Don't Assume Your Mortgage Broker Is Out To Get You

Sometimes they may not know what they're doing either.  There's a story in the Wall Street Journal about a mortgage loan officer (and landscape designer) whose family invested in a single-family house they wanted to flip.

Image of Bear Trap
Image of Bear Trap

Based on the assumption they'd flip the house quickly, they put no money down and took out an 80% mortgage priced well-above market at the time (almost 7%) and a double-digit interest piggy-back loan

The article mentions that the market in their area has shifted towards buyers, but that's not the half of it.  My parents retired to that city and it's bleaker than it reads.

Silicon Valley North 

Home to Nike, Intel, and a new Google facility, Beaverton, Oregon (just outside Portland) is a meant to be a suburban copy of Silicon Valley with more rain and better public transportation.

A few years ago, my folks and I looked at houses where there are actually streets named after Silicon Valley cities to make their prospects feel at home.  Now, you can't throw a football around that neighborhood without hitting a "for sale" sign.

If You Fail to Plan, Plan To...

The Catch-22 situation in the Wall Street Journal article was brought about by not considering alternate exit strategies if your primary out falls through.

But the real kicker here is that this was a mortgage loan officer who got herself into the situation of taking out loans that were above market: now they can't rent the place without losing money.  (This is actually abnormal in many parts of the country!)

What to Do, What to Do?

They can't afford an agent now, so they've listed their property for sale by owner (FSBO).  To better communicate the pros and cons of FSBO, I just finished reading The For Sale by Owner Kit by Robert Irwin --- a quality book --- and will be posting a summary shortly.

The Trap: They Fell In Twice

But Robert explicitly says in his book that most FSBO's are priced too high because the owner sets the price based on what they want to get back, not what the market will bear.

The couple in the story fell into this trap by trying to sell their house at an above market price.  In the meantime, the they're trying to rent their house with a lease-option. 

A lease-option is like "renting to own" and is usually structured where a portion of the rent payments can be applied to purchasing the house at a set price. 

The couple has set the lock-in price at 5% higher than the price they can't sell the house attoday!  And on top of that, they're asking for a deposit for the privilege.  That's both legs in the bear trap.

The Moral: Plan for Contingencies

If this couple would have gotten a set of market price loans, they would have avoided this situation completely. 

The reason why they didn't plan is because they made assumptions about the market direction instead of using solid financial numbers and analysis of their goals.

You may have feelings and even some assumptions based on data about whether the market will go up or down, but when you understand your goals and your exit strategies, you can make good decisions no matter what may be going on around you. 

Also, your mortgage broker or real estate agent may be family or a friend of a friend, but you still need to look out for your best interests.