Cheapskate

Last week I had one of the more amazing conversations in my career. A prospect wanted to refinance a home that now belongs to his parents, and he wants to transfer it to his name and get a mortgage. There are some interesting issues here.

The first is property taxes. In California , we have an unusual property tax structure. Many years ago the voters passed Proposition 13 which fixes property taxes at the level they were upon acquisition of the house plus a cost-of-living adjustment. Obviously property values in California have been increasing at a rate much higher than the rate of inflation, so in this case we have a property that is now worth perhaps $2,500,000, but the taxes are based upon the original purchase price of $750,000.

If they don't do the transfer correctly according to the County's exact procedure, the taxes skyrocket. I told him about some of the dangers in this and suggested that he consult an attorney who was knowledgeable in this field. I guess he had not thought to do so because he said that he thought it was good advice.

There are also gift and inheritance tax issues here too, because the IRS and State have rules about that. Transferring property with a tax basis of $750,000 that is currently worth $2,500,000 would certainly trigger taxes if not done to the letter of the tax code. I don't think that he had even thought about getting expert advice on this aspect of the transaction.

We finally got around to talking about mortgages and he asked what my fee was. I told him 1 point on a projected loan of $500,000 that he needed. He was outraged! He couldn't see how what I did was possibly worth $5,000. He said that he had gotten offers to do his loan for $700.

I told him that whomever he dealt with, even if it was directly with a bank, would charge him 1 point, although it might not be visible to him. At least with me, he would be getting the truth about fees and costs upfront and a guarantee that they wouldn't change later. Frankly, no one in our business is going to do his loan and charge him only $700, but his belief that he could get it done for that led him off on the wrong path, a path fraught with peril, as he will no doubt discover only when it's too late.

The discussion deteriorated after that because he thought I was gouging him. I invited him to go to his branch library just a few blocks from his home and check out my book and read it over the weekend. His comment? "I don't have time for that."

Frankly, I'd like to be a fly on the wall when the lawyers and CPAs tell him what they charge per hour. Here's going to have apoplexy! Good, accurate advice comes only from people who are knowledgeable and experienced. You don't get good advice from people making minimum wage, which he what he is likely to deal with at many lenders, because that is who they hire to answer the phones.

The reasons I want to discuss this here are twofold. First, there is the issue of getting advice. Here is a guy trying to tip-toe through a financial minefield and he wasn't even thinking about getting a guide. Frankly, these days we all have one area of expertise and we are dummies in almost all the other ones. When you are in a field where you are the dummy, you need to get yourself a guide.

The other issue has to do with compensation. Everyone wants to save money, to make sure that he is spending no more than necessary to accomplish the goals. But I think that it is important to calculate the risk-reward equation carefully. Getting the wrong Visa card may cost you a few dollars, but making a mistake or missing some incentive compensation on a $500,000 mortgage is another. The more dollars involved, the more you ought to be concerned about getting the best counsel you can.

Here's a guy who is preparing to structure a transaction with $2,500,000 on the table. Yet he hadn't thought about getting an attorney, a CPA, or a mortgage expert to help him. Maybe he just isn't aware of the complexities and pitfalls inherent in the transaction. Maybe he's just a cheapskate.

Whatever, I don't even want to deal with people who won't acknowledge the value of what I'm doing for them. That's the kind of transaction when you look at the check after it's over, you say, "It wasn't worth it."

As for you dear reader, I hope that you will commit yourself to getting the very best help you can find, whether it's getting your tax return done, buying a home, or financing it.

Be careful out there.