By now we had cleared the inspection and appraisal contingencies. The ball was squarely in the seller's court. They were having a hard time getting the HOA documents, so we extended that contingency date.
Redfin initially sent me the wrong documents - I was a little confused when I started reading through them and kept running across guidelines on using the marina. Finally, we got the real documents. They were fairly simple - the HOA started back in 1980, so all the documents were typed up the old-fashioned way. It all looked pretty typical and straight-forward... association meetings, several elected offices (President, Vice-President, Secretary, and Treasurer), rules that seemed reasonable and not onerous.
The one thing that made me nervous was a sheet filled out by the HOA manager, which listed the owner-occupancy ratio as 50%. Since I was buying one of the rented units, that would push the ratio up to 60%, but that was still below the 70% that I frequently heard mentioned. This seemed likely to sink the deal, and once again I bemoaned that we were doing the HOA docs at the end of the contingencies instead of at the beginning.
There are an incredible number of people involved in a real estate transaction. In addition to the buyer, seller, buyer's agent, seller's agent, and various hired professionals, there's also an escrow officer, and, on the loan side, a loan officer, loan analyst, underwriter, and funder. Almost all of my interactions up to this point had been with the loan officer, but as we came closer to the finish line, I started getting a few inquiries from the loan analyst, who prepares documents for the underwriter. A few of the things that she wanted included:
* An explanation for why the company name on my paycheck didn't match the company name on my W-2. (We were acquired by another company, and are handled by their payroll, and operate as a wholly-owned subsidiary.)
* An explanation for why a credit bureau was reporting that I still lived at an old address. (My answer: I have no idea, I haven't lived there since 2003, it must be an error.)
That was pretty much it. I'm not sure how far they dug into these things, it felt like they just wanted a satisfying answer from me that they could document.
A day or so later, I got a conditional loan approval. That meant that Provident would fund the loan once certain conditions were met. Some of those I had no qualms about, like verifying my employment and checking my rent history. I was pleasantly surprised to see that the occupancy ratio wasn't a dealbreaker. Instead, it was the HOA budget.
Ever since Fannie Mae and Freddie Mac entered federal receivership, the government has been tightening their lending guidelines. This didn't happen all at once; rather, it's an ongoing, rolling process; another loan officer told me later that it felt like the guidelines were changing every few weeks. Right now, virtually every loan made in the country is backed by a federally-affiliated program - FHA, VHA, Fannie Mae or Freddie Mac; private money is still extremely scarce, and can have restrictions as tight or tighter than the federal ones.
I've complained about this on the blog before, but I think that Fannie and Freddie have seriously miscalculated in their approach to condo loans. I suspect that what happened is, they looked at the subprime mortgage meltdown, saw that a lot of those units were condos, and decided to make condo loans harder to get. The thing is, though, that condos by themselves aren't any riskier than single-family houses. The reasons why there were so many condos involved were because there were so many flippers operating in places like Miama, Las Vegas, and Phoenix; condo construction boomed, people were treating them as investments instead of as places to live, and as a result they became the biggest part of the bubble. In places with high costs of living and extremely limited space, like, say, the San Francisco Bay Area, condos are a very prudent and conservative housing investment. Fannie and Freddie's one-size-fits-all approach ignores that reality.
Back to my loan: in their current incarnation, the guidelines actually have a wonderful new policy: owner-occupancy ratios are only a factor for investment properties. They are not a consideration if the buyer plans to live in their unit, as I do. This is great, since it allows associations that have slipped towards renters to gradually move back towards owners; under the previous system, once the ratio ever slipped below a magic number, it became impossible to recover because new owners could not get loans. So, I'm a big fan of that change, and look forward to seeing its result.
In its place, though, is a new policy - the HOA's budget must set aside at least 10% of the budget for a reserve fund. Now, in practice, I think that's a great idea. I'm a fan of well-funded HOAs and a foe of special assessments. Once again, though, this one-size-fits-all policy couldn't capture the nuance of each association. In my case, the amount set aside for reserves was rather low - just about 3%. However, the reserves themselves were quite well funded; they had enough cash in the bank to cover all scheduled capital improvements for the next few years, with some more left over. I could certainly see why the association would want to keep fees low... I'm paranoid, so I will always sock more away, but there really didn't seem to be a need for it.
That said, a rule's a rule, and this is one that couldn't be waived. That set things into a minor panic. Everything else had been taken care of, all other contingencies cleared, but this could send the deal down in flames. Regina urged me to start checking around with some other lenders to see if someone else could make the loan. In the meantime, she and the listing agent kept working with the HOA to see if there was any way around the budget.
Regina had worked before with a lender from Wells Fargo who I connected with. I was initially quite skeptical - I didn't feel at all like switching lenders this late in the game, and especially not to someone from a big bank. I was pleasantly surprised when he quoted me a rate and fees competitive with what I was getting from Provident, one that came in below that listed on the Wells Fargo web site. I suppose that loan officers have some leeway in making offers, and can trade in some of their commission in exchange for landing a deal. There was a catch, though - they didn't care about the budget, but would still require a full HOA review, which could take a while, and might come back negative. I could fast-track the application by putting down 30%, which sets it into a different set of standards and has a speedier approval process.
That was a possibility for me; I could have bumped up my down payment, but obviously that wasn't my first choice. I also spoke with a mortgage broker who the listing agent knew. (The listing agent was with Prudential Realty, and the broker with Prudential Finance, so it seems likely that there was some back-scratching going on.) She took all my financial docs - tax returns, pay stubs, etc. - but we never got around to actually meeting due to some late nights I had to work.
Regina and the listing agent were having a hard time tracking down the HOA. The contact person's cell phone mailbox was full, and the only way they could get ahold of him was by camping out in front of his office until he showed up. When they did get him, he was helpful. The budget we had received was the official one drawn up in February at the start of the fiscal year; since then, the budget had been revised, but not yet reprinted. He produced the updated one, faxed it off to Regina. The loan analyst checked on my verification of employment and rent history and submitted everything back to the underwriter. He came back and said that the budget would need to be signed.
Regina mildly flipped out, pointing out (accurately) that this requirement hadn't been expressed before, that it always took days to get updates from the HOA, and that we were running up against the extended contingency date for loan approval, and that our closing date was in jeopardy. Then, we all went back to work. We got the signed budget, put it back in, and waited for the answer.
Friday, November 26, 2010
Friday, November 19, 2010
Inspector Gadget
I'd become mildly addicted to Redfin's forums during my home search. Redfin lightly moderates them, and tolerates an amazing range of voices. The Bay Area board contains a few cheerleaders, who tend to obsessively focus on the specialness of particular areas like Palo Alto, but seems generally dominated by skeptics who are convinced that the market has a ways more to fall. The skeptics range from people who forecast stagnant prices for the next five years to people convinced that we will see a return to 1996 prices.
Anyways, it's always interesting, and often useful. The best bit of wisdom I've heard on there was something along the lines of, "your negotiations have only begun once your offer is accepted." That proved to be very true for me, and I was glad that I was mentally and emotionally prepared for the roller-coaster that followed, rather than passively believing that the hard parts were over.
Like I mentioned earlier, we had put together an offer with a fairly aggressive 30-day closing period. That worked fine for me, but I would have been happy with almost anything - I'm renting month-to-month right now, and while I've been looking forward to shortening my commute, I don't have any particular deadlines to hit. After learning that the unit was tenant-occupied, I actually wondered whether the sellers wouldn't prefer a longer closing period so they could give the renters adequate notice. In any case, though, we decided to go ahead with the 30-days.
Most of the closing period focuses on closing contingencies. My offer had included all the major contingencies - loan approval, appraisal, home inspection, pest inspection, and HOA review. In retrospect, one annoying aspect of this period was that, perhaps partly due to the shortened timeline, I needed to do all the contingencies that I had to pay for up front, and the contingencies that the seller had to pay for towards the end. That meant that, for example, I could easily spend a thousand dollars on my loan application and inspections, only to find out later that the HOA was in bad shape and that I wouldn't want it anyways.
Redfin has a very streamlined and efficient closing process, which is both good and bad. I felt like I couldn't give a lot of input into the process - for example, Regina went ahead and ordered the inspections right away, without asking if I had a particular inspector I wanted to use. I was planning on going with her guidance anyways, but still, I would have appreciated being asked. I'm sure that if I had kicked up a fuss I could have gotten my own inspector in there, but whatever.
On the plus side, it's always very clear what you need to do at any stage of the process. A lot of that involves reading documents, signing them, and then faxing them back by a certain time. I probably put over a hundred pages through the office fax machine before it was all done - fortunately, Redfin's fax is a local call to us.
We did the property and pest inspections on the same day. I stopped by on the way in to work, met up with Matt, and waited a few minutes for the inspectors. They were both friendly and helpful; I tagged along, they voluntarily pointed out the things that they were noting, and answered all my questions. They re-noted some things that had previously come up in the disclosures - for example, that the sliding balcony door didn't have a lock - and also went into more details; the property inspector suggested that I check with the HOA to see if they had records about the door brand and model, since with that information I could easily find a replacement locking handle that I could install myself. They also found a host of other issues, nothing critical but plenty that I would want to take care of... some voids in grout, a loose wax seal on the toilet, some holes on the balcony railing. All the major stuff seemed fine, though... the electrical system was good, no leaks in any plumbing, no mold, all appliances functional.
Matt also did his own walk-through, again noting some of the same things as from the disclosures. He also observed that some of the issues noted in the initial seller agent's walkthrough were probably actually OK - for example, the disclosures had noted that the cabinets above the sink were missing doors, but we agreed that they were almost certainly designed that way.
I chatted with Regina about the results. None of the proposed repairs seemed onerous, so I released these contingencies and waited for the next round.
Anyways, it's always interesting, and often useful. The best bit of wisdom I've heard on there was something along the lines of, "your negotiations have only begun once your offer is accepted." That proved to be very true for me, and I was glad that I was mentally and emotionally prepared for the roller-coaster that followed, rather than passively believing that the hard parts were over.
Like I mentioned earlier, we had put together an offer with a fairly aggressive 30-day closing period. That worked fine for me, but I would have been happy with almost anything - I'm renting month-to-month right now, and while I've been looking forward to shortening my commute, I don't have any particular deadlines to hit. After learning that the unit was tenant-occupied, I actually wondered whether the sellers wouldn't prefer a longer closing period so they could give the renters adequate notice. In any case, though, we decided to go ahead with the 30-days.
Most of the closing period focuses on closing contingencies. My offer had included all the major contingencies - loan approval, appraisal, home inspection, pest inspection, and HOA review. In retrospect, one annoying aspect of this period was that, perhaps partly due to the shortened timeline, I needed to do all the contingencies that I had to pay for up front, and the contingencies that the seller had to pay for towards the end. That meant that, for example, I could easily spend a thousand dollars on my loan application and inspections, only to find out later that the HOA was in bad shape and that I wouldn't want it anyways.
Redfin has a very streamlined and efficient closing process, which is both good and bad. I felt like I couldn't give a lot of input into the process - for example, Regina went ahead and ordered the inspections right away, without asking if I had a particular inspector I wanted to use. I was planning on going with her guidance anyways, but still, I would have appreciated being asked. I'm sure that if I had kicked up a fuss I could have gotten my own inspector in there, but whatever.
On the plus side, it's always very clear what you need to do at any stage of the process. A lot of that involves reading documents, signing them, and then faxing them back by a certain time. I probably put over a hundred pages through the office fax machine before it was all done - fortunately, Redfin's fax is a local call to us.
We did the property and pest inspections on the same day. I stopped by on the way in to work, met up with Matt, and waited a few minutes for the inspectors. They were both friendly and helpful; I tagged along, they voluntarily pointed out the things that they were noting, and answered all my questions. They re-noted some things that had previously come up in the disclosures - for example, that the sliding balcony door didn't have a lock - and also went into more details; the property inspector suggested that I check with the HOA to see if they had records about the door brand and model, since with that information I could easily find a replacement locking handle that I could install myself. They also found a host of other issues, nothing critical but plenty that I would want to take care of... some voids in grout, a loose wax seal on the toilet, some holes on the balcony railing. All the major stuff seemed fine, though... the electrical system was good, no leaks in any plumbing, no mold, all appliances functional.
Matt also did his own walk-through, again noting some of the same things as from the disclosures. He also observed that some of the issues noted in the initial seller agent's walkthrough were probably actually OK - for example, the disclosures had noted that the cabinets above the sink were missing doors, but we agreed that they were almost certainly designed that way.
I chatted with Regina about the results. None of the proposed repairs seemed onerous, so I released these contingencies and waited for the next round.
Friday, November 12, 2010
Rebound
Real estate really is a game. It's a game where the rules are constantly changing, and no two rounds are the same. I've spent well over a year reading up on every aspect of the process, both nationally and locally, and still was regularly surprised by what happened during my own search.
Case in point: about a week after I turned down (or was rejected by) the Mateo Avenue condo, I got a call back from Regina. The sellers were wondering if I would be interested in seller financing. I was fairly familiar with this idea based on my research; the basic idea is that, since I had offered $X and they wanted $X+30k, they would lend me the $30k in a separate loan. There can be some advantages to seller financing - you can get a better rate than from a bigger lender, and you can more easily get approved. I figured that the sellers probably realized that I was the only serious buyer they had encountered, and that they thought I wouldn't go above $X because it was the most I could afford. In reality, I could afford more than their asking price, I just didn't think it was worth that much. I wasn't interested in taking out a $30k loan for an overpriced home.
I told Regina that I wasn't interested in financing, but, if they were willing to drop their price, I'd still be interested in the property. We went through some back-and-forth, and they ended up coming down $20k. That was still $10k over my initial offer. I mulled it over for a while - it was more than I thought it was worth, but it seemed like this might be my last and only chance to get a decent condo that I could afford in the area I wanted. In the end, I decided that I'd go for it.
Rather than put together a new offer, we got back a counter from the sellers with the agreed-upon price. It also came with an "as-is" addendum. I talked with Regina for a while about what this meant - basically, it said that the sellers wouldn't be making any repairs for stuff that had already been disclosed or for "minor" problems found during the inspection. It's intended to acknowledge that this is an older property and that stuff won't be perfect, and that I'm buying it with that understanding. I wanted to make sure that I wouldn't be giving up any rights to ask for repairs or credits for major issues found during inspection. I was safe on this front, so I signed the counter and the addendum, and we entered contract.
Case in point: about a week after I turned down (or was rejected by) the Mateo Avenue condo, I got a call back from Regina. The sellers were wondering if I would be interested in seller financing. I was fairly familiar with this idea based on my research; the basic idea is that, since I had offered $X and they wanted $X+30k, they would lend me the $30k in a separate loan. There can be some advantages to seller financing - you can get a better rate than from a bigger lender, and you can more easily get approved. I figured that the sellers probably realized that I was the only serious buyer they had encountered, and that they thought I wouldn't go above $X because it was the most I could afford. In reality, I could afford more than their asking price, I just didn't think it was worth that much. I wasn't interested in taking out a $30k loan for an overpriced home.
I told Regina that I wasn't interested in financing, but, if they were willing to drop their price, I'd still be interested in the property. We went through some back-and-forth, and they ended up coming down $20k. That was still $10k over my initial offer. I mulled it over for a while - it was more than I thought it was worth, but it seemed like this might be my last and only chance to get a decent condo that I could afford in the area I wanted. In the end, I decided that I'd go for it.
Rather than put together a new offer, we got back a counter from the sellers with the agreed-upon price. It also came with an "as-is" addendum. I talked with Regina for a while about what this meant - basically, it said that the sellers wouldn't be making any repairs for stuff that had already been disclosed or for "minor" problems found during the inspection. It's intended to acknowledge that this is an older property and that stuff won't be perfect, and that I'm buying it with that understanding. I wanted to make sure that I wouldn't be giving up any rights to ask for repairs or credits for major issues found during inspection. I was safe on this front, so I signed the counter and the addendum, and we entered contract.
Friday, November 5, 2010
Ball One
I knew that my lower offer would have a tougher chance of getting accepted, so I made clear to my agent that I was happy to do anything outside the price to make the offer more attractive. I included a sizable 3% earnest money deposit (the maximum allowed for liquidated damages under California law), and offered a 30-day closing window - I had been pre-approved through Provident Credit Union, and was ready to move forward with them, plus since I'm in a month-to-month lease, I could move out of my current place whenever I wanted.
Because of the slight delay getting the disclosures, we ended up submitting the offer on a Monday instead of a Friday, and gave them 48 hours to respond. I was expecting a "Yes," "No," or, more likely, a counter. Instead, I got a pseudo-counter - the seller's agent wanted to know if I'd be willing to pay just $10k less than the listing price. My response was, "Uh, no." Again, having done my research, I knew that that was way too high. Regina wanted to know what my final offer would be; I let her know that my initial offer was basically my max, but that I would be willing to go a few thousand higher to close the deal. That still left a hefty gap between us. She called back in a bit to say that they weren't interested. I shrugged, went "OK," and moved on.
I was kind of surprised by how well I took it - it was the closest I had come yet to buying a condo, and it had seemed like it had the right potential to work. It was a rare unit in the area I wanted, small enough to fit into my price range, and overpriced enough to scare off competition. Again, I continued taking a break... it seemed like by this point I'd exhausted all my options, and, barring a price drop at Belamor, I'd be best served deciding whether to switch my search to another area or resigning myself to renting. Still, I wasn't too disappointed - since I had based my price on facts and not on emotion, I could confidently say "No" and not second-guess myself.
Because of the slight delay getting the disclosures, we ended up submitting the offer on a Monday instead of a Friday, and gave them 48 hours to respond. I was expecting a "Yes," "No," or, more likely, a counter. Instead, I got a pseudo-counter - the seller's agent wanted to know if I'd be willing to pay just $10k less than the listing price. My response was, "Uh, no." Again, having done my research, I knew that that was way too high. Regina wanted to know what my final offer would be; I let her know that my initial offer was basically my max, but that I would be willing to go a few thousand higher to close the deal. That still left a hefty gap between us. She called back in a bit to say that they weren't interested. I shrugged, went "OK," and moved on.
I was kind of surprised by how well I took it - it was the closest I had come yet to buying a condo, and it had seemed like it had the right potential to work. It was a rare unit in the area I wanted, small enough to fit into my price range, and overpriced enough to scare off competition. Again, I continued taking a break... it seemed like by this point I'd exhausted all my options, and, barring a price drop at Belamor, I'd be best served deciding whether to switch my search to another area or resigning myself to renting. Still, I wasn't too disappointed - since I had based my price on facts and not on emotion, I could confidently say "No" and not second-guess myself.
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