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Primer on Private Mortgage Insurance

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I just had a quick review on private mortgage insurance (PMI), due to a real situation with a client.  Most Realtors have to know a little something about mortgages, but with the ever-changing rules, laws and climate of the financial industry, it’s hard to stay on top of it all.   My client was quoted a certain rate on their PMI before getting into a contract to buy a home, and by the end the price had gone up almost $100/mo. from the original quote. While to some 100 bucks is chump change, to this client it almost broke the bank and killed the deal.   The client saw it more as $1200 extra a year and $6000 extra over 5 years. Here are some tidbit and a few new things I learned.

Most people know that PMI is required for FHA loans.  However, it’s any loan that is over 80% of the loan to value.  Or another way to put it, if a borrower does not put down 20% or more of the purchase price, PMI is required by the lender.  Many would see it like a punishment for not having enough money to put down.  This type of mortgage insurance is not for the borrower, rather it’s insurance for the mortgage company or note holder.  They are protecting themselves against the borrower defaulting on their loan.  The theory being, if a borrower puts more money down (in this case 20%) they are less likely to default or not pay their mortgage payment.  Or conversely, when there is less “skin in the game,” there is more reason to bail or default when times get tough.   A borrower can be relieved of this dreaded insurance by paying down their mortgage so that they have 20% equity, or their loan is 80% of the home value.  I’ve heard that mortgage companies are required to cancel the PMI once it hits 78%, but the savvy borrow might keep a closer eye on things and get it cancelled sooner.   The other way to get rid of PMI is if the market is favorable – over time values can increase to a point where the home is reappraised and the market has worked it’s magic… no more PMI!

Mortgage insurance is actually run by private companies, hence, private mortgage insurance (PMI).  It’s not run by the bank/lender or mortgage broker.  There are three main companies here in Sacramento, CA.  They post their rates, kind of like title companies, so there’s not much negotiating.  I learned though that the rate varies (goes up and down slightly) based on one’s credit score and amount of down payment.  FHA loans require 3.5% down payment – it may be worth it to see what the difference is if you can afford to put down 5% (1.5% more).  It could lower your cost in the long run.

Any other lenders and real estate buffs have more to add – feel free to comment.

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Keith Klassen, Real Estate Broker

Klasssen & Associates / 916.595.7900

Home Inspections – Perceive the Need

I worked at a semi, high-end restaurant while in college.  I started as a busser, moved up to “expediter” (the person who double checks plated food for accuracy before they go out to guests, puts garnishes on, etc.), then became a server, and ended up being a trainer for the servers.  One important piece I recall teaching was, “perceive the need of the guest (before they ask).”  Or when they do ask, you, like a magician hand them exactly what they wanted – that feels good and everyone is happy!  When a Caesar salad is served, bring the pepper grinder and offer fresh ground pepper.  When clam chowder goes out, put some crackers and hot sauce in your apron.  Steak knives go with steaks, straws go with certain drinks,

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lemon wedges go on a fork with shrimp cocktail, kids like to color – give ‘em crayons.  Perceive the need.  This can be applied to most everything in life.  This may come natural to some, yet others need to develop and practice this skill – a little forethought and care goes a long way.

Attention Realtors and home sellers (at least in California), inspections and appraisals can go much more smoothly by perceiving the issues ahead of time.  I write this after applying my own advice, which is really just you taking advantage of my failure and experience of having 100’s of inspections done – some I got lucky, and others went badly.  Finally, I started making a mental note… then I made a physical note to self – a checklist of sorts.  Keith Klassen: Before inspection, make sure the follow things are in place…. aka., stop making the same mistakes!  Also, if you are the buyer’s agent, it’s not a bad idea to ask the listing agent or seller to make sure the following are done (Doesn’t not apply to cash offers, but still a good idea).

  • Ask your favorite appraiser for a list of FHA guidelines, if the buyer is using this loan product. Some favorite overlooked items
    • Self-closing hinge on door to garage
    • Peeling paint
    • Low windows (usually to the side of the front door) that are not tempered glass
    • The obvious, smoke detectors and CO detector. Are they there?  If so, do they work?  Test them.  Ask your appraiser for the guideline they use (seems to vary from one to another).
    • Earthquake-strapped water heater

 

  • Another seemingly obvious one: Make sure utilities are on –  Electricity, gas, water (WIFI with password and a comfy chair for me to keep working while I stand around – ha ha).

 

Since I deal with a lot of income properties, it’s common for a tenant to move out and the power stays on, floating without a name on the account.  Make sure it goes back into owner’s name.  Recently, a tenant moved out, power was on for months and I assumed it was transferred into owner’s name (good assumption, right?).  We get into contract and, of course, the appraiser and inspector go out and the gas is turned off.   I was just there two days prior!  Both charged $125 for a re-inspection for that error.  Who eats that cost?  Most likely me.

 

  • Make sure attic and crawl space are accessible. Try to get owners to make open and accessible – take locks off gates; unlock garages, move things away from walls to get to electrical, etc.  Many times garages are so packed with gear, so much so, the inspector cannot even get to the hatch to the attic (same goes with entrance to crawl space if in a closet – no one wants to move dresses, shoes, suits and boxes with party hats and keepsakes).  Then you’ll get the ol’, “I don’t move personal items to inspect.”  That’s a whole nuther topic – don’t get me started!

What’s your #4?  What would you add to the list?  Thanks for reading and please subscribe, share, or leave your comments.

Cheers,

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Keith Klassen, Real Estate Broker

916.595.7900

Oak Park, Curtis Park Reunion / Gentrification / Local Eats

Lately there’s been some chatter about bringing the two Parks together.  Since the late 1950’s (I read 1959), when highway 99 cut off Oak Park from Curtis Park, this subsequently divided the two Parks and ghettoized Oak Park (Good Article on the History of Oak Park).  There’s a tunnel on 2nd Ave. that goes under the 99 freeway, where art work is proposed to bring the two Parks together – messages that welcome and encourage cross-over.  I love this idea and reliance on the local residence to give input and be part of the building process.

Another hot conversation revolves around the revitalization of Oak Park.  Clearly property values and rents are going up, up, up!  It wasn’t but several years ago everyone was “under water” on their mortgage.  Now, if they didn’t foreclose, those owners are considered genius for holding their investment (or maybe just lucky).  Much development is taking place – the Broadway Triangle, bringing restaurants, retail, and residential living opportunities.  Early adopters as the good folks at Old Soul, Naked Lounge, Arthur Henry’s, the Brick House art studio, etc. have paved the way.  Oak Park Brewery is now legit.  Five years ago you’d be afraid to get robbed or at the very least propositioned by a prostitute… now people are listing to live music and eating trendy mobile truck food, all on the open patio!  Newer-comers like Broadway Coffee, Capitol Floats, (I got my wife and I a gift certificate to try out one of these isolation, float tanks – I can’t wait!),  The Plant Foundry Nursery, La Venaditas continue to enhance, bring life and some would say gentrify the area.  I saw this tag out front of La Venaditas when my wife I got out there to try some delicious tacos, ceviche, and cold beer!

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An interesting article was written about the restaurant in the Bee.

What are your thoughts on joining the two Park?

What do you think of gentrification?  All for the good, or displaces and wrecks the community?

And most important, who like tacos??????  Seriously though, have you tried La Venaditas?  I hear their happy hour worth a shot.

Cheers,

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Keith Klassen, Real Estate Broker (916.595.7900)

 

Closing Letter – The little things make a big difference

In an industry where the Realtor is often the scapegoat for any problems related to the deal that go sideways, it’s such a pleasure to get a thank you letter from a client, where hard work and professionalism is acknowledge.

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Keith,

Just a short note to thank you for your extraordinary service in the recent sale of my property on [street address]. How lucky that I ended up working with you when my tenant decided to move!

In these days of poor customer service, it is heart-warming and reassuring to meet people like you. Not only did you help me navigate the difficult waters of fixing the place up for sale: you advised me well on which repairs would add value, and which would not. Your expert assistance in selecting just the right contractor for the job and seeing the job through far exceeded my expectations.

Thank you for responding promptly to my queries, and for a job well done.

I will certainly be happy to serve as a reference for anyone considering your services.

Sincerely,
[client’s name]

Flipping Houses – Investors’ Mistakes

I get frequent calls from investors and referrals consistently of those who are fliplooking to invest in and/or flip properties.  The latest was a semi-retired contractor who has enough cash to buy and improve a home, and would like to do several of these a year.  The potential problem:  He’s never done this before.  So I did a little hand-holding, went over spread sheets and took him through a real potential property to flip.   This was an off-market deal – not offered to the general public – derived from a relationship I have with another investor.  At the end of the day the seller asked for $5000 more than they originally said they wanted – still a good deal.  The buyer (being new) got really offended by this and said that he felt jerked around.  I agree, no one likes to pay $5000 more after expectations get set at the lower price.  Instead of trying to negotiate or come up with a solution, the buyer just emails me, “You’ve found some real winners to work with!  Have fun!”  I emailed him back (since he stopped returning phone calls), erring on the side of miscommunication I replied, “I’m not sure how to take this last email… clearly you are frustrated.  Are you calling it quits?  Is that the way I should read it, or are you just frustrated with this deal?”    I’ve yet to get a response, taking that to mean he threw in the towel, with no acknowledgement that I took the time to educate him, coach him, and served him up a sweet deal – just that I somehow was part of “jerking him around.”  He’ll probably never know how good it was, even at the higher price.  Some of you may wonder how sweet at deal it actually was, or if it was a good deal or not?  The proof is in the rest of the story.

The very same day I return a call to one of those investors who calls saying, “Looking for a good deal… want to flip a property [yada yada yada].”  I almost didn’t call him back after that last incident.  After asking the caller a few qualifying questions (realizing that this guys if for real), I told him about the same deal at the higher price.  He got so excited that he ran out to the property the same day, met his contractor, and we wrote an offer the following day!  He thanked me profusely.  The deal closed in two weeks without a hitch.  Again, he could not stop thanking me and was so glad for the deal.  In fact, they will be done with the project in a few weeks (1 month turn around) and they asked me to list the property.  A home run for everyone!

This is what a seasoned investor/flipper realizes:

1) It’s all about inventory – at least right now in the Sacramento CA area.  Without the project/property, nothing else matters.  If you cannot land the deal, everything else is a waste.

2) It doesn’t matter what the previous owner paid for it, nor what they will make from the sale, nor what the agent will make.  What matters is if the deal is good for them per the numbers.   Don’t miss the obvious and focus on your situation answering the questions, “Is this a good deal for me?”  This is the only magic there may be – figuring out the real disposition cost and an true exit strategy.

3) They don’t take it personally.  Clearly the first, unseasoned guy let his emotions get in the way and let them cloud his judgement.  I think that if he could have got past the feeling of being jerked around and realize that it’s part of the “game,” he could have executed a great turn-around.  The next guy swooped in and is going to make a chunk of change, and we’ll probably do a bunch more deals in the future.

4) Relationships are of the utmost importance.  I always appreciate the trust from those sending referrals and putting in a good word.  And it takes time and energy to develop relationships that create a win-win on both sides of the deal.

I guess the comments by the “rookie” that were meant to hurt me, were the truth after all.  I picked some real winners to work with [not him] and I AM having fun.  I took it as a learning lesson and reminder to qualify the would-be investor/flipper more carefully.  I am thankful for the experience and hopefully I can have more discernment on the future –  it never feels good to pour into a would- be-investor, only to get kicked in the stomach on the way out.  Thanks for playing!

What’s your recent “war” story, whether as an agent or investor?

Cheers,

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Keith Klassen, Broker

Is the Bubble Going to Burst in Sacramento Housing Market?

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My kids (and adults alike) love these huge bubble makers – they are awesome!  It seems like the public feels the same way about the real estate market.  One investor, friend of mine, who has been in business since the early 70’s – yes, 1970’s) is very skeptical.  He says, “Maybe it’s just the old guy in me talking [kind of sounds like my dad], but I’m sure if this appreciation in the market is real or manufactured?”  He went on to say that with the government backing so many loans at 3.5% down, so many home buyers are instantly upside down in their home after they buy it, as it takes about 8-10% to sell it.”  I’ve never really looked at it like that before. My response was, “but hardly any other buyers are able to even get an offer accepted, let alone close on a home, due to all the investors gobbling up the inventory with cash!”  My seasoned friend mused on, “Even with unemployment going down, I wonder how many of these new jobs are substantial… solid jobs – ones where people are making a good living and able to buy or invest with confidence.”   I left that conversation thinking:  1) The market will keep going up as long as there is demand, and I know with my list of buyers, there is HUGE demand.  And, it will keep going up as long as there is a perception of health in our economy – that seems what everyone wants to feel, even if it’s just a perceived reality.  How long will it last?  Or, at what price are these home unattractive to both investors and buyers?  2) Especially for investing… proceed with caution.  Another friend at the table said that he will only invest if he knows that he can get out safely within 6 months.  It’s interesting to hear seasoned investors say they are unsure and don’t know, especially when the wisdom of the day is to make certain proclamations like, “We got 2 years of appreciation!” or “Once the unemployment rate falls to ____, then interest rates will go up.”  Some of these statements have truth embedded, but beware of those who “knows for sure.”

Another respected voice, Jed Kolko (Cheif Economist) says in a recent article, “that the next housing bubble is probably just a matter of time. But, as Trulia’s Bubble Watch shows, that time is not now.”  See this interesting article HERE.

Getting the Deal Done – Thoughts on the Sacramento Market

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JUST SOLD – 7113 Rimrock, Sacramento CA 95828 – It went into contract in one weekend with multiple offers – this seems to be the case on most listings these days.  I hate to admit it, but I only went to this property two times – once to put the lock box on and take pictures, and once to take the lock box off.  I began to line up lawn care and an open house, but it flew off the shelf so fast, none of that was necessary.  The other trend is cash offers from large investment firms.  It’s tough being on the buying end, especially with a loan offer, and even more so if it’s FHA.  We received over 15 offers and the first thing the owner does is “throw out” the FHA offers.  The negotiation phase is where I earned the commission… these investors come across firm, with a stance as though they won’t budge.  What they don’t know is, I’m an investor too and I represent many investors.  With this mindset, I was able to remind the seller that he held all the cards and there was a few more dollars to be made.  The classic price reduction came once in contract and after inspections – we reminded the buyer that there were 15 others in line that would be happy to scoop this up if they did not move forward at the agreed upon price.  There was a lot of squirming and posturing, but finally they conceded.  Reminded me of putting my two boys to bed at night – whining, flailing, a little goofing around, then they give in and fall  asleep.  Like raising children, selling real estate can look easy from an outsider’s point of view, but experience (success and failures/battle scars) and a lot of finesse goes into making the outcome a success

Keith Klassen, Broker – 916.669.9030

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