Most Californians Have Insufficient Insurance Coverage

Owning real estate has inherent risks. From burglary to floods and fires, your possessions or your home itself could be damaged substantially by forces outside of your control. Fortunately, we have insurance to deal with those exact circumstances. In fact, when we handle an escrow for a real estate transaction involving a lender, the buyer is almost always required to get fire insurance (especially in California) before the purchase is allowed to go through. The lender (usually a bank) provides the buyer with the capital they need to purchase the property, so it makes sense that the lender would want to protect their investment in case of a disaster like a fire.

Over the past few weeks, many California home-owners were struck by tragedy when forest fires did damage to thousands of homes, some burned completely to the ground. In the aftermath, now that the fires have been contained, they have to figure out exactly how far their insurance coverage will get them since homeowners on average tend to be significantly underinsured. Insurance companies, like all other companies, are in business to make a profit. They don't want to pay any more money than they have to, so if you're one of the unfortunate Californians having to deal with this, you really need to be proactive.

Even if your home isn't in one of the current fire zones, you need to be vigilant for the future, because these forest fires have become an almost-yearly feature for Californians. Be careful with every document you sign regarding your insurance coverage. In order to maximize their profits, especially in a high-risk state like California, some insurers have been adding extra provisions to policies when customers come in for seemingly-routine renewals. The new provisions will often limit coverage for smoke damage (as opposed to damage from actual flames) or will set a short time limit within which a customer must report such damage.

One of the most common issues that homeowners run into is not being insured enough. Often, it's because of the rising costs of building materials. Now, insurers suggest that you get coverage for more than what you think you need. You can overapproximate material and labor costs, and some policies even let you include upgrades for changes to the house's wiring or for the cost of personal property, like televisions and computers. To get coverage for those products, though, you should take a video of your home and its contents, to provide proof to your insurance company if they try to give you a hard time about it.

Some insurance companies have decided to leave California entirely, stating that it's too expensive to provide insurance in an area so prone to wildfires. Others charge incredibly high rates, set exorbitantly expensive to make sure they can cover their costs in the case of a disastrous wildfire. One state-sponsored program, the California FAIR Plan, provides less costly coverage than most private companies, but will only provide up to $1.5 million in replacement costs, so you should think carefully about whether you would be sufficiently covered before you purchase such a plan.

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Common Real Estate Scams and How to Avoid Them

Just like with most other areas of business, the real estate industry has been the target of many types of very creative and successful scams. While scammers are an unfortunate part of all industries where the exchange of money is involved, real estate especially has been a focus in recent years, likely because many more real estate investors these days are not local, and instead invest from afar. When someone can afford to invest in lucrative real estate across the country without ever leaving their home, they gain valuable convenience, while at the same time opening up themselves to risk.

One of the common scams is referred to as a "land contract sale" scam. A land contract is a document that spells out the legally-binding agreement between a seller and buyer, in which the seller of the property agrees to finance the buyer's side of the sale. Basically, the seller of the property becomes like a bank, in situations where the buyer doesn't have the credit history to get a real bank loan. So, instead of getting a mortgage and paying the interest and principal to the bank over an average of 30 years, they work out a payment plan where they pay the seller "mortgage-like" payments over 30 years (or often a shorter period, with a balloon payment at the end).

The existence of land contracts is important in the real estate industry, in that it allows people with little credit history to start down the path to home ownership earlier than they normally would be able to. Unfortunately, because of how the contracts are designed, sometimes sellers are able to take advantage of their buyers. The seller will put extremely strict requirements in the contract, intended to force the buyer to break the restrictions, thus making the property revert back to the seller's ownership. Or, they might make the interest rate on the payments much higher than any rate a bank would set. Sometimes, they even choose not to file the land contract and take out loans against the property, until it gets foreclosed upon. Land contracts don't always have bad outcomes, but if you're ever in a situation where you might need one, you should have your legal representation take a thorough look.

Lending scams tend to be very common as well, especially among people with little credit history (or very bad credit scores). Some (often unlicensed) lenders will be willing to lend an investor a lot of money to purchase a property and fix it up but will charge a much higher interest rate and have a shorter period in which the borrower must pay back the loan. They will also often charge high upfront fees for "loan insurance." The way to avoid this type of scam is to be wary. If a lender doesn't have very many questions for you, or if they don't ask for your credit information, it's probably a scam. As the saying goes, "If it seems too good to be true, then it probably is."

Rental scams, which don't necessarily affect real estate investors directly, do affect people in the real estate industry quite often. The scammer will find vacant houses, often for sale or for rent, and will post their own listings, claiming to be looking for tenants. A potential renter will sign a fake lease created by the scammer, will wire or mail a security deposit and the first month of rent, and will never receive the keys to the property in response. The scammer will tell their target that they live out of town, which is how they explain why they can't give the prospective tenant a tour. They also quote a rent price significantly less than the going market rate, to help convince tenants to move fast on the "opportunity." It is suggested that homeowners looking to sell or rent should clearly place signage with contact information, in a location that can be clearly seen by prospective tenants.

One of the most costly scams out there is a classic. The scammer (sometimes the actual seller, or sometimes just a random person), will convince the prospective buyer (usually an out-of-town investor) that the property is of higher condition than it actually is. They accomplish this by insisting on using their own inspectors, who give the prospective buyer a false report. They will also not disclose liens on the property or significant unseen damage (like termites or mold in the walls). One way to avoid this scam (though not foolproof by any means) is to only purchase properties listed on trusted platforms like the Multiple Listing Service (MLS). Additionally, out-of-state investors who aren't able to come and actually see every property they invest in should still visit the area at some point and find real estate agents and inspectors who they can trust to be honest. There's no perfect way to stop yourself from getting scammed in any industry, but being careful in all of your business decisions is a good start.

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Natural Hazard Disclosures for Real Estate Transactions

One of the main purposes of using an escrow officer when moving forward with your real estate or business transaction is to make sure that both seller and buyer fulfill all of their requirements (both legal and contractual). The escrow officer holds onto all of the funds in the transaction until those requirements are met, at which point, the escrow officer is legally allowed to begin disbursement. One of those legal requirements that must be completed by the seller, at least for real estate transactions in California, is what is known as a natural hazard disclosure, or NHD. In general terms, this means that, before escrow can close, the seller must disclose any and all potential hazards related to the real estate property being sold.

In some cases, sellers will fill out the required documentation themselves, usually the Natural Hazard Disclosure Statement or on the Local Option Real Estate Transfer Disclosure Statement (if applicable), both of which allow the seller to outline all hazards in full. However, the vast majority of sellers elect instead to use a third-party service to prepare the disclosure statement. It is important to note that, even if a seller uses such a third-party, they are still legally responsible for any information that is not disclosed. So, if a seller wishes to use a third-party service, they should make sure to choose one that will deliver the required scope of information necessary.

Natural Hazard Disclosures need to have information regarding whether the property is located in an area that has a heightened risk of certain (usually significantly destructive) natural disasters. For example, the seller must disclose if the area is one of potential flooding and if it is located in Zone A or Zone V (specially-designated zones that have very high flood hazard). Additionally, the NHD will include whether the area has been designated as "high fire risk," or if it is within a designated wildland area. Finally (and perhaps most devastatingly, in California), the NHD must list if the property is in an area with heightened earthquake risk and if the property is located along a fault line.

So, now that you know what kind of information you need to disclose when selling real estate, make sure that you cover all of your bases before escrow closes. A recent analysis of several third-party NHD preparers discovered that several of the companies only included the major, state-mandated information, as outlined above. However, there are often local city or county regulations that require even more natural hazards to be disclosed. These additional disclosures can range from recent methane leakages to issues with hillside erosion or landslides. So, be careful when filling out your disclosure statement, and be even more careful if choosing a third-party. You don't want to be left without full legal and financial protection because of a couple of missing disclosures.

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Cryptocurrency as Funds in Escrow Transactions?

An escrow officer's main duty in any transaction, be it a real estate sale, liquor license transfer, or hard money loan, is to act as a neutral third party between the buyer and seller (or lender and borrower). The escrow officer holds funds in a trust account and only disburses those funds once both parties have fulfilled all of their obligations in the transaction. Sometimes those obligations entail performing repairs or professional inspections, and sometimes it's just a short period (often 30 or 60 days) in which the escrow officer can get all of the necessities taken care of (Grant Deed, Change of Title, insurance, property liens, etc). Throughout this process, the escrow agent has a fiduciary duty to safeguard the funds in the trust account until such time as they can be disbursed.

Because an escrow officer almost always has to hold onto funds for some amount of time (even in all-cash offers), the funds need to be in the form of a currency that will retain its value. Until recently, that was simple. In the United States, the value of the dollar fluctuates very slightly each year with respect to the currency of other nations, but will generally be worth approximately the same amount from one day to the next. An issue may arise if the buyer wants to pay with funds that are not American currency, or even any type of national currency. In some cases, buyers want to make a purchase using Bitcoin.

Bitcoin is a well-known type of blockchain-based cryptocurrency. A blockchain is a decentralized record of all transactions happening within an online peer-to-peer network. The benefit of such an innovation is to allow users to confirm the transfer of funds without the need for a third-party like a bank to wire the funds. Cryptocurrency is the "currency" that is being transferred through the online blockchain. In a general sense, cryptocurrency is a chunk of data that can be easily transferred between users. While cryptocurrency is a convenient way to transfer funds, there are several downsides. First, cryptocurrency has no intrinsic value. One Bitcoin is only worth as much as someone is willing to pay you for it. There is no guaranteed trade-in value for paper currency or other commodities such as gold or diamonds. Second, cryptocurrency has no physical form. There are no bills or coins -- nothing except a block of data that says how much currency a user owns.

Unlike the U.S. dollar, cryptocurrency doesn't have a stable value. There are owners of Bitcoin who put in thousands of dollars just to lose it all in days, and there are users who saw their Bitcoin investment increase a thousand-fold over the course of a year. There's no way of predicting if the value of a cryptocurrency will go up or down, as the value is determined by how much people want it. It is a currency that exists in the minds of its users. If all buyers are willing to pay $10,000 for one Bitcoin, then that's the value of the Bitcoin. If all buyers are only willing to pay $100 per Bitcoin, then that's its value. Such an unstable currency is unusable by an escrow officer because there's no guarantee that the seller will receive the amount of real money (U.S. dollars) that they had assumed based on the price of the cryptocurrency at the time when the purchase agreement was signed. During the 30 or 60 day escrow, while the currency is sitting in a trust account, it could just as easily go up in value as it could go down. That kind of volatility is bad for business, so even if a buyer can find a seller willing to accept the cryptocurrency, Escrow companies cannot accept this as currency as Bitcoin does not qualify as verified “good funds”.

Finally, there's the major issue that blockchain is decentralized, which means it doesn't have any official (governmental or otherwise) institutions backing up the currency. The decentralization is a good aspect to many users since it makes the transfer of funds relatively inexpensive, fast, and painless. However, decentralization also means that if your blockchain account gets hacked and you lose your cryptocurrency, you're on your own. With centralized systems (such as banks or credit cards), if you are the victim of cybercrime, your funds will generally still be safe, and the financial institution will take the burden of dealing with law enforcement in tracking down the criminal and getting the money back. With blockchain, there's nothing proving that a piece of cryptocurrency belongs to you. It's just a chunk of online data associated with an online account that someone else might gain access to. This is why the inherent instability of cryptocurrency in its current form is not an acceptable means of funding an escrow transaction. Perhaps in time, and with more regulation and security this could be the way of the future, though for now, escrow companies do not accept Bitcoin in lieu of U.S. currency.

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Find out more about us at www.sepulvedaescrow.net. Any Questions? Contact our Escrow Expert! Sepulveda Escrow Corporation (818) 838-1831. Follow our company on Facebook, Twitter, LinkedIn, and Google+.

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Federal Law Prohibits Banks, Escrow, and Title Companies from Participating in the Sale of Marijuana-Related Businesses

The sale and consumption of marijuana, both medicinally and recreationally, is a pretty controversial topic throughout the United States. Some view marijuana as a dangerous substance that should be banned, comparable to hard narcotics like cocaine or methamphetamine. Many others view marijuana as a substance that should have limitations (similar to the sale of alcohol and tobacco), but not be completely illegal. Then, there's the even deeper issue of medicinal versus recreational usage. Some believe that marijuana should only be used when absolutely necessary (i.e. as a diagnosed treatment for a legitimate medical condition like glaucoma or nausea caused by chemotherapy), and some believe that cannabis isn't dangerous enough to be limited much, if at all.

The main difference between cannabis and substances like tobacco and alcohol is a lack of information. While there has been plenty of research done on the health effects of tobacco (cancer, asthma, etc.) and alcohol (impaired motor skills, liver disease, etc.) and even the effects on a fetus, there really isn't enough evidence to make a conclusive ruling on marijuana. However, for a while, it didn't matter whether marijuana was healthy or not. It didn't matter if it could impair motor skills or give a smoker asthma, because the sale and/or consumption of marijuana was illegal in the U.S., both on a federal and state level.

Over a decade ago, several states (California being one of the first) began to legalize medical marijuana, which could only be purchased from a licensed dispensary with a prescription from a doctor. Then, much more recently, states began legalizing recreational marijuana usage. However, that doesn't mean much from a business standpoint, because although marijuana is now legal in California, it's still illegal according to federal law. That may change within the next several years, but as of this moment, the law is the law, and that's all there is to it.

Because marijuana is still illegal federally, many businesses that must comply with state law (such as escrow/title companies), are not permitted to participate in any transactions regarding businesses that handle the sale of marijuana. In fact, in April of 2017, several national title companies received a memorandum from the Office of the Chief Underwriting Counsel that if the title company gets any indication from a buyer, seller, or broker that the Land will be used for growing, processing, distributing, or dispensing any types of marijuana-based products, they aren't allowed to be involved in the handling of any escrow or other funds of any type, issue any type of zoning coverage, or issue title insurance (except with the inclusion of an exception related to violation of federal law). This policy even applies to an entrepreneur looking to buy property that they will then rent out to tenants who may be involved in the marijuana industry,

Federal laws are taken very seriously by businesses involved in escrow and the transfer of funds, including banks. Banks are federally chartered, insured by the FDI, and use the Federal Reserve wire system. If those banks start breaking federal laws (even laws that don't exist at the state level), the bank can lose its charter and FDIC insurance, and eventually get shut down altogether. Just like banks, escrow companies lose their legal ability to operate if they break federal laws, especially in the financial realm, and for most of those businesses, it simply isn't worth the risk of getting involved in any transaction that might violate federal law.

For that reason, escrow companies (just like title companies and banks) don't take part in transactions involving property (or businesses) that are connected to the marijuana industry. It can be next to impossible for an entrepreneur to start that kind of business with a loan from a bank, because banks won't provide the loans and title companies won't close the sale (a closing is usually required by a lender). However, in some situations (where the sale is an all-cash offer, with no financing), there are law firms with real estate experience that can close real estate transactions. As of now, federal law makes it nearly impossible to do business in the cannabis industry if you need bank financing or plan to go through an escrow company. The laws may change in the future, but for now, it is what it is.

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CFPB Proposes New Regulations on Payday Loans

In an attempt to avoid situations in which borrowers get stuck in an endless cycle of debt, the Consumer Financial Protection Bureau (CFPB) released a set of new proposals this Thursday to regulate the market for payday loans and certain types of credit known as being "debt traps." James Rufus Koren, in his L.A. Times article, discusses the new rules and the effects they may have on the economy.

A payday loan is a special type of loan with very high interest rates that is made on the condition that the borrower will pay it back as soon as they receive their paycheck. Unfortunately, according to CFPB Director Richard Cordray, lenders often make the loans knowing that borrowers can't pay them back and will end up stuck in a never-ending cycle of debt. The new rules aim to limit the number of loans a consumer can take out in a year and make the lenders review the finances of potential borrowers much more thoroughly before making a loan. In a healthy credit market, lending and borrowing money should be a win-win situation. Both parties, not just the lender, should benefit from the transaction, and that is the situation the CFPB is trying to remedy.

Lenders have been outraged by the proposed changes, claiming that it will make their business more costly and will cause most of their loans to become unprofitable. The CFPB has responded that it isn't looking to put lenders out of business. Rather, the organization is trying to make sure that customers don't get stuck in debt traps, where they pay off a loan just to find out that they need to take out another loan to have enough money for day-to-day living costs. The new regulations will force the lenders to do in-depth analysis on income and living expenses to determine whether they will be able to make the payments every month without running out of money.

Already, the CFPB has enacted similar regulations for banks and mortgage lenders, but payday lenders may be right in complaining that the new rules are unfair or insensible. Many claim that the process will add time and cost, which hurts everyone. Under current practice, a borrower can walk into a loan branch and leave 20 minutes later with a $250 loan. A detailed analysis of "take-home pay" and expenditures would probably add a lot of cost in the form of fees, which could drive away potential borrowers. Those borrowers could end up going elsewhere to find their loans.

It is likely that the new regulations will naturally stop some people from getting loans. Some people worry about where those people will have to turn to make ends meet. Perhaps some will be forced to get a handle on their finances and will end up much better off in the long-run. Others will have to go to pawn shops or family members for help. Still others may turn to installment lenders, which are not covered under the new rules. The installment lender gives much larger sums of money, with smaller monthly payments over a long period of time, but the borrowers often end up paying more in interest on the loan than the actual value of the loan itself. Analysts believe that the regulations will help somewhat, but only in that they will stretch the debts out onto a longer time line, rather than reducing such debts altogether.

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BEWARE - You and Your Clients Are a Target For This Real Estate Scam

Cyber-criminals are finding new methods every day to steal personal and financial information. Their techniques range from phishing scams to buffer overflow techniques and brute-force password hacking. Banking institutions have found themselves under attack far more than usual in recent years, and have in turn begun to incorporate stronger security measures in an attempt to block hackers. As a result, many scammers/hackers have moved on to what they believe are "easier targets." focusing on normal people rather than financial institutions, Just last week, the Federal Trade Commission and the National Association of Realtors issued a warning to consumers that they must be hyper-vigilant in order to avoid recent phishing schemes that have been targeting closing costs on real estate transactions.

The National Association of Realtors, along with the Federal Trade Commission, issued their statement warning people to be on the look-out for a specific scheme targeting those involved in a real estate transaction. First, the hackers gain access to the email account of a customer, real estate agent, or escrow officer, and use the information to keep up-to-date on the transaction and determine the closing date. When they have figured out the closing date, the scammer sends an email that has been masked in such a way that they are able to impersonate the escrow company, title company, or real estate agent, telling the customer that the wiring instructions had a last-minute change. If the customer takes the bait, they send their funds to the scammer's account, which can be emptied in minutes.

Sepulveda Escrow utilizes encrypted and secure email when sending documents with sensitive and confidential information. In addition, documents can be returned via email through this secure portal. Sepulveda Escrow has also instituted new procedures to contact Clients directly to confirm details, rather than relying on email or contact through a third party. (Please see end of this blog for some helpful tips.)

It is imperative to know that cyber criminals don't always need to be able to break through firewalls or use high-tech software to get your personal information or access your computer's data. Quite often, hackers use more subtle tricks to gain access. Phishing schemes are one of the most common ways by which they trick potential targets. One example of phishing is when a hacker sends a mass email to a group of people, and makes it look like the email comes from a bank or other online payment platform. The email requests that the recipient verify their login information by following a link. The link leads to a page that closely resembles the actual login page for the financial institution, but when the user inputs their login information, the hacker records the username and password, thereby enabling them to access the account and steal their money.

Another example of phishing is when a hacker contacts a target or a group of targets under the guise of an Official informing them that they have been the victim of a scam. They then tell the recipient that they can help them fix the damage, but first ask for certain sensitive information like Social Security number or bank information, to "verify" what data had been "stolen."  While you may look at this and think that the scheme is too obvious to be effective, statistics show that approximately 0.4% of recipients fall prey to such attacks. In other words, if a mass email is sent to 10,000 people, about 40 of them will have their information successfully stolen.

While phishing is historically the easiest and most effective method by which hackers are able to steal personal or financial information, there are several other methods. A buffer overflow attack, used by more sophisticated hackers, involves inputting many lines of code into an online form in order to overload the system and allow the hacker to steal data inputted by previous customers. A brute-force password hack involves a computer program that inputs all kinds of combinations of letters, numbers, and symbols, until the correct password has been found and the hacker has gained access to an email or other kind of online account.

Finally, hackers often package viruses or worms into free online software or as attachments to mass emails. Such viruses can enable the hacker to record keystrokes, thus giving them access to many of your passwords, or enable them to access built-in microphones or webcams on laptops. Simply opening such an email or downloading an infected attachment can lead to a virus being installed on your computer or mobile device. Fortunately, anti-virus software can often help to detect and remove these viruses, but hackers are constantly finding new ways to avoid detection by your anti-virus program. The best way to avoid getting such viruses is to be careful when downloading anything, and to avoid opening any emails that seem suspicious or come from unknown or unreliable sources.

Here are some tips to help you avoid being affected by similar scams. First and foremost, if something doesn't look right or feels even a little bit suspicious, don't hesitate to double-check it. Don't rely too much on emails. Instead, pick up the phone and call your escrow officer or realtor to make sure that everything you have received is correct. Don't open email attachments you aren't expecting. Additionally, you shouldn't trust financial information that has been sent via email, nor should you send any of your own financial information via email, because it usually isn't secure. In general, wiring instructions are sent by fax or encrypted email message. When inputting personal information on a website, check the address for "https," of which the "s" stands for secure, meaning that your information will be better protected.

Be very careful when opening attachments or downloading anything from an email, no matter who sent it to you. Just because you recognize the email address, doesn't mean that the message actually came from the person you associate with that email address. It's possible that a scammer could have hacked a friend's email, or could have disguised their email to appear as if the message came from a friend's email address. Proceed with caution. Being aware and cautious can save you a lot of hassle in the long run. 

Biggest Tip: Following up on the phone after sending an email may seem burdensome, but we at Sepulveda Escrow find that it is always worthwhile to go the extra mile to avoid financial losses and potential lawsuits.

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Find out more about us at www.sepulvedaescrow.net. Any Questions? Contact our Escrow Expert! Sepulveda Escrow Corporation (818) 838-1831. Follow our company on Facebook, Twitter, LinkedIn, and Google+.

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Rising Insurance Costs in High Fire-Risk Areas

When a home is purchased with a mortgage, using a loan from a bank, the bank will always require the homeowner to get insurance in order to make sure their investment is protected to some extent. Insurance, while a necessity, can be a costly addition to one's monthly or yearly bills. Since an insurance company wants to stay in business, it charges higher rates to provide insurance to individuals in high-risk areas: flood zones, fire zones, earthquake centers, etc, so that it will have the money to pay off claims involving fixing or rebuilding of affected properties. For people like John Stoffan in Samantha Masunaga's L.A. Times article, the costs of fire insurance in drought-parched California make the state almost too costly to bear.

The Stoffan family, whose Northern California home survived various wildfires around Yosemite National Park throughout the years, is finding that their insurance rates may actually be the reason they finally jump ship. The house itself, as well as the county in which it is situated, are considered to be "high-risk" for insurance companies. Even after having installed fire-resistant plants, developed "buffer zones" of areas without any plants surrounding the property, and created holding areas to keep thousands of gallons of water on hand, insurance companies have doubled rated in the past year.

The past four years of dry conditions have made things worse for those living near large forests. The combination of summer temperature and lack of water can turn a forest into a raging wildfire with the merest spark. Because of this risk, home-owners like the Stoffans, no matter how many preventative measures they take, are stuck between a rock and a hard place. They need insurance to have a mortgage to own a home, yet the insurance rates are unaffordable and getting worse. What is their alternative?

While all are hoping for a good winter to break California's dry spell, many are considering moving out of the area altogether. Others have found more creative options to reduce their insurance costs. Some people, like Alpine's Mollie Jacques, have been able to find significant discounts by using insurance companies based in other cities. For Jacques, her choice to switch to an insurance company 100 miles from her home saves her over $700 per year. Some homeowners have even been refused insurance completely and have been forced to use the California Fair Plan Association to have some, albeit limited, coverage.

Communities are coming together in these fire-prone areas to try to make their homes and surrounding land as safe as possible. Since insurance companies determine rates through statistics involving fire department preparedness, water supplies, and availability of emergency communication. With the help of the California Fire Safe Council, a nonprofit organization, such communities are able to purchase wood chippers and other machinery to help clear dry brush and other flammable material. The more prepared a community becomes for a wildfire, the better rates insurance companies will provide. It comes down to economics. Insurance companies will charge a lot of money for taking on a huge financial risk. The more you lower that risk for the insurance company, the less money they will require you to pay.

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Find out more about us at www.sepulvedaescrow.net. Any Questions? Contact our Escrow Expert! Sepulveda Escrow Corporation (818) 838-1831. Follow our company on Facebook, Twitter, LinkedIn, and Google+.

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Santa Monica Council Bans Short-Term Rentals

5/20/15 - Hundreds of property owners, especially those living in vacation destinations, rely on the income that they earn when they rent out their homes, condominiums, or spare bedrooms to short-term visitors. Because of new laws passed in Santa Monica, these individuals may find themselves struggling to find tenants. Tim Logan, in his L.A. Times article, discusses the implications of Santa Monica’s law banning short-term rentals.

Tourists who come to places like Los Angeles, New York, and San Francisco are not generally there for a month at a time, but that is what this law will require. The law, in an effort to deter short-term renters and protect the hotel industry, bans rentals that last less than 30 days, and force individuals renting out a room to pay extra taxes similar to those paid by hotels. This, however, is not to say that the Santa Monica officials are only interested in protecting hotels. The council claims to be introducing these regulations in response to the complaints of annoyed neighbors and advocates for affordable housing in the neighborhood.

Home-sharing, the term given to the practice of renting out a room for a short period of time, has grown exponentially over the past few years. Websites like Airbnb, on which people post their rental listings, have become the place to look for anyone needing a place to live, albeit on a short-term basis. According to Logan, the home-sharing industry is booming and unlikely to slow down anytime soon. Profits are large and demand is high, so even with the new laws, people will likely find some way to keep doing what they are doing.

Some people providing housing through Airbnb are entrepreneurs, managing multiple residences and earning money left and right. Others are elderly and retired, who rent out their apartment when they go out of town to visit family. They encompass two ends of the spectrum, but both feel the same way: the regulations need to be changed. Many understand that home-sharing should be regulated to some extent; they just believe that an all-out ban is the wrong way to do it.

While some people fear that similar laws will be proposed in cities other than Santa Monica, Logan believes that the spread will be limited. Usage of online platforms like Airbnb is hard to keep track of, which is why the government may be afraid of its continued progression toward becoming an integral part of society. Logan recommends wariness when doing business with anyone, but especially with strangers met online. Some feel that laws and governmental oversight would reduce risks. Others believe that the government getting involved would just create hurdles and reduce profit. It's hard to tell which side is correct. Santa Monica may be the guinea pig that the rest of the country needs to test these risky waters.

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FICO Introducing Alternative Credit For Those With Poor or Nonexistent Credit History

4/3/15 - Individuals with low credit scores struggle to get a credit card, or to obtain a mortgage or other loan. Some see this as a fair system, especially since a low credit score usually means that the individual has a history of late payments or outstanding balances. It only makes sense that those with sketchy credit history should be trusted with more credit less readily. However, what about people without any credit history? A recent L.A. Times article discusses the options available for such individuals.

To build up a credit score, someone gets a credit card or loan, then pays back the loan on time, so as to show the credit company that they can be trusted. The length of a person's credit history is a substantial factor in determining how much money a bank or credit company would be willing to lend them. Unfortunately, without credit history, it can be difficult to get a loan in the first place. Without that first loan, the aspiring borrower can't build up a history of timely payments, and will therefore be unable to get a loan. This seemingly endless cycle has many newcomers wondering what to do.

Fortunately for young, first-time borrowers, Fair Isaac Corporation, known for its FICO credit score, has been working together with LexisNexis Risk Solutions and Equifax to create an alternative system for determining credit scores for individuals with little to no credit history. According to their research, someone with a good record of paying utility bills on time would also likely pay credit card bills in much the same pay. Using payment history instead of credit history, this system will create alternative credit scores and provide them to the top credit card issuers. Fair Isaac has yet to release information as to which banks have decided to participate in this program.

This currently unnamed new program is not meant to replace the FICO credit score. Instead, it will provide information only to credit card companies, in order to give credit-less consumers, usually young people, the opportunity to get a credit card and start building up their credit. Once credit has been built up through a history of timely payments, the consumer will be able to rely on the standard FICO credit score in order to get a mortgage or other loan.

According to a representative of LexisNexis, all collected data will be protected under the Fair Credit Reporting Act, so everyone involved will be able to dispute negative events on their credit reports, such as disputed bills. This system appears to have positive effects for all involved. New borrowers will be able to get credit cards with much less of a struggle. Banks will gain access to millions of previously non-existent customers and their interest payments. It's a win-win situation for everyone.

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Home Equity Used For Long-Term Investments

12/12/14 - A decade ago, before the Great Recession hit in full effect, it was common for people to take out a line of credit on the equity of their homes. This “quick cash” was spent non-productively, used to buy groceries or spent on vacations, rather than being used as an investment. Over time, people began to cease such “wasteful” ventures and have slowly been learning to use Home Equity Lines of Credit (HELOCs) in a smarter manner. In his article in the Los Angeles Times, Kenneth Harney describes how a recent increase in the use of such lines of credit is a good thing for the economy.

Although such HELOCs were once a way for people to pull money out of their homes for regular expenses, people have generally learned not to jeopardize the equity of their homes unless investing in something safe. For example, most of those who took money through a HELOC used it to make improvements on their homes, or to pay off higher-interest debts, such as those on credit cards. Both of these provide long-term benefits for the home-owner. Thus, it is shown that tapping into home equity is not always a bad thing. For those who make smart investments using the line of credit, home equity can be used and quickly earned back.

Until recently, most home-owners were wary of HELOCs, remembering the negative consequences that had arisen from the use of such funds for day-to-day expenses. Now, though, equity lines are up 21%, which, according to Harney's sources, could mean that people are starting to become more confident in the economy's stability. With less fear of economic collapse and an improvement in equity and interest rates, more home-owners consider a line of equity to be a “safe investment.”

Besides a stabilizing economy, HELOCs have become safer because of a crackdown by lenders. Lenders have become more careful as to who they lend to, making sure that credit scores and financial reserves are up to par. As Harney concludes, now is the time to look into home equity lines of credit. Such money, if used right, could have a dramatic economic impact, both personally and nationally.

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Credit Unions Providing Home Loans

11/21/14 - While home loans were once the responsibility of major financial institutions like banks, the post-recession mortgage loans have slowly but surely been making their way into the realm of the credit unions. Such credit unions have been amassing members, and currently own over 8% of all mortgages, three times as much as were owned before the Great Recession. Lew Sichelman's L.A. Times article goes into how these credit union loans can actually be preferable to those provided by “standard” institutions.

Credit unions, which are member-controlled, provide an alternative to common loan institutions that commonly increase the cost of a loan through miscellaneous fees. Anyone can join a credit union, and their non-profit standing keeps people interested in their loans, especially with our currently troubled housing market. During the recession, while many lenders pulled back and restricted the loans they were willing to grant, credit unions stayed open, making their loans available to those whom they deemed a worthwhile risk.

These lenders are different; they are run by the people. Every member has a say in how the union should be run, and this is a big part of why credit unions have been increasing in success. While mortgage loans were once a minimal area of focus for credit unions, new interest has led to mortgage loans encompassing over 40% of all loans provided by such institutions. The interest rates on credit union loans may be the same as those from other lenders, but a more personal touch of a credit union appears to be one of the factors drawing in new customers. Borrowers, of late, tend to have more faith in them, rather than in the banks and other lenders that once held the vast majority of mortgages and other such loans.

Although they are still relatively new to most, credit unions are gaining ground as they accomplish various goals. The common mortgage loan from a credit union is the normal, 30-year fixed rate, but many of these institutions have been applying innovative new techniques to make these loans more manageable. From ways of scheduling your mortgage so that you finish at a specific time, to loans that reset their interest rates to market level every five years, credit unions have developed ways to make their loans as consumer-friendly as possible. All in all, a standard banking institution may be great, but credit unions might be an option for many potential borrowers to seriously consider.

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FHA Set To Re-institute Quick-Flip Restrictions

11/14/14 - The Federal Housing Administration, a federal agency involved in providing mortgage loans to real estate investors, is set to reinforce restrictions that were lowered in 2010 in an effort to help the weak housing market. These restrictions set a minimum of 90 days for investors who wish to buy a home and “flip” it, by fixing it up and reselling it. The 90 day period between buying and selling is meant to prevent the selling of poorly-fixed houses for “hyper-inflated” prices. On the other hand, forcing flippers to hold onto a house for 90 days raises their costs, which they then have to incorporate into their selling price. An article by Kenneth Harney of the L.A. Times investigates the positive and negative aspects of the FHA's restrictive 90-day flipping period.

By waiving the 90-day flip period in 2010, the FHA enabled investors to buy, fix, and sell houses quickly and at lower cost, thus allowing first-time home-buyers to more easily find homes in a lower price range. These quick-flips benefited both investors and buyers, lowering prices across the board. Because of the decreased restriction, over 100,000 homes were revitalized and sold, thus improving the housing market.

This improvement is the reason for the FHA's reinstitution of the 90-day flip period. The waiver program has done what it was meant to do: it stimulated home sales, thus stabilizing the market and allowing newcomers the chance to become home-owners. The program has worked relatively well so far, but such a program always has its possible dangers.

In the past, before the 90-day period existed, investors would commonly resell seemingly well-maintained houses, which were nothing more than run-down homes with a fresh coat of paint. This would lead to buyers defaulting on their mortgages, and the FHA would be forced to cover the losses. By forcing investors to take at least 90 days in fixing the houses for resale, the sellers are encouraged to actually do a decent job on the construction.

Whether the restrictive 90-day period is a good or bad thing is a matter of opinion. Yes, forcing flippers to hold onto a property for longer than they need to would raise sale prices, but allowing quick-flippers to sell dilapidated properties at synthetically-high price would also hurt the housing market. The main point addressed in Harney's article is this: whether you like it or not, the FHA has made its decision. The waiver program will stop at the end of December, and the 90-day resale period will come back into practice at the beginning of 2015.

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Low Supply + High Demand = Price Increase

10/31/14 - Southern California rental costs are on the rise, and there's nothing we can do about it. According to a recent study cited in Tim Logan's L.A. Times article, rent prices throughout the Southland are poised to rise over 8% in the next two years. This is due partially to a surge in job growth as well as a shift from home ownership to rental.

While Southern California has long had issues in providing enough rental housing, the recent rise in demand is far surpassing the rate of new construction. The study shows that vacancies remain roughly the same, since the higher rent prices, combined with roughly unchanged income, make for a situation in which renters can't afford the cost of renting.

This trend, predicts the study, will lead to the mass exit of industrial jobs from Southern California. Without affordable housing, businesses can't afford to remain open or open new factories in the Southland. Logan's source even compares California's current stance to that of Detroit in its heyday: a strong housing market, which could fail as soon as industrial jobs move elsewhere.

As Logan discusses in the article, this future failure could be prevented with the right policy initiatives. From lowering restrictive and costly requirements on new construction to speeding up the approval of building permits, Logan presents evidence that shows how policy-makers could make housing more affordable and, at the same time, keep jobs close at hand.

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Credit Scores Now to Include Rent Information

9/26/14 - An individual's credit score is one of the largest factors affecting their ability to get a mortgage or other type of loan. Unfortunately, your credit score is determined mainly from the payment of debts: credit card bills, loan payments, etc. Even if someone has paid their rent on time every month, or has made routine payments on their cable, cell phone, or utilities bills, all of which should be a good indicator of reliability and credit, this information is nowhere to be found on their credit profile. In an L.A. Times article, Kenneth R. Harney describes how two national credit bureaus: Experian and TransUnion, have recently started including rental payment information in their determination of an individual's credit scores.

Up until recently, there was nothing that required landlords or phone and cable companies to report payment information to the credit institutions, nor was there any system to make this reporting of data feasible. While the reporting of this payment information is still voluntary, a newly created connection between these credit bureaus and an online service called RentTrack has made it much more convenient for rental property managers to report payment information from their tenants' records.

According to Harney and a study by TransUnion, this addition of rental payment information can have a dramatic effect on a renter's credit score; in some cases, their scores increase up to 10 points. Furthermore, this research showed that even the shift from renter to home-owner can raise scores considerably. With the RentTrack system, as well as another system called ResidentialCredit, tenants in any situation benefit from the ease and reliability of electronic tracking of their payment information.

While the RentTrack system currently only keeps information on rental payments, Harney believes that it will just be a matter of time before telecommunications, cable, and utilities information make their way into the system. While RentTrack is the main service mentioned in the article, some other companies, such as Equifax and ECredable.com, also hold information regarding utility payments, rental data, and more, which can be given to a mortgage loan officer for use in determining an individual's credit and determining whether they will qualify for a loan.

As Harney concludes, while an individual's credit score was once based solely on mortgage and credit card payments, that is no longer the case. As such, we may soon witness a new trend: even those individuals lacking “traditional” credit information will find it possible to become first-time homeowners.

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Buying vs. Renting: Pros and Cons

9/19/14 - Prior to the Great Recession, the question of buying versus renting was never really an issue at all. If you could get a mortgage, then buying was the best way to go. Even after the housing market crash, there was still plenty of interest in buying rather than renting. If people had some money to do it, then buying was generally their course of action. However, with real estate prices, especially in Southern California, on the rise, and very few “bargain homes” available, potential buyers are being much more careful in deciding whether they really want to enter the market. In a Los Angeles Times article, Tim Logan discusses the potential positive and negative aspects of either buying or renting.

The decision is a hard one for many. Yes, the housing prices have gone up dramatically, but the interest rates on mortgages are lower than they have been in years. Renting makes it easier to pick up and leave, but owning a home has a huge payoff in the long term. According to Logan, a survey of renters showed that most do plan to buy, but are unsure as to how soon. Furthermore, some statistics presented by Logan show that, over the span of seven years, buying can cost you over 20% more money than renting.

The prices of homes are not the only thing deterring potential buyers. It's all about location, location, location. In some areas in Southern California (Lancaster, San Bernardino, etc.), foreclosures make the monthly mortgage payments lower than average rent payments. In other areas (San Marino, Newport Beach, etc.), the return of seven-figure price tags make rent much more affordable than mortgage. Besides the costs of homes and apartments in certain areas, differences in construction choices can limit a home-hunter's options. For example, some areas are busy building new apartment buildings, while others are designing condos and houses. If there are very few houses available in your area, then buying might not be an option. According to Logan's sources, new construction has been mostly for rental properties, likely due to developers' fears of another housing crash.

Apparently, members of the younger generation are statistically more likely to want to rent, not yet willing to “tie themselves down” to something like home ownership. However, even “prime” first-time buyers (married, early 30s, income of at least $95,000) have lately become hesitant toward buying property. Logan's sources claim that this hesitation is due to the housing crash. These first-time buyers witnessed the colossal blow that the recession made on their parents' financial situation, and are leery as to how good of an investment home ownership really is.

As Logan states, this hesitation can be a good thing, preventing buyers from jumping into the realm of home-ownership without the necessary means to make their monthly payments. By making sure that they know what they are getting into, this new, more realistic, outlook of buyers will hopefully prevent another crash in the near future.

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Banks Held Responsible for Housing Market Crash

9/12/14 - Three of the country's largest banks have been facing all kinds of financial and legal repercussions in the aftermath of the housing crash that contributed greatly to the Great Recession. Bank of America, who, in 2008, bought out a couple of failing firms: Countrywide Financial Corp. and Merrill Lynch & Co., are now suffering the consequences of “the worst deal in banking history.” An article by Jim Puzzanghera and Walter Hamilton, of the L.A. Times, described the various legal problems and penalties that Bank of America, JPMorgan Chase & Co., and Citigroup Inc. have had to face over the past year.

Even between BofA's record-breaking $16.65 billion settlement, JPMorgan Chase & Co.'s $13 billion settlement, and Citigroup Inc.'s $7 billion settlement, these three penalties only make up a fraction of the total amount gathered from such financial institutions. According to Puzzanghera and Hamilton, approximately $125 billion in settlements related to the financial crash have been paid by the six largest banking institutions alone. While some of BofA's penalties are due to the pre-recession actions of Merrill Lynch and Countrywide, every bank has problems of its own.

Out of the many billions of dollars paid in penalties and settlements by these banking institutions, over 50% of this money goes to several federal agencies, including the Securities and Exchange Commission, as well as a few states that were most affected by the banks' practices. California by itself has been designated $300 million from the settlements to help reimburse two of its largest pension funds: the Public Employees' Retirement System and the Teachers' Retirement System. The rest goes toward “ consumer relief,” which involves write-downs of mortgage principal or reductions in interest rates on the mortgage. According to Puzzanghera and Hamilton, rates could be reduced to as low as 2%.

While many people and federal institutions blame Bank of America for many of the practices that contributed to the housing crash and the Great Recession, others feel that it is unfair to punish BofA shareholders for the actions taken by executives and employees at Merrill Lynch and Countrywide. While criminal suits against Angelo Mozilo, the former Countrywide chief executive, have been dropped since his involvement didn't quite “rise to the level of a crime,” many prosecutors are continuing to pursue civil cases against him in the hopes of finding some way of holding him responsible for his actions and the actions of his employees.

Now that these proceeding are, for the most part, done with, investors can hopefully breathe easier in the coming future. According to experts, these penalties will only affect the current quarter, and that by the third quarter, profits should be back up to their usual levels. While it is great that these financial institutions are being held responsible for their decisions, I personally am skeptical as to how these penalties are going to have a long-lasting effect on pulling us out of the Great Recession. I guess we will just have to wait and see.

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High End Home Sales: On The Rise

8/15/14 - Recent housing statistics show that, while the housing market as a whole has been at a bit of an impasse, home sales on the upper end of the spectrum appear to be steadily increasing. In the aftermath of the Great Recession, lenders have become more cautious, preferring to fund mortgages for borrowers with cash on hand and access to credit, as compared to the average American home-buyer. This split between buyers has led to a split in housing sales, thus resulting in this recent trend of increased million-dollar home sales, especially in California. In an L.A. Times article, writer Tim Logan discusses this phenomenon and what it means for attempted rebuilding of California's housing market.

Logan looks into how first-time buyers, what with much stricter loan regulations and a not-so-stable jobs market, are having trouble taking their first step into the realm of home ownership. On the other hand, wealthy investors, with available cash, are more able to benefit from current low interest rates. While average California housing prices are getting toward the high six-figures, it appears that from the San Francisco Bay Area to Southern California, seven-figure home sales have become more common than ever.

Even for older home buyers, of the “Baby Boomer” generation, purchases of homes with seven-figure price tags have become all the more prevalent. For these buyers, looking to downsize, the cash that they gain from selling a large house goes into the purchase of a high-end condominium, such as those produced by City Ventures, which go for around $1.5 million on average. However, while these buyers pay all cash for such properties, Logan presents statistics showing that 70% of recent million-dollar home sales in California were accompanied by a mortgage, illustrating the way in which buyers are taking advantage of historically-low interest rates.

Logan shows throughout this article how beneficial the current housing market is – at least, for wealthy, high-end buyers. Even for the average buyer, although they have more difficulty getting loans, these low interest rates can help them to purchase homes on the upper end of the housing spectrum, since low interest rates mean more affordable monthly payments over the course of a mortgage. Thus, while this article shows that lower interest rates have been helping those with cash on hand, individuals looking for a fancier home or an investment property, perhaps lenders will soon enough loosen their grip, allowing for the average home-buyer to also benefit from these lower interest rates.

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Sale Price vs. Mortgage Rate: Which Would You Prefer?

7/31/14 - Which is worth more: a lower price on a home, or lower monthly mortgage payments? An article by Kenneth Harney of L.A. Times takes a shot at answering this question. What with slowing sales, price erosion, and rising of mortgage rates, realtors and home sellers are looking for better and newer ways to stimulate the housing market.

A relatively new topic for home resale, it appears that a strategy called “interest rate buy-down” has become more prevalent in the housing market of recent years. This method, as described in detail by Harney, involves the seller making a cash payment to the buyer's lender in order to lower the buyer's interest rate and thus reduce the size of monthly mortgage payments. In this way, both sides win.

Since the buy-down lowers the monthly payments, the buyer is able to afford a higher sale price on their dream home. Since the buyer pays more than they would have previously paid, the seller has the capital necessary to pay off the lender. The more a seller buys off, the lower the monthly payments are and the higher the sale price a buyer can afford. An extra positive for the seller: the money they pay for the interest rate buy-down is a deductible expense under IRS rules!

While buy-downs may be the way of the future for some, other buyers prefer a lower sales price than lower mortgage rates. Furthermore, according to Harney, a buy-down of half a percent of the mortgage price could cost the seller two percent or more, thus lowering net income and making the scenario less than ideal.

Basically, although an interest rate buy-down isn't the best choice for all sellers and buyers, it certainly should be available for those who want it. While a mortgage buy-down may mean a higher sale price, the lower interest rates and monthly payments can definitely make the trade-off worthwhile. That being said, if interest rate buy-downs sound interesting to you, look into it and talk to your local loan officer to find out more!

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