,000 a month total investment but lease an identical home in the same tract for $700 (this isn't theory, it's a fact locally). Just do the math on what that additional $250 per month will be worth in 30 years over the house... even if the house doubles from say $140K to $280K.


It's not so easy.

Put the person owning the house in a 35% tax bracket. Suddenly, those $250-$300 a month disappear for quite a few years of the loan.

Assume a 30 year loan:

$700 in rent nets $0 in tax deductions. $1000 in a home, in the first year, about $800 a month are interest. given a 35% tax rate, that means a tax deduction of $280, that the home owner can invest anyway. So the difference becomes an extra $20 that the renter can invest, in exchange for the $200 of equity that the homeowner gets. The investments have to be much better than the house to beat it 10:1 for the first few years.

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I bought my home in 2007 for 30 years fixed at an interest rate of 6.75 with $0 down and PMI at $75/month and closing costs around $2,500. My credit rating is stellar which got me the loan with no money. I just refinanced my loan this week for 15 years fixed, at 4.25 percent with a second loan for the 20% down payment at 5.25 percent - losing the PMI. My closing costs were $900. I saved a ton of money. My payments are higher, but it's worth it. I recommend trying a credit union.

I was able to deduct interest on my taxes netting me $3,000 back.
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Drew1365 wrote:
mdp4828 wrote:
30 year fixed (no variable rate loans for us).


In the coming months (years?) that will probably be the key. Interest rates are likely to skyrocket, and those with variable-rate loans are going to get screwed. Lock it in now, folks. Lock it in, now.


Why do you think that interest rates are going to sky rocket?

How do you know that interest rates are going to be higher than your fixed rate for the majority of your 20/30 year term?

Assuming the US is not different from home financing markets elsewhere why would you want to fix 100% of the loan and thus:

1. be either entirely or greatly hindered in making additional payments to reduce your loan term and overall interest bill;

2. pontentially have to pay the bank money to break the fixed term contract if circumstances require you to sale and the interest rate is lower than the fixed rate?
 
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DWTripp wrote:
BoB3K wrote:
SpaceGhost wrote:
However, until the recent bubble housing prices have been pretty flat (once adjusted for inflation) for the past 30 years -- so there really isn't true equity.


I don't get you. If I pay $100,000 into a house (after interest) over, say, a 15 year period, and the house's value stays flat (adjusted for inflation), and then I sell the house, I get my $100,000 back. That's equity. If I payed $100,000 in apartment rent over 15 years, at the end of the 15 years, I've got $0.


There are always exceptions. Generally speaking it's pretty much undeniable that a family home, as an investment, fairs poorly when compared to traditional (conservative) investments.

It's rare that an apartment or rental would be as costly as a home and even then it's kind of apples and oranges. Where I live (and probably most of the nation) there are good rentals of very high quality available at 50-70% the monthly total investment of a similar home.

Once you factor in interest, upkeep, insurance and any of dozens of variables ranging from property tax to assoc. fees home ownership is not really a bargain as an investment.

On top of which most people don't pay their homes off in 15 years, which more than doubles the interest. It's kind of like the new car versus the year old used car. It's indisputable that the year old car is a hugely better deal in almost every respect... yet there is always going to be a strong market for new vehicles because one size does not fit all.

So here I can buy a reasonable tract home for say $1,000 a month total investment but lease an identical home in the same tract for $700 (this isn't theory, it's a fact locally). Just do the math on what that additional $250 per month will be worth in 30 years over the house... even if the house doubles from say $140K to $280K.


Particularly given your ability to apply interest payments as a tax deduction this all seems to assume a market with:

1. very marginal house price growth; and
2. low rents.

Maybe this holds true for rural areas (?) but honestly doesn't seem to be very applicable for most urban areas in the developed world over the last 10 years (last 18 months excepted).
 
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Quote:
Maybe this holds true for rural areas (?) but honestly doesn't seem to be very applicable for most urban areas in the developed world over the last 10 years (last 18 months excepted).


There are lots of variables for sure. Mortgage deductions are unusable for quite a few homeowners depending on their tax rate. "Profit" on homes is also dependent on actually selling the home to realize it.

Overall, unless one is as fortunate as I have been with real estate, the profits are quite a bit less than promoted by common lore. Even then, when I applied the rule of "7's" to my 30+ year RE history I'd have done close to 200% better by just investing in conservative stocks and funds... and that includes the deductions I received on taxes.

My advice to my kids was to NOT do as I did. Save a minimum of 10% of every dime they make and buy a home when they can afford it without reducing or interrupting the 10% strategy. In retrospect, had I done that (and not been a spendthrift) I'd be worth several million dollars at this point in my life... even with the heavy losses I took when the California RE market collapsed around 1980.
 
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myopia wrote:
Assuming the US is not different from home financing markets elsewhere why would you want to fix 100% of the loan and thus:

1. be either entirely or greatly hindered in making additional payments to reduce your loan term and overall interest bill;

2. pontentially have to pay the bank money to break the fixed term contract if circumstances require you to sale and the interest rate is lower than the fixed rate?


I don't know about other places, but most mortgages in the US don't have prepayment penalties. And the Congress is thinking about restricting them further (personally, I would support a ban).
 
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Even in these times a home is one of the best investments one can make; considering the alternative is giving somone else your money to pay for their property instead.

Anyone here lease boardgames instead of buying them? If thats the case I got a 3 bedroom Arkham Horror for rent - only 5 dollars a month with a 12 month lease. Oh yeah, and a 15 dollar security deposit, which will be refunded if the game is returned in the mint condition it is now in.......
 
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