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Some Silicon Valley Tech Workers Get Home Loans with No Money Down
- whack 10y agoI have little interest in tying myself down by buying a house, but the part that's most appealing to me is the mortgage structure. You get to borrow money at a ~3.5% interest rate, in order to invest in something that produces 5-7% yearly returns. On average, this is going to make a ton of money in the long term. Is there any way to do something similar with stocks, without paying an insane amount of money in interest rates or fees? Edit: I know returns aren't guaranteed, I'm referring to expected returns. I'm perfectly willing to take on risk, in order to make positive-EV bets. I tossed out the 5-7% number as a very rough approximation - assuming that you buy a house with a buy-rent ratio of < 20, in which case the returns that you make by not having to pay rent, will be 5% or more.
- aianus 10y agoOf course, and the interest rates are much lower than mortgages (which makes sense since stocks are more liquid than houses). However, you can only get ~4x leverage. https://www.interactivebrokers.com/en/index.php?f=marginnew&p=stk https://www.interactivebrokers.com/en/index.php?f=marginnew&...
- refurb 10y agoWhy do you assume housing provides a 5-7% yearly return? Past performance is no guarantee of future performance. You're also ignoring the carrying costs of a house.
- tantalor 10y ago> carrying costs of a house Indeed, taxes and insurance can dominate the mortgage.
- snowwrestler 10y agoOwning a home can create real returns even if the home only appreciates at the long-term inflation rate, because of leverage. With a 20% down payment and 2.5% appreciation, you're going to see a return of 12.5% on that down payment. Of course there are monthly payments and maintenance too, but you'd have to live somewhere even if you didn't own a house. To account for those properly in calculating the real return, you really should diff them against the rent on an equivalent property. And don't forget the interest tax deduction. Finally there is the wonderful fact that capital gains on your primary residence can be kept tax-free up to $250,000 ($500,000 if you're married).
- wiredfool 10y agoOwning a home can destroy real money if you have 20% down and prices fall by 10%. At that point, if you need to sell, you've lost your down payment, as in WA at least, it costs approx 9.3% to sell a house (unless you're in an insanely sellers market, which you're not if you're down).
- steveplace 10y agoThat's quite an assumption you're making on the interest rate tradeoff. No guarantee of 5% annual on RE, even if you're in an area controlled by bunch of NIMBY's. The best model for that is to be a bank with the 3/6/3 model. Borrow at 3%, lend at 6%, on the golf course by 3 PM. Now doing something similar with stocks.... that's kind of Warren Buffett's model. He uses insurance companies like Berkshire and Aflac to create cash flows to buy stocks. I guess you could use options to do something similar.
- lucaspiller 10y agoTake a look at the UK for a great example of how well that turned out. You can get a buy to let mortgage at around 3% (using your existing home as collateral), and achieve rental income of 10%+. I think you were even able to claim back tax on the interest up until this year.
- kirykl 10y agoWith a house you're hoping to just maintain equity by avoiding rent, not make 5-7% yearly returns
- loeg 10y agoReal estate returns are historically flat. Only recently have they risen so quickly. If the bank thought they would get 5-7% on the house, why wouldn't they just buy it themselves instead of giving you a 3.5% loan?
- whack 10y agoYou're ignoring the cash flow that real-estate-owners get from collecting (or not paying) rent. Once you factor that in, 5-7% returns are the norm.
- dasil003 10y agoI'd be super careful with this. When I make 4x the median American income and have almost zero hope of ever being able to afford a home (until I get my FU money that is), that ought to tell you something about the sustainability of the current market.
- twblalock 10y agoAs long as there are a lot of people with enough money to afford homes at the market-rate price, the market will remain sustainable. You may make 4X the median income, but there is no shortage of people who make a whole lot more than that. I see no reason to believe that will change anytime soon.
- dasil003 10y agoGiven the number of homes in the Bay Area, yes there is a shortage of people making more than that. What there isn't a shortage of is wealthy speculators, a significant percentage of whom don't even live here.
- twblalock 10y agoThey still count, because they buy homes here. They are consumers in the market, and they make the market sustainable.
- dasil003 10y agoSpeculators make bubbles, not sustainable markets. The problem is too many people are vested in property values, so when 2008 happened, everyone bent over backwards to prevent prices to come down to what their true sustainable value was. Bailouts, properties taken off the market, presidential speeches, all to prop up the status quo. Banks didn't pay the price, and so it continues.
- rgbrgb 10y agoSorry to pile on, but I wanted to throw out the fact that there's currently a huge transaction cost to exchanging real estate in the US too -- the largest factor of which is real estate agent commission (typically 5% in California, 6% in some states).
- tinbad 10y agoWe looked at financing through some of those new 'hip' lenders. My wife works for Google and SoFi had some of the highest rates (even with 'Google discount' and 10/20% down). They may get your pre-approval within a day, but in reality most lenders get that done quickly. In the end, they have to play the game everyone else is playing and it means long turnaround times to actually close. This is the part that is fundamentally broken and really in need of 'disruption'.
- fsckin 10y agoJust bought my first house a couple months ago. Despite picking a lender that seemed to have their ducks in a row, I wound up 'at the table' from 9AM to 6:45PM. Everybody involved was surprised it actually got done. Fundamentally broken is an understatement.
- tcoppi 10y agoWe bought a house last year with a credit union, and everyone during closing was quite surprised that we actually closed within two hours of starting. Apparently it is not unheard of for mortgage lenders to be doing final approval up to the day of closing, and keeping people on hold/not answering phones while you and the seller are sitting there twiddling your thumbs.
- ryandrake 10y agoThis is one of the reasons why a seller would accept an all-cash offer significantly lower than a competing offer where the buyer requires financing. No seller wants to wait around for a lender to figure out how to do the one thing they're being asked to do.
- markvdb 10y agoHah. Only days? In Belgium, it takes three to four months. Plus about 15% of the purchase price in taxes, sky high monopoly notary fees and more.
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- baq 10y agothe more money you've got, the cheaper it is to get more. money follows economies of scale.
- zanalyzer 10y agoand having no money is expensive.. see Louis CK :) https://youtu.be/rMG1MOn49Ts https://youtu.be/rMG1MOn49Ts
- refurb 10y agoOne reason: Almost half of their compensation packages are in Apple shares. So their lender, Opes Advisors, assigned the couple a financial adviser who used a software program to factor in debts and future income, including the stock, and the costs of education over the years for two young children. They don't go into much detail, but this part scares me. I'm assuming the "model" estimates some sort of future value for the stock. "You only make $150K, but don't worry, our model says that once your stock starts to vest, you'll be making $250K per year thereafter". Of course that assumes their "model" of the stock price is correct. However, California is a no-resource [edit:non-recourse] state, so if the owners get to the point where they can't afford payments, then it's the lender that is on the hook for the loss.
- protomyth 10y agowhat is a "no-resource state"?
- alex8022 10y agoI think he means "no recourse state." http://www.nolo.com/legal-encyclopedia/whats-the-difference-between-recourse-nonrecourse-loan.html http://www.nolo.com/legal-encyclopedia/whats-the-difference-...
- Tuna-Fish 10y agoProbably an autocorrect glitch. What he meant to say is no-recourse state. In some US states, when a mortgage defaults the borrower is personally responsible for the full repayment of the loan. That is, the asset is first sold and if that fails to cover all expenses, the borrower must fork over the difference. In no-recourse states, the asset turned over to the lender and even if it fails to cover the debt, the borrower gets to walk away.
- calpaterson 10y agoNon-recourse debt is debt for which you can't pursue the debtor beyond any collateral they originally put up as part of the deal. http://www.investopedia.com/terms/n/nonrecoursedebt.asp http://www.investopedia.com/terms/n/nonrecoursedebt.asp In California all mortgages are non-recourse debt.
- elgabogringo 10y agoHow does it make sense to tie up $1M+ at 1%? Are they turning around and selling the note to Fannie or Ginnie Mae? Unless we are Japan (and that's a slight possibility, but not likely IMO) this will be a total loser - not as bad as buying Spanish/French/Italian debt at negative rates, but pretty bad. Who else has friends going through all sorts of ridiculous acrobatics to buy houses in the bay right now? Where they are "lucky" to get their 10-20% over the list price offer accepted? Yeah, this will end well.
- ceejayoz 10y agoI'd guess the bank is treating this as a similar risk investment as stuff in a money market fund.
- JumpCrisscross 10y ago> How does it make sense to tie up $1M+ at 1%? Three things likely going on here: loss leading, promotion and a hunt for yield. Let's start with the hunt for yield. Yesterday's auction priced the 3-year at 0.87% and the 5-year at 1.15% [1]. We don't know the term of Zuckerberg'a mortgage. If it was less than 5 years, the bank might make a spread. If it's a loan with a longer term the lender could have made more by lending to the U.S. Treasury. In that case, the difference may be booked as a promotional expense. "We're the guys Mark Zuckerberg gets his mortgage from" is succinct and memorable. Finally, the lender may eat a loss on the loan for the opportunity to do more business with Zuckerberg in the future. One sees this with credit facilities in investment banking: JPMorgan and friends give companies cheap loans in hopes of winning their more-lucrative IPO and debt capital markets business. [1] https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield https://www.treasury.gov/resource-center/data-chart-center/i...
- Johnie 10y agoAlso, someone like Mark Zuckerberg has almost 0 default risk. To the banks, this is free money. Remember, when the bank issues a mortgage for 3.5%, the spread between that and their cost of capital covers the risk of default. But if the default risk is minimal, they can basically issue the loan at cost.
- artursapek 10y agoWhy does someone like Zuck need a mortgage? Is it economically advantageous to him in a significant way?
- ceejayoz 10y agoSame reason Apple finances stuff despite their giant cash hoard. With interest rates as low as they are, it's smarter to take the financing and have the money available for stuff with returns higher than the mortgage interest.
- whack 10y agoCheck out my earlier comment. Any time you get to borrow money at 1%, you should take that loan and reinvest it in something (anything) that yields a higher return. It's almost like getting free money.
- artursapek 10y agoBut is the cost of a house significant to someone worth billions? I'm asking why he wouldn't just pay cash for it.
- ceejayoz 10y agoThere's a saying along the lines of "You don't get rich by spending money" that applies here. A mortgage at 1.05% interest as mentioned in the article is basically throwing money at the person taking the mortgage.
- artursapek 10y agoMakes sense, thanks.
- deleted 10y ago[deleted]
- raincom 10y agoBillionaires' finances are managed by accountants, money managers, and lawyers. So, the accountant in this case suggests what's best: tax write off (interest expense), and interest rate differential (higher returns elsewhere - mortgage rate).
- 6stringmerc 10y agoI seem to recall Angelo Mozilo doing some similar "deal making" type things for US Government Employees during the time he was turing Country Wide into a cesspool of bad loans. And, for some reason, he's never had to atone for his role in the 2008 crash. Not like he's the only one though.
- random28345 10y agotl;dr: Houses are so expensive that people can't afford a down payment, so banks let people buy houses for no money down, driving up the purchase price of houses.
- refurb 10y agoThis is a great point to reinforce. Low interest rates are a HUGE driver of housing prices. No one knows what interest rates will do, but if they go from 3% to 6% (historical average), then suddenly everyone can't afford as much house and prices decline.
- ryandrake 10y agoI'm confused. The title says "Silicon Valley Elites" but the article says "tech workers", then goes on to list Mark Zuckerberg and some Apple guy who's salary is apparently 50%(!) stock, as examples. So who are these banks "courting" again? Elites or tech workers? Or just these two guys? It's hard to tell. Interesting news would be "Banks giving kickbacks to CEOs and VCs who throw them corporate business." This article seems to just be "Look! Some people are getting sweet deals on their mortgages."
- CPLX 10y agoI find it hilarious that the answer to this isn't obvious. This is 2016. Tech workers are the American elites. Did you think elites were still guys with a monacle sitting in a drawing room that overlooks a coal mine or something?
- deleted 10y ago[deleted]
- ryanlm 10y agoIs that so? Why would tech workers be considered elite?
- zanny 10y ago> Tech workers are the American elites. I don't have any congressmen on speeddial to get whatever I want passed through the next pork barrel bill in Congress, what am I doing wrong?
- lisper 10y agoYou aren't writing checks. Send a Congressman $1000 (that's really all it takes to get their attention) and you'll be amazed how responsive they will come. Senators are a little more expensive, but still reasonably priced at $2-5k. Presidential candidates are in the low five digits.
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- gmarx 10y agoDoes anyone else experience mild anxiety reading stories about Bay Area real estate? Long ago I decided it can't be wise to buy instead of rent. Logic and math argue this must end and yet it seems there is always another "sucker". We seem to have entered a new phase in which Chinese are moving money offshore and into the local market. Lots of Chinese, lots of money, could go on and on but for how long? Ultimately a home is only worth what someone can rent it for, right? right? please????
- deleted 10y ago[deleted]
- orasis 10y agoReal estate is a local competition among capital. As long as you have a lot of reasonably wealthy people in the area, prices will stay very high. I don't see the Silicon Valley startup machine quitting anytime soon.
- twblalock 10y agoEven if it does quit, there are so many large, established tech companies here that prices will remain high anyway. Actually, most of the people I know who have bought houses in the past few years work for such companies: Cisco, Apple, Google, etc. Their employee stock plans are so generous that startup stock options are not very attractive.
- aphextron 10y agoIt's reaching the point of absolute absurdity. Check out the forecast price on this listing: http://www.zillow.com/homedetails/811-Arlington-Ave-Oakland-CA-94608/24754125_zpid/ http://www.zillow.com/homedetails/811-Arlington-Ave-Oakland-... I hadn't looked at zillow in a couple years, I can't believe how insane it's gotten. $800k for a century old 2 bedroom home on a rough stretch of MLK boulevard in Oakland.
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- aresant 10y agoI'm going to counter the "math" in this thread Let's take the example of Nick eg: "Nick Merz knows how tough it can be. He’s a 41-year-old product designer at Apple Inc. whose wife also works there, and says they couldn’t figure out if they could afford to own a place anywhere near the company’s offices in Cupertino, where the median value is $1.8 million." Glassdoor check for sr product designer = base of $157,000 to a max of $200,000. With 7 years figure he's at $180,000. Figure his wife is in another $100,000 territory as a co-apple employee. So maybe they're at $280,000. With a 20% downpayment they can "afford" $1,931,000 of house (2) Why? Because interest rates are insanely low. But problem for nick and others is that lenders want a 20% down payment because that gets skin in the game. On that $1.931 house that's $386,200 which is damn near impossible to cobble together after dropping crazy SF rents for a decade (or two). My guess is that the bankers are using significant stock options as a swap or partial collateral for that down payment. That's a bet I would take eg: - You've got a guy with a 7 year track record at the most valuable company in the world + his wife there too which is solid income criteria. - You've got him with real skin in his game - his life savings which just happens to be in apple stock and probably will always be worth more than zero, and likely enough to continue working for even in a downturn. - Even if the house drops in value when interest rates go up (which is the most common prediction from mortgage bankers I know) Nick needs a place to live by Apple, is invested in his house, and is as likely as anybody to continue paying a mortgage on an asset that technically is worth less than he paid, but because it's tied to a monthly payment he can "afford", will stay on for the long haul. (1) https://www.glassdoor.com/Salary/Apple-Senior-Product-Design-Engineer-Salaries-E1138_D_KO6,36.htm https://www.glassdoor.com/Salary/Apple-Senior-Product-Design... (2) https://www.zillow.com/mortgage-calculator/house-affordability/ https://www.zillow.com/mortgage-calculator/house-affordabili...
- balls187 10y ago> But problem for nick and others is that lenders want a 20% down payment because that gets skin in the game. Lenders typically charge PMI if you have LTV > 80%. Our first home was purchased with 0 down (perks of being military brat), and no PMI. Current home was ~10% down, with ~$500 in PMI (kind of a cluster-fuck--the mortgage broker said the loan had no PMI, but last minute it had PMI. We had 2 days before closing, and couldn't find a better deal, so we had them drop the rate). Our family income is north of the projected Merz' family income of $290k, and while we could afford that 1.8m home, financially it wouldn't make sense to tie up so much of our income into a house (even though it would be straight baller).
- vermontdevil 10y agoMedical school graduates get similar deals as long as they verify proof of residency. They can get up to $500k with no money down and $1m with some down and near zero interest rates. I'm sure other types of employees get these deals. See this for example: https://www.53.com/mortgage/physician-loan.html https://www.53.com/mortgage/physician-loan.html
- abbottry 10y agoCame here to mention this exact thing -- you don't even have to be an attending, my wife and I have this loan through a different company, and she is still a resident. We had banks fighting over our mortgage. No money down, no PMI, and they portfolio the loan instead of selling it right away like a standard mortgage. We live in a Detroit suburb.
- sandinmyjoints 10y agoWhy would they "portfolio" (I'm inferring this means keep it on their books) such a loan instead of selling it? Because the risk is thought to be so much lower than standard mortgages that keeping it somehow helps them in some way?
- deleted 10y ago[deleted]
- GeneralMayhem 10y ago>30-year adjustable-rate mortgages >clients for life You'd think what is very clearly a paid advertisement for SFCU and SoFi would leave out the scariest details.
- GeneralMayhem 10y ago>30-year adjustable-rate mortgages >clients for life You'd think what is very clearly a paid advertisement for SFCU and SoFi would leave out the scariest details.
- czep 10y agoAny advice on where to look for a house in the bay area right now? Like I'm sure a million others, I'm sick of renting in a market where landlords sell and evict every day (happening to me right now, again). Got a kid, need good schools. Other than that, anything goes. I just want to live without constant fear of being upended every 6 months. Is that so much to ask?
- jf 10y agoAlameda
- anewcolor 10y agoWe just bought a place in Pacifica for similar reasons
- jhspaybar 10y agoI'm in the same boat, rented for my first year back in the bay after living in Seattle for a number of years and my landlord wouldn't let me sign another year long lease(meaning, I'm going to get booted sometime sooner). I just bought a home in Pleasanton and I'll be taking a shuttle to my office(everything in the south bay seems to have them). And, if I change jobs I can make it into SF on bart.
- jasonmp85 10y agoI realize this headline is meant to be inflammatory (look at those entitled people who get it all!), but this practice already exists for medical doctors: http://whitecoatinvestor.com/personal-finance/the-doctor-mortgage-loan/ http://whitecoatinvestor.com/personal-finance/the-doctor-mor... Basically: "you're about to have a high income and—as a class—have a very low default rate. We'll let you put 0% down and not count your student debt against you". Usually before you get your first paycheck (just need to show them the contract). FWIW I'd argue that tech workers are—financially speaking—much more varied than doctors, who generally exit residency, get a position (sometimes in a new city) and see their income skyrocket. So I can't say this is perhaps as justifiable an idea as it is for new doctors, but I can buy the rationale for certain workers. If you're in the boat of "I could afford a mortgage around here, but would take years to save a huge downpayment on these prices", the doctor mortgage can be a great thing. Not least of all because it's not always savvy to make a big downpayment: http://themortgagereports.com/18520/20-percent-downpayment-risk-mortgage-interest-rate http://themortgagereports.com/18520/20-percent-downpayment-r...
- patcheudor 10y agoI found it to be a particularly interesting headline because I thought such things were normal. When I bought my home in 2004 it was not only zero down but on a 7/1 interest only arm at just 1 point above the basis rate with a maximum increase over the life of just 4 points. As a bonus I got $50K out to pay off the boat. Needless to say when the housing market crashed I wasn't freaked out because I had effectively nothing to loose. Sometimes not having any money invested, especially for the first decade or so can be a relief if one must consider a strategic default of the mortage.
- refurb 10y agoWhen I bought my home in 2004 I think the "2004" in your reply is key. Crazy things were happening back then and as you called out, the housing market crashed. I think what freaks people out is that only ~8 years out from the crash, you can already see lending standards getting more relaxed. Didn't we learn anything last time? Not to mention the number of people I've talked to that said "housing always goes up, it's a great investment!". In less than a decade people have gone from "housing sucks" to "it will never go down". Amazing.
- bwb 10y agodoesn't seem to surprising, high job demand, high salary = low risk to banks.