Home Radio Segments Real Estate Round-up How To Recognize And Protect Yourself From The Latest Mortgage Scams

How To Recognize And Protect Yourself From The Latest Mortgage Scams

Terry Story, Protect Yourself From The Latest Mortgage Scams

With Terry Story, 29-year veteran Real Estate Agent with Keller Williams in Boca Raton, FL

Partnering To Buy Homes

Steve kicks off Real Estate Round-Up by noting that home prices have risen to such a degree that small mom-and-pop investors are starting to partner up with others in order to afford them.  Investment properties have surged about 25% from 2014 to 2016, according to the National Association of Realtors, and have attracted investors who are keen to flip homes to try and make some money.

The market is very tight in the $300,000 entry-level range, so investors are teaming up to buy more expensive homes where competition is not as pronounced.

The Risks Of Investment Partnerships

Terry adds that it’s a great idea to partner, but you’ve got to be fully aware of the risks and rewards and must have your agreement in writing, clearly laying out what is expected of each in terms of ongoing capital and in-kind contributions, cost, and profit sharing, etc.

Moreover, partners should be clear about how losses would be distributed, whether they’d all go to the lead investor who put in most of the money and wants the loss for tax purposes, or something else.

Tiny Homes

Steve moves on to another topic that was in the news a lot in 2017, tiny homes, defined as under 600 square feet, which are appealing to about 53% of all surveyed adults.  45% of baby boomers and 30% of the elderly would consider tiny homes, but younger generations have a much stronger interest in them.

The problem with tiny houses, though, is that you have to be in a community and an area that would allow zoning for them.  Tiny homes particularly do not make sense where zoning calls for minimum lot sizes of, say, 5,000 square feet, making 600 sf homes impractical and unaffordable due to high lot acquisition costs and other reasons.  Instead, people may find it easier to acquire a 1,000 sf apartment instead.

Lenders Preying On Veterans

In closing, Steve wants his listeners to be aware of the deeply disturbing issue of mortgage lenders preying on veterans by offering them mortgage refinance deals that actually hurt them financially within a few months and for the long term.  Here’s their modus operandi:

Lenders approach borrowers with teaser rates, zero payments for the first few months and escrow refunds, and essentially bait them into swapping fixed long-term loans for short-term floating rate loans.  In doing so, lenders generate fat fees from these new loans but straddle veterans with higher long-term costs and more burdensome loan terms.  This switch from long-term rates to short-term floating rates is a really bad idea, especially when interest rates are only expected to go up (as was clearly stated by the Federal Reserve, which could hike rates three times in 2018, for a total hike of at least 0.75%) and increase your monthly mortgage payments.

For example, if you have a $300,000 loan and rates go up by 0.5%, you’d pay at least $1,000 each year to your payments.  And if rates go up even more, your “savings” from switching will evaporate very quickly.

Steve reminds us that these were tactics used prior to the crash of 2008, so don’t be fooled by any promise of something that seems too good to be true.  Instead, if you’re looking to refinance, get a couple of opinions before you make any decision.

Disclosure: The opinions expressed are those of the interviewee and not necessarily United Capital.  Interviewee is not a representative of United Capital. Investing involves risk and investors should carefully consider their own investment objectives and never rely on any single chart, graph or marketing piece to make decisions.  Content provided is intended for informational purposes only, is not a recommendation to buy or sell any securities, and should not be considered tax, legal, investment advice. Please contact your tax, legal, financial professional with questions about your specific needs and circumstances.  The information contained herein was obtained from sources believed to be reliable, however their accuracy and completeness cannot be guaranteed. All data are driven from publicly available information and has not been independently verified by United Capital.

Read The Entire Transcript Here

Steve Pomeranz: It’s time for Real Estate Roundup. This is the time, every single week, we get together with noted real estate agent Terry Story. Terry is a 29-year veteran with Keller Williams, located in Boca Raton, Florida. Welcome back to the show, Terry.

Terry Story: Thanks for having me, Steve.

Steve Pomeranz: So, Terry, prices of homes have risen to such a degree that some small investors are starting to partner up with other people in order to be able to afford them. What do you know about that?

Terry Story: Yeah, that’s right. You know, a lot of investors are just little ma-and-pa investors, they’re looking to acquire one or two properties for their portfolios. And we’ve actually seen investment properties surge about 25% from 2014-2016, according to the National Association of Realtors, so it’s an attractive idea to be a flipper and try to make some money.

Steve Pomeranz: Mm-hmm (affirmative).

Terry Story: Now when I say that, it’s also very important to know what you’re doing. What I’m seeing, Steve, is that Investor 1 may be able to purchase up to $300,000, and that market is very, very tight. There’s not much for sale in the entry-level market. So, they’ll double that amount or triple that amount. I’ve got one investor, right now, who’s looking at an $800,000 house and has to pull in a partner in order to do it.

It’s a great idea, but you’ve got to beware. You know, any time you go into a partnership, you better be fully aware of the risk and rewards of a partnership.

Steve Pomeranz: Yeah, well, again, it’s like a personal relationship, it’s kind of a business marriage, so you guys better figure out who’s going to do what, definitely get it down on paper, so there’s no question later on.

Terry Story: Yeah, you can’t just be, one person can be … You know, it’s okay to have one person be more the money guy and the other guy actually doing the work and orchestrating the work. But have a plan and have it in writing.

Steve Pomeranz: Yeah, yeah.

Terry Story: How the profits are going to be divided, is it 50-50? A lot to think about. And then we’re talking about the profits, well, what if there’s a loss?

Steve Pomeranz: Yeah. Who takes the loss? Both of you? The money guy? You know, because if one person’s the money guy, puts in let’s say the lion share of the money and the losses—maybe the smaller money investor really can’t afford to take a loss.

Terry Story: Right.

Steve Pomeranz: And maybe the money guy wants the loss for tax purposes, perhaps.

Terry Story: Yeah, there’s a lot to discuss when it comes to being a small investor and starting up a partnership with it.

Steve Pomeranz: All right, good information. Another item that has come under my eyes here is this whole idea of tiny homes which are homes defined as those about 600 square feet in area … were seemingly very popular for a while, and we wondered whether they were a fad or not. Has that trend continued, Terry?

Terry Story: Well, you know it’s interesting. When they survey people, half of adults recently surveyed—like 53%—said they would consider a small home. And then when you start looking at the younger generations, they find it appealing, which I think it’s just an interesting concept. They’re open to the idea. Baby boomers, however, there’s about 45% of them that would consider it. And in the elderly population, there are about 30%.
So here’s the problem with the tiny houses. You have to be in a community and an area that would allow it in zoning. If you think about it, Steve, the minimum lot size requirements, in some towns, the minimum lot size has to be, I don’t know, I’ll make it up, 75 by 100. Well, you’re going to really put a tiny house on a 75 by 100 lot?

Steve Pomeranz: Yeah.

Terry Story: And the cost of the land is so expensive, I just don’t see them popping up in Boca Raton, for example. You know, a lot’s going to cost you $479,000, and you’re going to put a 600-square foot house on it? I mean, it doesn’t make a whole lot of sense.

Steve Pomeranz: Well, you know, it seems to be the size of like a mobile home or something. To me, 600 square feet is just nothing. I mean, you get an apartment-

Terry Story: Yeah.

Steve Pomeranz: You’re going to have 1,000 square feet or 1,100 square feet mostly.

Terry Story: Right, most apartments that we see around here would be in a minimum 980 to 1,100.

Steve Pomeranz: 980. Right. So, think about 600 square feet, and you’ve got to get a kitchen in there and a bathroom and bedrooms and living room. It’s really tough.

Terry Story: Well, you know, and then you talk about like New York City. I’ve never been into any of those apartments, but from what I understand, they all make them sound like they’re 100 square feet.

Steve Pomeranz: Yeah, that’s very true, that’s very true. So, that is not just a fad, it is more of a trend, but it’s got some limitations because communities and municipalities probably frown on them, to some degree. So, you have to be very careful about where you decide to try to do something like that.

Terry Story: That’s right.

Steve Pomeranz: Okay. I wanted to talk about this other issue because it’s very disturbing and something that everybody should know about. And that is that there are lenders that are preying on veterans and offering them mortgage deals that are actually hurting them. And a lot of them are getting sucked into this, and it’s really hurting all of us. So, tell us about that.

Terry Story: Yeah, and it is very disturbing. So basically, what they’re doing, Steve, is they’re inducing these borrowers to refinance their loans, and the reason why they’re doing it, it’s in order to generate fat fees for the lenders and themselves, rather than benefiting the veterans with lower costs and better loan terms. So, it’s kind of like a baiting tactic. We’ve seen that back in the old housing boom days. These are teaser rates. They’re promising them zero payments for one or two months, refunds of escrow, switching from long-term rates to short-term float rates. It’s just a bad, bad idea, especially when interest rates are rising.

Steve Pomeranz: Yeah, so listen, listen everybody, you’ve got to use your common sense here. First of all, if you’re going to go from a fixed long-term rate, and you’re going to go into a shorter, floating rate, you have the risk that if interest rates rise, your payment, your mortgage payment will rise. And if you think that the money you’re saving is something that’s going to last for a long time, you could be sorely mistaken. That could really, really hurt you. These are the things that happened prior to the crash in 2008 and to the mortgage meltdown. And we’re starting to see this again, so don’t be fooled by any promise of something that seems too good to be true.

Terry Story: Yeah, exactly. It’s just taking advantage of maybe people who aren’t totally informed as to what they have. If you’re looking to do any kind of refinance, get a couple of opinions before you make that decision.

Steve Pomeranz: Absolutely. You know, if you have a $300,000 loan and rates go up a half of 1%, that could add more than $1,000 a year to your payments.

Terry Story: That’s right.

Steve Pomeranz: So right now, rates seem to be wanting to rise. There’s talk about the Federal Reserve raising interest rates, this year, by maybe three times, so that’s particularly good to watch out for. Be careful about that. Be careful about teaser rates, you know, that looks like … maybe they’ll offer you 1% for six months, but then what happens after that is anybody’s guess. So just be very careful.

Hey, Terry, we’re out of time, so I just want to mention that Terry’s a 29-year veteran with Keller Williams, located in Boca Raton, and she can be found at TerryStory.com. Thanks, Terry.

Terry Story: Thanks for having me, Steve.