by Neil Kearney | Sep 1, 2010 | General Real Estate Advice |
Five years ago I had never heard the term ‘short sale’, now I hear it almost every day. Even if you own
your home free and clear knowing what a short sale is and how it works will keep you up to date in today’s real estate market. Currently of the roughly 50 million households in the U.S. 2.5 million are in foreclosure and 7.2 are delinquent. A related number which encompasses many of these households are the 11 million homeowners (Corelogic) who owe more than what their home is worth. In order for these people to sell their house and move on they either have to come to the closing with money or negotiate with the bank who hold the mortgage.
The Basics: Wikipedia.com definition – A short sale is a sale of real estate in which the sale proceeds fall short of the balance owed on the property’s loan. It often occurs when a borrower cannot pay the mortgage loan on their property, but the lender decides that selling the property at a moderate loss is better than pressing the borrower. Both parties consent to the short sale process, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan, known as the deficiency.
Owners Perspective: These would be sellers are stuck. They would like to (need to) sell but for any number of reasons (bought for too much, negative amortizing loans, second loans, etc.) they cannot find a price a buyer will pay for the home and pay off the existing loans and the closing costs. Convincing the lender is not an easy job. First of all there must be a compelling hardship where the seller absolutely cannot keep up the payments nor come up with cash to close. Once all of the documentation is complete a package including the sales contract signed by buyer and seller is sent to the bank for approval. This is the tough part, it takes patience. It can take up to 5 or 6 months but usually no fewer than 8 weeks to get an answer from the bank. If the short sale is approved, the sale goes through at a lower amount the sellers credit is hurt (although not as bad as a foreclosure) and the bank still has the right to claim and try to collect a deficiency.
Buyers Perspective: Short sales provide a unique value opportunity. Many times banks approve a price which is a great deal for the buyer. The main downside for a buyer is the uncertainty. The bank has the right to accept other offers so even if you were the first offer in to the bank, by the time they get around to reviewing it there may be multiple offers. It might take two or more months to figure out that the bank will not approve the list price of the house. Buying a short sale is not for someone who has a certain date in mind or is not willing to be patient while the weeks tick by without any word. There is no countdown, there are no numbers. You hear when you hear and the news is not always what you had hoped for. For the right buyer it is a good opportunity but it is certainly not for everyone.
by neil kearney | Nov 10, 2009 | For Buyers, General Real Estate Advice, Real Estate 101 |
In Part 1 of this article I outlined the initial steps a buyer needs to take in the home buying process. In this post I will explain what happens once a buyer finds “the” right home.
The Offer
After viewing a few homes or many homes, eventually you will narrow your choices down to one “best” house. It’s time to make an offer. Your Realtor’s expertise will now be most helpful. Together you will evaluate not only the other homes on the market (the relative value of the other choices), you will research the value of the home in question. A seller can ask anything they want from a home so it is important that your offer is based in reality, not a seller’s fantasy. After checking the comparable sales it is a good idea to evaluate the position of the seller. How much do they owe? How long has the house been on the market? Have they reduced the price? What other clues do we know about motivation? With all of this knowledge you can with your Realtor formulate an offer strategy.
Once the strategy is in place your Realtor will then prepare a written offer. In Colorado we use a standardized form approved by the real estate commission. Most of the contract is pre-written and we have just to fill in some blanks. Your Realtor will advise you on reasonable contingency dates, contingencies, inclusions, financing and any additional provisions that are unique to this particular property. Once the offer is written, the buyers sign and date the agreement. The offer is then delivered to the listing agent and/or the sellers for review.
Earnest Money
So you will not be placed in an uncomfortable position when you purchase a property, an understanding of the earnest money deposit is important. At the time a written offer is initiated, you will be required to include a personal check or cashiers check as a good faith deposit. The check is deposited into the listing broker’s escrow account upon contract acceptance and will remain in escrow until the time of closing. This amount is credited towards your closing costs and down payment at closing. If the offer is not accepted, the deposit is returned to you. The amount depends upon the sales price of the property. The amount is negotiable, but a good rule of thumb is 1% or more of the offer price. You can only loose your earnest money if you change your mind or if you do not perform to the dates or the provisions of the contract. Your deposit will be returned to you if your loan is disapproved or an inspection resolution cannot be reached. So long as these are done in a timely manner.
The Contract Gets Accepted – Now What?
After the buyer and seller reach agreement on the details of the contract and both have signed either the original offer or a subsequent counterproposal, the focus turns to fulfilling the various contingencies set forth in the contract. The major contingencies are loan approval, inspection and title documentation.
The first order of business is to alert your lender and provide to them a copy of the contract. At this point you will have the opportunity to lock-in an interest rate and firm-up the details of the loan program in which you will pursue. As the lender prepares your file for submission to their underwriters you will be asked to provide documentation of assets, income and anything else they feel that they will need. They will also be asking for money to pay for your credit report and appraisal.
Inspection
The inspection of your home is most important and setting up a general home inspection should be done as soon as possible after contract acceptance. During the typical 10 day inspection period a buyer has the right to inspect the house, check on crime reports, check with the city regarding future development and any other inspections that any particular house may need. After the inspections are complete the buyer has three options: terminate the contract, move forward with the house in as-is condition or provide the seller a list of unsatisfactory conditions. The most common is the later. Once a list is provided a negotiation ensues between seller and buyer to find an acceptable solution. If an agreement is not met the buyer has two options: to let the contract expire or to waive all inspection objections and move forward as-is. To learn more about the inspection process click here.
In Colorado the seller is required to provide to the buyer title insurance which insures clean and merchantable title. Basically, the house must be transferred without any title disputes. The title company will do a title search and disclose to the buyer any recorded documentation that will transfer with the house. Common examples of the exceptions to title insurance are homeowners association covenants, development documentation and utility easements.
Appraisal
Your lender will order an appraisal on the property. Having a third party asses the value, helps the mortgage company evaluate their risk in their investment. If the appraisal comes in less than the purchase price (this is happening quite a bit), the buyer has three options: re-negotiate with the seller, put additional money down to keep the loan-to-value ratios in line, or to terminate the contract.
Final Walk-Through
Just before closing it is a contractual right for the buyer to do a final walk-through. This is the time to check that all inspection items have been completed as well as check on the overall condition of the house. If something were to happen to the house between inspection and closing the seller is obligated to fix it.
Closing
Once all of the contingencies have been met you are ready for closing. The closing day is set forth in the original offer but the closing time is usually worked out by the Realtors about two weeks in advance. The closing takes place at the title company and it usually takes a little more than an hour. A day or so before closing the title company will provide to the buyer a settlement statement that will show exactly how much the buyer will need to bring to closing in the form of good funds. Good funds can be a cashiers check or a bank to bank wire. At the closing the title officer will guide the parties through the various documents which need to be signed. After all of the signing is complete and all of the money is accounted for the place is yours! It’s time to move in.
by neil kearney | Nov 10, 2009 | For Buyers, General Real Estate Advice, Real Estate 101 |
Moving in to a new home is one of the more exciting things we can do. The process seems simple enough – choose a house, write a big check and then move right in. Of course there is more to it. In fact, after selling homes since 1992, I know that no two transactions are the same. Knowing what to expect and doing it in the right order goes a long way towards archiving your goal. The following is my home buying 101.
Have a Firm Financial Foundation:
The foundation of a successful home purchase begins long before the home search. It begins with having a sound financial footprint. In today’s credit environment, a buyer needs both good credit and a sizable down payment. At least a few months before the contemplated purchase you should check your credit and make sure that there are not any surprises lurking. The days of 100% loans are gone, so you will need at a minimum 3.5% (FHA loans) plus closing costs ready to put down. If you are getting a conventional loan or buying investment property you will need a much larger down payment.
Find a Good Realtor
The internet gives you all of the information you could ever ask for at the click of a button. But when it comes right down to it, you need the assistance of a professional who has been through the process time and time again. Most people end up working with a Realtor, so why not engage one early on in the process? Realtor’s have tools that will save you time and put you on the right track sooner. I can set up an automatic email search and a password protected website that work together to give you all of the details about all of the houses you may be interested in. A good Realtor will help you navigate the process, get you the information you need and allow you to concentrate on your family and your job. Make sure you have found a Realtor who is more interested in helping you find a great house for the long haul rather than a quick sale for them. It takes patience and persistence to make sure you get the job done right.
Get Pre-Approved
The next step in the process, before you even view a home is to find a good lender and get pre-approved. Your Realtor should be able to recommend a few local lenders who have proven themselves to be responsive and know how to get the job done. Using a local lender is important, not only are they accountable but they are there to solve problems at the closing table if anything comes up at the last minute. Your earnest money is at stake! If your lender is delayed at the last minute or their money doesn’t make it to the closing table on time and the seller chooses not to give you an extension, you lose your earnest money. You cannot go back to your lender and recover those lost funds. Choosing a lender is more than finding the lowest interest rate, it is finding an advisor who will help you make a sound financial decision given your unique circumstances. The credit rules change often and it is important to use an experienced lender to help you get the job done in a timely manner.
Viewing Homes
The next step in the process is setting your criteria and starting to view homes. At any one time there are hundreds if not thousands of homes available in any given area. Believe me, you don’t have the time or the patience to see them all. The broadest categories in which to sort homes are: location, price and size. Your Realtor can narrow your search by using literally dozens of features but in the beginning it is best to keep it as broad as possible. A good practice is to look at a good cross-section of homes and then communicate your likes and dislikes with your Realtor. They will then be able to suggest other homes to see. When viewing homes it is easy to get overwhelmed by information overload. If you look at ten houses on a Saturday by the last few it is hard to remember if it was the second one or the fifth one that had the good view. I like to keep it to six or fewer. Take notes, ask questions and communicate your likes and dislikes.
Click here to view Part 2 which will take you from offer through closing. To get started call Neil Kearney at 303-818-4055
