Friday, June 22, 2007

Cash-Back-At-Close Scheme (Y2/M2/D22)















UPDATE:
Price Reduced: 07/06/07 -- $825k to $775k
Price Reduced: 08/14/07 -- $775k to $759k
Price Reduced: 09/04/07 -- $759k to $749k (down 9.21%)

UPDATE THE SECOND: The MLS description was changed 7/13/07 to read: "
motivated sellers! New commission 2.75% yes 2.75% "

Well, it looks like the tides might be starting to turn on the housing front. Today I got a call from a real estate agent following up on her open house that I attended. I am actually kind of flooded with these calls now but this one was different. Here's a rough transcript:

Agent: Hi Kate! This is Agent. Remember the house you saw in Sherman Oaks on Sunday?

Me: I saw lots of houses Sunday....

Agent: Oh, of course! Well this one was priced at $825k and we had a long talk about how you thought it was worth closer to $725k?

Me: Oh yes, the one that needed a new kitchen? In Sherman Oaks?

Agent: Yes! Well, would you consider maybe $760k?

Me: Honestly I've been down this road before and I prefer that there be a price reduction before a I write my offer.

Agent: Well, they already have one offer but I happen to know that the prospective buyer has made an offer on another bank-owned foreclosure property.

Me: . . .

Agent: So would you be willing to write an offer at $760k?

Me: But I already told you I don't think the property is worth that so...

Agent: Well, I could get the house appraised at $800k and you could get cash back you know for your closing costs or whatever and ....

Me: Let me make sure I understand you.

Agent: Okay.

Me: You want me to write an offer for $800k on your listing?

Agent: Yes. But you will get cash back so it will only be $760k and ...

Me: Let me finish.

Agent: Okay.

Me: You want me to write an offer for $800k, and take back about $40k, so I am giving the seller only $760k.

Agent: Yes! Yes!

Me: But I pay 5% commission on that higher sales price?

Agent: Well... yes but you are getting cash back for your closing costs and improvements...

Me: Again, I am paying 5% commission on $800k instead of $760k, and my property tax basis will be $800k instead of $760k?

Agent: Well, the property tax is only 1.25%

Me: Every year.

Agent: Right.

Me: Okay, so I am paying higher commissions on the sale and higher taxes every single year, for the privilege of getting a $40k loan?

Agent: ....

Me: Why would I do that? I have good credit and I do not need a loan. Also, I think it's a fraud on the market.

Agent: It's not fraud. Let me tell you how it works!

Me: Trust me, I know how it works:

You get a bigger commission and you get to delay the inevitable price crash in your little pocket neighborhood. The sales data for the area will reflect artificially high prices so honest people with decent incomes and good credit scores who used to be able to afford the area no longer can. And what do I get? A $40k loan that I don't want or need. As a bonus, I will not only pay interest on this wholly unnecessary $40k loan but I will pay an additional $2,000 sales commission to you and my agent up front because that $40k is being treated like purchase money. But that's not all! No! I will also have to pay an additional $500 in property taxes every year I own the house because the records will reflect an artifically high purchase price.

Agent: ....

Me: Call me if the seller lowers the price.

Agent: Okay, when do you want to see the house again? Friday? Does that work for you?

Me: Are they lowering the price on Friday?

Agent: No.

Me: ...

Agent: Hello?

Me: I'm sorry. I'm really busy. I have to go.

24 comments:

brettdl said...

Good for you. Too bad more people couldn't figure out how home pricing became a scam.

Anonymous said...

Hey There,
You should report that agent to the real estate board. Totally unethical and in my opinion, that agent will "try" to screw you even if the house got lowered to 300k.
I'm an agent and there are a lot of great ethical honest agents out there. Keep looking and don't fall in love with any house.

Pete Viles said...

Kate -- I love your blog. I'm going to post a link to this item on my blog at LATimes.com, which is LA Land. Can you please contact me at lalandblog@yahoo.com?
Peter Viles
LA Land blogger

Anonymous said...

As an agent in the valley, all I can say is i'm so sorry for the behavior of some. *sigh* makes us all look like used care salesman. (no offense to used care salesman).

Anonymous said...

I thought the seller paid the commissions...

Anonymous said...

Response to "agent": surely more than a few sellers, agents, brokers and lenders and buyers are playing this game. It is fraud played out at every level. I hope the lenders get there just deserts. Its too bad that the government will bail the lenders out when the S*&^ hits the fan!(That is exactly what happened during the S&L scandles years ago). Enjoy your mortgage payments!

Anonymous said...

Kate,
If you were going to purchase the house why would you have to pay the 5% commission ? Shouldn't it be the seller who is paying the 5 % of the sales price o the respective agents?
Thanks- Mark

Kate said...

In response to the various comments about seller paying commissions, that's true. But it's like when you used to open a bank account and they'd give you a free toaster. Was the toaster really free? No, of course not. The cost of the toaster was covered by the additional fees and costs you pay on that bank account. And so it is with commissions. Sure the seller pays them, but they are built into the price YOU pay for the house.

Think about somebody who bought a house for 500,000 in November 2006(Okay, I have no idea where that house would be... Kansas, maybe? But I digress). Now the homeowner has a job transfer and must sell right away. He'd like to just sell it for $500k and get his money back but he can't do that due to the "transaction costs."

See, if he sells the house today for $500k he will have to pay 5% in commissions ($25,000) and he will have to pay closing costs at about another 1% ($5,000). Thus, he needs $530k or he will take a loss. Even then, he will still probably take a loss because he probably paid points on his loan, and possibly a pre-payment loan penalty could apply, and he paid closing costs when he bought the house. And he needs some wiggle room to negotiate so that house is going to list at $560k a mere six months after he bought it. Even if there were absolutely no improvements since the last sale.

Is the house really worth $60k more a mere six months later? Nope. But the seller sure doesn't want to pay those transaction costs so he will hang on until a buyer comes along who is willing to pay it for him.

robert said...

How much do you earn that $800k is your price range as a first-time buyer?!

Kate said...

*clutches pearls* Did somebody just ask me what my income is?

Anyway, I've budgeted carefully and I am committed to staying BELOW $800k. My MLS search is $650k to $800k but I have to say that almost nothing comes up below $739k. This particular price range is VERY popular and houses that are at all desirable have been flying off the market despite the slump in $800k and up homes in my target neighborhoods.

robert said...

Nice way to dodge the question.

Again, do you earn $200,000 per year or more that you can afford to *really* buy this house?

I mean, I talk to my co-workers all the time, and we're all first-time buyers in the $400,000 to $500,000 range, because we all earn between $50 and $70k per year. Combined incomes of $100,000 in LA mean a house of around $500,000 max with a standard interest-only loan.

So how is it possible that a first-time buyer is looking in the $800,000 range?

Kate said...
This comment has been removed by the author.
Kate said...

Robert:

It seems like what is really perplexing you is the fact that I haven't bought a house before even though I earn six figures, have a high credit score, and 20% down (not to mention E, who is buying with me).

The answer to that questions is pretty simple: I didn't buy before law school because I wasn't really settled. During (and right after) law school I was totally broke and also living outside of Los Angeles but planning to move back.

When I finally moved back to L.A. it was 2005, the boom was underway and I was completely furious that a home I could afford BEFORE law school was still all I could afford even though my income had tripled. So I rented (and seethed). And then E moved in. And then we got a dog. And, damn it, that dog deserves a yard!

So for the first time, it makes sense for me to buy a house. You're right though, I suppose MOST first time buyers are like you and your buddies. But I don't think it's any easier or less scary at $500k than it is at $800k. It's still a lot of money and probably the biggest financial decision we'll ever make.

Thanks for reading.

~K

Kate said...

Robert:

WHOA! I just realized that you wrote "STANDARD INTEREST ONLY LOAN." I don't think that interest-only is standard at all.
Indeed, pre-bubble these types of loans were last available during the Great Depression (somebody provide me a citation to reliable source if I am wrong).

The standard loan requires you to pay both principle and interest from the start of the loan (although the ratio of interest:principle changes over time).

Personally I would never take out an interest-only loan but especially not in this unstable market.

Bakersfield Bubble said...

Good reporting! This will get some serious play! The REIC is nothing but a bunch of crooks!

Kate said...

Bakersfield:

I do think that there are a lot of unscrupulous agents out there -- but I also believe that there are good honest real estate agents.

As an attorney, I may be extra sensitive to an entire profession being maligned. But I really think there are some nice people who are outstanding honest agents. It's just that there is such a low barrier to entry (and so much money to be made) that you are bound to attract a lot of unscrupulous people.

Troubled Loner said...

Kate,

Be patient, prices will continue to fall, further than most people think. If you can wait at least another year, you will be amazed at where prices will be...

Kate said...

Hi TL:

I know that patience is key. At the same time, we've already been waiting two years. And another year seems like an impossibly long time. Luckily, I haven't fallen head over heels for anything we can afford, so that may be my saving grace.

Thanks for reading.

Anonymous said...

Excuse my ignorance, but i would like to understand how the $40,000 in "cash back" would function as a loan? Let's say you did agree to the $800,000, would the buyer or agent issue you a check back for $40,000? I think I'm thinking of a a loan as something you have to pay back to whoever issued you the money. Would that be the case in this situation?

Kate said...

Hi Anonymous:

It is a really confusing offer, I am sure you aren't the only person who has this question so I'll try to break it down.

First, let's not forget it's called "cash back" for a reason. The only way to get something back is if you gave it away in the first place.

So, in this example, you can just buy the house for $760k and give the whole $760k to seller. You'd get no cash back.

Or, you can do what the agent suggested and take out an $800k mortgage, give the whole $800k to the seller, and the seller gives you back $40k. (Technically, the escrow company would write the $40k check out to the you.)

For clarity, that $40k "cash back" is money you borrowed from the bank, gave to the seller, and then the seller gave back to you at the close of escrow. You are responsible for paying the $40k back plus interest (together with the remainder of the mortgage) to the bank.

While I am actually planning to do a 20% down payment, the math still has essentially the same effect. The only difference is that I have to come up with a bigger down payment (20% of $800k instead of $760k) AND take out a larger mortgage. (And of course there's the higher property taxes each year.)

Patient Renter said...

"I know that patience is key. At the same time, we've already been waiting two years. And another year seems like an impossibly long time."

Very nice post Kate. I agree with what was said - you'll be VERY surprised at what you can purchase in the future if you decide to hunker down and wait a while. The momentum of the downturn is still just picking up... I'd hate to see a savvy buyer like you find themselves 2 years post-purchase with a home that is worth 25% (or whatever) less. As surely as prices went up, they will come down, reverting to the mean.

Good luck.

Kate said...

Thanks, PR, for the encouragement. It's all so frustrating.

exposure to black mold said...
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