Greg Wang's Real Estate Blog

The U.S. homeownership rate experienced its biggest drop in 2010 in 70 years, dropping to 65.1%, down from 66.2% in 2000, according to data from the Census Bureau.

The decline came even as the nation added 15.8 million housing units, increasing the total housing inventory by 13.6%, the Census Bureau said Thursday.

Eleven states suffered declines of at least two percentage points in their homeownership rates, led by South Carolina, with a decrease of 2.88 percentage points.

Nevada, the state that experienced the biggest housing boom in the nation over the past decade, saw its homeownership rate fall by 2.09 percentage points. The state’s housing units grew by 41.9% from 2000 to 2010. Housing growth outpaced population growth — which was already the fastest in the nation — by almost 7 percentage points.

Nevada, also registered the biggest growth in vacancy rates. The state’s vacancy rate, a measure of the share of unoccupied units on the Census survey, rose by 5.1 percentage points in 2010 from 10 years earlier. It stood at 14.3% at the end of 2010.

That increase “was almost completely driven by the increase in Clark County,” said Ellen Wilson, a statistician in the Census Bureau’s Economic and Housing Statistics Division, on a conference call Thursday. Clark County, home to Las Vegas, saw a 6.4 percentage point increase in vacant units.

Nevada’s vacancy rate was followed by Florida, (up 4.2 percentage points); Michigan (up 4 percentage points); and Georgia (up 3.9 percentage points).

The 10 states with the highest housing unit growth rates were in the West and South. After Nevada, Arizona clocked the second-largest gain, as its housing inventory rose by 29.9%, followed by Utah, with a 27.5% gain, and Idaho, with a 26.5% increase.

California had the most total housing units in 2010, as it did in 2000, with an inventory of 13.68 million units. Texas was next, with 9.98 million units, followed by Florida, which gained enough housing units to surpass New York.

Source: Liz Enochs

Wachovia Short Sales Are Far More Superior than Any Other Short Sales

As a Real Estate Broker in the trenches who hears and experiences a lot of short sales horror stories each and everyday, when we closed our first Wachovia short sale, we thought we all had died and gone to Real Estate Heaven. When the manager of the short sale department for Wachovia first came to my office to talk to me about Wachovia’s short sale program. It was hard for me to believe his pitch because it sounded way too good to be true.

The truth is Wachovia takes the pain out of short sales for everyone involved in the transaction. Wacovia is a portfolio lender, meaning it made its own loans and is responsible for deciding whether to approve a short sale. Other banks such as Bank of America, CitiMortgage, Chase or Wells Fargo generally have to submit the file to their investors for approval. Depending on the guidelines those investors follow, the process can be complex, lengthy and or produce ridiculous demands that cause short sales to be rejected. Not so with Wachovia!

How Banks Other than Wachovia Handle Short Sales

First, to truly appreciate a Wachovia short sale, it helps to look at the short sale process adopted by most major banks. Once you realize what hell those banks put a seller and buyer through, you’ll understand why Wachovia is special.

Here are some of the problems with other short sale banks:

• The worst problem is it takes too long. Buyers get tired of waiting for short sale approval and cancel their purchase because banks can’t process their short sales fast enough. It can take a minimum of 6 weeks to 6 months or longer to get short sale approval.
• Banks require a ton of paperwork from the sellers. They generally want their last 2 years of tax returns, W2s, payroll stubs, completed financial statement, bank statements, hardship letter, in addition to a slew of documentation from the listing agent.
• Some banks demand seller contributions, even on California purchase-money loans. Purchase money loans in California are typically exempt from a deficiency judgment in the event of a foreclosure, but to grant a short sale, the banks may demand money from the seller.
• Often, when there are two short sale loans, the two banks fight over how much the second bank will receive. Some second lenders try to push sellers to commit short sale mortgage fraud. It’s a nasty situation all the way around!
• By the time the short sale finally closes, the sellers often feel broken down, beat up and battered. They wonder why they even tried to do the right thing by choosing a short sale over a foreclosure. And even after closing, sometimes the bank’s departments are so confused that the short sale department forgets to notify the foreclosure department that the transaction has closed, and the bank files foreclosure anyway.

How Wachovia Handles a Short Sale

With Wachovia, it’s like opening the door at the train station in Venice and discovering the Grand Canal is at your feet, looking just like a picture postcard. Like Dorothy in Wizard of Oz, leaving her black-and-white world and entering the colorful Land of Oz. It’s like eating chocolate for breakfast.

Before rendering an opinion on the short sale, Wachovia asks for basically 3 things:

• The buyer’s and seller’s signed purchase offer.
• The buyer’s preapproval letter and proof of funds.
• The seller’s listing agreement.

A representative from Wachovia will either call or visit the seller at home to discuss the seller’s financial situation and appraise the home. If there are two short sale lenders, Wachovia knows how much the second lender is likely to accept and offers that sum to the lender. A HUD statement is then delivered to Wachovia by the Title Company, and a decision is rendered, generally within a few weeks.

In certain situations, Wachovia will offer the seller a cash bonus to assist with moving expenses. All short sale banks should approve short sales like Wachovia and when they do the entire Real Estate Community will all feel like they have all died and gone to Real Estate Heaven!

I Want a Bigger/Nicer Home but…

Over the past few weeks I have talked to many present and past Clients that are current homeowners that would like to move up to a larger or a nicer home, but are patiently waiting for the market to improve.  A frequently heard complaint is that they can’t sell their home for what it is currently worth.

Buying up in a down market is actually advantageous because while you might get less for the home you’re selling, you’re also getting the larger home for less.  For instance, if you had to sell a $400,000 home for a 10% discount, you might feel that you left $40,000 on the table.  However, buying a $600,000 for the same 10% discount would put you $20,000 ahead on the sale and purchase. (The $ 60,000 you gain by buying at a 10% discount minus the $ 40,000 you lose by selling at a 10% discount equals a $ 20,000 profit.)

The other obvious matter is that when the mortgage rate increase while you’re waiting for the market to improve, it dramatically increases your cost of housing with higher payments.  The cost of housing is affected by price and mortgage rates.

To accurately evaluate your current options, you need facts and assessment tools that will provide you the information to make an informed decision. Below is a example that simply illustrates how by just waiting to move up to a larger home while the mortgage rate increases how much more the house will cost while you wait for the market to improve.

Therefore, if you have contemplated on moving up to a larger home now is the perfect time to make that move before the interest rate increases and you end up paying more for the same house.

As home prices fall and rents rise, some investors are plunking their money into real estate, chasing the cash flow that comes along with becoming a landlord.

“For the first time in a long time, you can buy that home and can get a cash-on-cash return immediately,” said William King, director of valuation services for Veros Real Estate Solutions, a supplier of housing data to the country’s largest banks, as well as government organizations. “There are a lot of places in the country where an investor can buy a single-family home, rent it, and get a positive cash flow.”

In fact, investors bought 20% of all the homes sold in April, according to the National Association of Realtors. Some of them are buying with cash.

But even if they do finance part of the purchase, they’re able to turn around a profit much quicker than they would have been able to in the past, King said. And the return on rentals can be much better than returns on other investments these days, he added.

In the past, investors would subsidize their monthly payments on a property with the rent they were able to collect, and the big payoff was the price appreciation he or she would accumulate, he said. Now, investors can come in with a 25% or 30% down payment, finance the rest, and the rent they collect often can cover the mortgage payment, taxes and insurance — with additional cash left over, he said.

“Investors are looking at these properties on a monthly income generating basis,” said Alex Villacorta, director of research & analytics at Clear Capital, a firm that provides data for real-estate asset valuation and risk assessment to financial services companies. “They can start to realize instant profit margins, even as the market goes down more.”

“There’s a turning point where the cost of owning a home is less than the cost of renting,” he said. “When that disparity grows … we will see a push from investors to pick up investment properties.”

In general, that investors are beginning to snap up rental properties is a good thing for the stabilization of housing markets, King said. It’s also one of the ways that a floor on real-estate prices can be established; as more investors spot opportunities in residential markets, prices could bottom.

“Once investors come into a community, you’re seeing the beginning of the end of the decline,” King said.

What to look for

Before investing in a rental, make sure you’ve considered the harsh realities of becoming a landlord, said Mike Litzner, broker and owner of Century 21 American Homes, which has locations in Long Island, Queens, Nassau and Suffolk Counties. He’s also a landlord.

“There are some people who think it’s glamorous, but when you get the wrong tenants, it can be a nightmare,” he said. That said, when you get the right tenants and the properties perform as expected, it can be a “tremendous” way to make a buck — and he believes the “smart money” is now working its way into the marketplace.

Before considering any purchase, decide if you have it in you to be a landlord. You have to be willing to set expectations and consequences to ensure rents are paid on time, and you have to ready for the possibility of evicting non-paying tenants, he said. Plus, you’re responsible for the upkeep of the property, no matter how your tenants treat it.

From there, it’s a numbers game. Get a sense of what rents are in the area you’re considering, the vacancy rate, and consider your costs of financing, Villacorta said. Don’t forget the other costs of owning a property, including taxes and upkeep. Some investors may want to enlist the help of a real-estate agent to assist with analyzing the market.

Remember, often the best investment is a home you wouldn’t necessarily buy to live in yourself, Litzner said. These days, foreclosures can be snapped up at bargain prices, and as long as you have the means to make required repairs, they can represent good opportunities.

Don’t buy the most expensive house in the neighborhood,” King said, “and look at the broader community. Where are the renters going to come from, and what do they do?” Areas near colleges and military installations can be good places to invest; and think about what renters typically look for, including access to public transportation, he said.

Some of the houses bought in the worst conditions ended up being the best investments for Litzner, who was able to put some sweat equity into the homes before renting them out. It’s also important that investors have multiyear plans for the properties they buy, planning the financials at least 5 years into the future, he said.

Best markets

Many investors sink their money into properties not far from where they live. Those are likely the communities they’re most familiar with, and from a management perspective, you’re never far from the tenants you’re dealing with.

But some markets are better than others to invest in right now.

A recent report from Inman News, an online real-estate industry publication, named the 10 best markets for home investors. These are markets with traits including high affordability, low prices, high share of foreclosure sales, high population growth, improving unemployment rate, and high return on investment in the next 10 years.

The following are their top 10 markets:

1. Indianapolis-Carmel, Ind.
2. Winchester, Va.-W.Va.
3. Gainesville, Fla.
4. Tucson, Ariz.
5. Tallahassee, Fla.
6. Hagerstown-Martinsburg, Md.-W.Va.
7. Salt Lake City
8. Richmond, Va.
9. Gainesville, Ga.
10. Winston-Salem, N.C.

Source:  Amy Hoak, Wall Street Journal

An interesting new buying trend I’m starting to see around the Bay area is a segment of homeowners are still trading up even in a declining market. While I find it rather unexpected, I believe the local conditions make such a move both feasible and favorable.

First, by trading up, these homeowners are opting to sell their homes at either a small or negligible loss so they can purchase a property in a prestigious neighborhood at a steep discount. These are usually million dollar neighborhoods with a few distressed homes that are being sold for 30-40% discounts, even steeper drops than more modest and affordable neighborhoods. Often, they are able to get such a home for little more than what they paid for their current home. Similarly, townhouse homeowners are able to trade up to single families with a bit of financing lifting and foresight.

While taking a loss is hard for anybody to stomach, I commend these homeowners for using this situation to get into a home that otherwise would have remained out of reach even in times of easy credit. The calculus is cold and brutal. For a loss of around $30-100K, they’re able to save $300-500K on a prime property when trading up. This is not for the faint of heart.

Meanwhile, another group of homeowners are trading up by actually going against the prevalent trend and moving out into the suburbs. Out there, they can easily buy a home twice as large for half the price. Plus, many of the homes are nearly brand new, having sat empty since the housing bust. This is possible as the telecommuting culture is pretty mature in the Bay Area and many technical workers don’t ever have to show up at the office, negating the enormous burden of high fuel costs and enormous amount of time spent in traffic each day.

Of course, the first strategy is predicated by a belief that home prices in California are not about to revert back to the national median. As for the second, it’s a great way to hedge against further price declines since prices in the suburbs are already at the national median.

Your have found the home of your dreams, started packing all your things and have mentally moved in when suddenly a challenge arises that could put a serious wrench in the home buying process. In today’s market, finding the home is only the start of a transaction that can have many stumbling blocks along the way.

Here are the top 10 deal breakers buyers and sellers encounter that can impact the sale of a home:

1. Fixtures and Personal Property Pitfalls

I can’t tell you how many times I have seen deals fall apart because of disagreements over silly stuff like who gets the fireplace screen, the wall sconces or the appliances. For some buyers and sellers it can be difficult to distinguish between personal property and fixtures that come with the house. I once had a seller try to take a dish washer, like the buyer wouldn’t notice?

How to avoid it- Disputes over fixtures and personal property are common. It is important to educate yourself about the difference between attached appliances and personal property but there are times when the lines get blurred. Wall mounted flat screen TVs are frequently an issue. If something is really special to a homeowner, my recommendation to the sellers is to remove the item before you put the house on the market. Have a beloved chandelier? Replace it before you start showing the home with an acceptable alternative. If this isn’t possible, exclude it in MLS listing along with frequently confused items like that flat screen TV, and make sure it is excluded at the time the offer is written as well. Buyers should have their Agent investigate and include any items in the offer that are important to them.

2. The dreaded ex-wife/husband

There may be many reasons to dread an ex, but when it comes to selling a property, it can impact the sale of a home. Over the last 25 years I often see situations where the owners got divorced but he/she didn’t sign off. Finding this out late in the process can be problematic, especially when one of the parties no longer has a financial interest in selling the home. This scenario along with other clouds on the title can take time to clear. Bank owned properties often come with title issues such as unpaid garbage fines or back HOA dues that can impact your closing.

How to avoid it: Get a preliminary title report as soon as possible and if you are a seller be sure to disclose to your Agent up front if there are any potential claims on the title.

3. Buyers Buying “Stuff”

Your are a first time home buyers and you are moving into your new home. You don’t have a washer and dryer of your own and the local appliance store is offering a smoking deal – get a store credit card, and save 15% on the purchase of your new appliances! Sound like a steal? It might just kill your deal.

Time and again I counsel buyers not to make any major purchases before close of escrow such as a new car or major appliances, and time and again, some appliance store has a great “deal” that kills the deal. Any major purchase can impact your credit, and it can also impact your loan being funded too.

How to avoid it: If you are a buyers wait on appliance purchases, new car purchases, furniture and more until the loan has been funded and the escrow is closed. Put all  those credit cards away until the paperwork is recorded.

4. Failure To Disclose

“But Greg, I didn’t know I had to disclose that the hill behind the house next door came down last spring. It didn’t impact my part of the hill.” I have had to fight with sellers to get them to disclose certain facts about their home, but it is almost always better to over share when it comes to disclosure. Inevitably, a neighbor is going to tell the prospective buyer about the sliding hill, the formerly moldy basement or about the meth lab around the corner.

How to avoid it: When in doubt, disclose, disclose, disclose. Did I forge to mention disclose? Problems always seem much bigger when they are uncovered by a buyer after they are in contract.

5. Appraisal Nightmares

We went through a period of time when appraisals always magically came in at the offer price. For the most part, those good old times are gone. Appraisals are common deal breakers, and in many transactions, you don’t just have one. Review appraisals of the first appraisal are commonplace these days.

How to avoid it: Make sure the lender has a qualified appraiser. When possible, have your Agent accompany the appraiser on the inspection. Be prepared in advance that the purchase price may have to be renegotiated or a higher down payment may need to be brought in if the appraisal comes in low.

6. Who Owns What?

You as a buyer think you are getting a 10,000 square foot lot, only to find out that the fence is built on the next door neighbor’s property. Or the seller think they own the driveway, but it is really an easement on property owned by the cranky old neighbor next door. Lot lines, shared driveways, and fences are common stumbling blocks in a transaction.

How to avoid it: Review the preliminary title report with your Agent carefully. Legal descriptions aren’t always easy to read, but take the time and effort to do so carefully. Have a title officer walk you through the title report to explain anything unusual. If needed you should go to the city/county authorities to review the items on file. If you are concerned about the lot boundaries, hire a Civil Engineer or a Surveyor to perform a survey. While surveys can be costly, not knowing the actual boundaries can be costlier. If you are only concerned about one side of the property have the Surveyor perform a partial survey for just the side in question.

7. No permits

In many areas, unpermitted additions or remodels have become serious deal killers. Many cities and towns have implemented pre-sale inspections to fill their dwindling coffers.

How to avoid it: If city/town inspections are required, get them in advance, correct any required issues, and get your clearance. Some municipalities don’t operate on the swiftest timeline, so start as early as you can.

8. Unexpected inspection findings

I have worked with an inspector that other agents called the deal killer and honestly, he was. But he was also a lawsuit saver. When you are paying hundreds of thousands if not multiple millions of dollars for a house, you should know what you are buying. I call inspection periods the second negotiation phase of the deal. Inspections are common deal breakers when agreement cannot be reached over repairs. I remember I once almost lost a deal when the home inspection uncovered numerous foundation cracks in the crawl space. Amazingly enough, I was able to hold it together, the price was renegotiated and we were able to close the deal.

How to avoid it: If you are a seller get inspections before the property is actively on the market. Buyers will probably still get their own, but at least you can resolve serious problems that may send a buyer running in advance. Repairs almost always cost a seller less if the buyer knows about it before they write their offer.

9. The lender changed the rules

This may be hard to imagine, but sometimes you are ready to rock and roll, you got your loan pre-approved, not just pre-qualified, you are in contract and everything looks great until- poof- the lender changes the rules. Suddenly you can’t meet the lender documentation requirements. This would have been helpful to know in advance.

How to avoid it: Unfortunately, there is not much that can be done to avoid it other than working with a reputable mortgage broker or lender with a solid record of closing transactions. If you are the buyer, I highly recommend that you leave your loan contingency in place until the loan is funded. If market conditions don’t permit this, make sure you are aware of the ramifications if the loan doesn’t fund.

10. The bank doesn’t care

If the property being purchased is a short sale, the bank is pretty much in charge and they simply don’t care about your timeline. I have heard of people celebrating two and three year anniversaries of working on a short sale. Although most banks have made tremendous efforts to improve and streamline the short sale process when it comes to short sale timelines, anything goes, or better yet- who knows?!

How to avoid it:The best way to save a deal when a bank is involved is to make sure you as the buyer have appropriate expectations about the process. Work with an Agent who has experience with short sale transactions and learn about all the pitfalls of working with a bank. You might also want to read my other blog that I posted 3 weeks ago 5 Most Common Complaints of Short Sale and REO Buyers ( and How To Avoid them ).

One of the best ways to avoid killing a deal- Work with an experienced and reputable agent to help guide you through the process of the entire home buying/selling process to make sure you are properly prepped goes a long way to holding deals together.

Happy Buying and Selling in 2011!

Zillow Mortgage Market Place’s most recent survey indicates that there are many aspects of the home buying process that continue to elude prospective home buyers. Here are some of the more surprising results of the findings, along with five things home buyers don’t know, but should:

Mortgage rates vary daily

A whopping 55 percent of prospective home buyers don’t realize that mortgage rates, which are determined by a slew of factors, can – and do – change daily (and sometimes more than once a day if certain economic reports are released.) To get the best rates, you have to monitor them (watch the movement of the 10-year Treasury bond; that’s your best indicator.) and shop around. After all, a change in a rate of a mere .125% to .25% could mean thousands of dollars in savings each year.

Lender fees are negotiable

When you apply for a mortgage, the bottom line is that you’re going to have to pay lender fees. And these fees — from origination fees to credit report fees to appraisal fees and more — can add up quickly. But the good news — and what 34 percent of prospective home buyers don’t know — is that fees not only vary from one lender to the next, but that they’re negotiable. All the more reason to shop around for different mortgage rates from various lenders.

FHA loans are available to all buyers

More than two in five (42%) prospective home buyers think that only first-time buyers qualify for an FHA loan, a mortgage insured by the Federal House Administration. That’s not the case. In fact, these loans are available to all buyers who meet eligibility requirements. Among the key benefits: minimal down payments, relaxed credit score requirements, low costs, and attractive interest rates.

Interest rates on ARMs don’t always reset higher

While interest rates on 5/1 ARMs do commonly increase after 5 years, rates could decrease. Prospective home buyers may not realize this because so many of us — some 57 percent, in fact – simply don’t know how adjustable rate mortgages work. FYI: the interest rate on this product is made up of two parts — the margin, which is fixed percentage; and the index, which goes both up and down with the general movement of interest rates.

Pre-qualified doesn’t mean much

Just because you’ve been “pre-qualified” for a loan doesn’t mean you’ve secured financing,  yet 37 percent of prospective home buyers think it does. When a lender “pre-qualifies” you, they simply approximate how much you can afford, but don’t run your credit or request any sort of documentation to verify the information you provide. It is not until a lender has approved your loan application without conditions that you’ve got a firm commitment.

Source: Zillow.

Consider these factors before you make a big move in 2011.

Downsizing is a big part of many baby boomers’ retirement plans, but the flat housing market and still-shaky economy have put many moving plans on hold.

2011 isn’t expected to bring higher home prices, so now may be a good buying opportunity, housing experts say. Still, renting may be an attractive option if money is tight or if you’re not sure where you’d like to plant your retirement roots. A third of respondents in a recent Fannie Mae housing survey said they would be more likely to rent their next home if they moved.

Here are some factors to consider as you weigh whether renting or buying is best for you.

Four Reasons to Rent

An easy trial: Renting a home or apartment is an ideal way to test-drive a new community. You get the flavor of a new location without the financial commitment of home ownership — and you can always buy later. Vacationing where you may want to retire is another smart way to audition an area.

Flexibility: If something changes in your life, such as an unexpected job relocation or family needs, or if you just plain don’t like your new neighborhood, it’s a lot easier to walk away from a short-term lease than a home you own.

Less maintenance: Renting means you relinquish many of the responsibilities of home ownership. If something breaks, you can call your landlord instead of hiring a costly repairman.

More to invest: If you sell your current home and rent instead, you can invest the sale proceeds to boost your retirement nest egg.

Four Reasons to Buy

It’s a buyer’s market: While the sluggish housing market is painful for many sellers, lower prices in many areas make it a good time to buy. The NAR (National Association of Realtors) expects prices to stay flat in 2011.

Low mortgage rates: If you need to borrow to buy a home, mortgage rates are at historic lows.

Tax advantages: Under current law, most homeowners can deduct property taxes and mortgage interest, which lowers your overall tax bill.

Build equity: The housing market may not move much in 2011, but many properties can be snapped up for bargain prices. If you plan to stay put, you have time to build equity as the housing market rebounds. Historically, home prices rise over time, so a purchase at today’s lower prices can be a great investment if you plan to stay in the home for many years.

National Association of Realtors spokesman Walter Molony says a recent survey by his group found “a preponderance of baby boomers buying single-family homes.”

You also can borrow against the equity in your home using a home equity loan or line of credit, and the interest paid may be tax-deductible, too.

Other Considerations: Before moving to your next home, you may need to sell your current property. Depending on current prices in your area and when you first bought the home, you may have to sell at a loss.

“We’ve seen three years of declining prices, and it’s flat this year, so for some people who purchased, especially if they did so during the housing boom, it will take longer to get back where they started from,” Molony says.

For a ballpark estimate of your home’s value, try online services such as Zillow.com or Yahoo! Real Estate. For a more accurate assessment, contact a local real estate agent for an analysis of your home and the most recent sales in your neighborhood.

If you lost your job or had credit troubles during the recession, be prepared to face stricter lending retirements when you shop for a mortgage. Before you start looking, make sure you understand your credit standing. If it lacks gusto, make some improvements before you approach lenders for a mortgage.

Roughly forty percent of the homes for sale on today’s market are short sales and foreclosures! Distressed properties are well known for their value (a reputation which is sometimes accurate, and sometimes not), but they also have a reputation for causing buyers to become distressed, too!
Transactional snafus, last-minute surprises and long, drawn-out escrows that never close seem to be par for the course.

Instead of avoiding these properties altogether, get educated about the most common dramas that go down in these deals, and how you can avoid falling victim.

1.  Run-on (and on, and on) escrows. When you’re buying a home (or selling one, for that matter), time is absolutely of the essence.  And buyers reasonably expect that the big time suck in real estate is in the house hunting process itself; seems like once you find a home you want to buy and the seller agrees to your price and terms, things should move pretty quickly, right?

Not so much, when it comes to some distressed property sales. I’ve heard tell of the occasional, swiftly-moving escrow on an REO (real estate owned – by the bank). But for the most part, these transactions take anywhere from a few days to a few weeks longer than “regular” sales, because of the extra signatures, supervisor-level approvals and even investor involvement required to seal the deal.  Banks don’t have the same sense of urgency individual home sellers do, and it’s not uncommon for the people who need to sign on the dotted line to be on vacation or scattered across the country, adding days’ or weeks’ worth of time to the escrow.

And short sales are also an entirely different animal when it comes to escrow timelines. While a standard sale from an individual seller to an individual buyer might take 45 days from contract to closing, a short sale can take anywhere from 45 days to 6 or 8 months (!) to get the deal closed, after the seller has accepted the contract.

Avoid the drama by: expecting your escrow to run long, and being pleasantly surprised if it doesn’t.  Expectation management is everything. Make sure you take these extended timelines into account when you’re working with your mortgage broker on the issue of when to lock your interest rate, and how long your rate locks will last. You might even need to plan on and/or set aside an allowance for the cost of extending your low interest rate, if rates are rising rapidly during the time you’re waiting for the deal to be done.

2.  Bank won’t take lowball offer. If I had a dollar for every time I’ve received a question from an outraged reader to the effect that a buyer has had their short sale or REO offer rejected on grounds that it was too low, even though the bank has no other offers, I could buy a foreclosure myself (admittedly, it’d be one of those $150 foreclosures in some blighted town with tax liens and no plumbing, but still).

Banks owe their shareholders and investors a duty to get as much as they can for these properties. Just because you see it’s on the market and listed as a short sale or a foreclosure doesn’t mean they’re going to give it to you for a fraction of its worth. The bank’s goal is to get a purchase price as close as possible to the home’s fair market value, as determined by the recent sales prices of similar, nearby homes, with some adjustments made for the property’s condition.  Fact is, many banks would rather see the listing agent reduce the price by a moderate amount, and wait to see what offers come in, than to accept an offer 30 percent below the asking price just because there are no other offers on the table.

Avoid the drama by: working with your agent to make a realistic offer, based on recent comparable sales in the neighborhood, not just on what you think you can get away with.  You can waste a lot of time, spin a lot of wheels and lose out on a lot of properties making lowball offer after lowball offer on distressed homes. Sit down with your broker or agent, review the ‘comps’ and make a smart offer that reflects a good value for you, is within your budget and is not bizarrely out of the realm of the fair market value of the property.

3.  Last minute postponements/cancellations. These transactions have an uncanny way of being delayed at the last minute – or never going through at all, through no fault of the wanna-be buyer. You signed docs yesterday, put your dog in the crate this morning and just hopped in the moving truck, only to get a text from your broker that the deal didn’t close because the escrow company which was selected by the bank flubbed the checkboxes on a single sheet of paper (it happens). Or, you’ve been in contract (with the seller) on a short sale for four months, and the bank refuses the sale entirely because the seller refuses to kick even $1 of their own cash into the deal, despite having a flush savings account.

Avoid the drama by: staying as flexible as possible with your moving plans as long as possible.  Best practice is to plan on some overlap between the time you can be in your last place and your scheduled move-in date.  Also, if you’re in contract on a short sale, you should take the point of view that you don’t have a firm deal until you get the bank’s approval of the transaction. So don’t even think about starting to make moving plans or paying for home inspections and appraisals until you know the bank has greenlit the deal and that the purchase price and terms they’ve approved work for both you and the seller.

4.  The bank’s black box. Make an offer on a normal home and you’re likely to know what the outcome will be within a few hours or a few days, at the outside. If things take longer because the seller is out of town or some such, the listing agent tells you that, and you at least know what’s going on.

Make an offer on a bank-owned property or a short sale?  It’s a crap shoot – could be days, but could also, easily, be weeks or months before you know what’s going on.  And no amount of calling, pleading, prodding or nudging is likely to get you much information on how your offer or the seller’s short sale application is being handled or what (if any) progress is being made.  And that “black box” into which your offer disappears at the benk level is very frustrating.

Avoid the drama by: continuing your house hunt until you have an answer back.  Maniacally pestering the listing agent for answers or harrassing your buyer’s broker into spending hours on hold with the bank is highly unlikely to get you any insight. (With that said, it does make sense for your agent to check in regularly – sometimes even daily –  with a short sale or REO listing agent to stay updated on any developments with the property and to make sure your offer/transaction stays in the front of their mind.)

Most of the angst in these situations arises when a buyer feels they passed on properties that would have really worked for them when they pinned their hopes on a distressed home.  You can only control your efforts and activities, not the bank’s.  So, consult with your own broker or agent about staying proactive in viewing and even pursuing other properties until you have a firm “yes” from the bank on your short sale or REO offer.  Until that time, and usually for a short time after you get the bank’s approval, you have the right to back out of the transaction if you need to (make sure your broker briefs you on precisely when your right to rescind your offer or exercise contingencies – i.e., bail – will expire).

5.  Double standards. In a “regular” equity sale with no bank involvement, both buyer and seller are obligated to meet various timelines.  Seller has to provide disclosures by X date, open the property to inspections – with utilities on – by Y, and close and move out by Z.  REO and short sale buyers, on the other hand, are often dismayed to find that  even though the bank might take weeks or months to sign or handle its deliverables, the bank will insist that the buyer show up, sign or send a check quick-like.

Avoid the drama by: chalking it up to the (admittedly irritating) way things are – the price you pay to buy from the bank.  Realize that working with the bank on the bank’s terms is unavoidable when you buy a distressed property. Then, go into the deal with realistic expectations – including the expectation that the bank will drag its feet, despite expecting you to keep every deadline – and you’ll be less frustrated, and less likely to make poor decisions out of frustration.

Also, make sure you do respond in a timely manner to the bank’s requests and your obligations under the contract.  I’ve seen banks capitalize on buyer delays in returning signatures and removing contingencies to accept higher offers they received in the interim.  Don’t lose your home on a technicality because you assume that the bank’s lackadaisacal timelines apply to you as well.

Source: Tara-Nicholle Nelson, staff writer of Trulia

Have you had a conversation with someone in the last 30 days about the consequences of walking away from your mortgage?

If the answer is yes, you are not alone.

With an estimated 11 million people underwater on their mortgage, (owing more on their mortgage than their home is worth), even the most credit-worthy consumers are considering walking away from their mortgage.

“Walking away from a mortgage,” or what’s known as a strategic default, usually results in either a short sale or foreclosure and many people in this position are asking one simple question:

What are the consequences of walking away from a mortgage?

Walking Away from a Mortgage: The Consequences

Generally speaking, if you are considering walking away from a mortgage the major consequences will include:

• Impaired credit
• Deficiency risks
• Tax consequences
• Moving costs
• Professional implications

Impaired Credit

Most people are aware that walking away from a mortgage will mean their credit score will take a hit. What most people may not be aware of is between short selling and foreclosure, there is very little difference in how much your credit score is impacted.  The main difference between a short sale and foreclosure is how soon you can qualify to buy a home again after the event, not how many points your credit score went down.

In addition to your credit score taking damage points, it is also common for credit card companies to cancel credit cards or lower your credit limit as a result of missing mortgage payments.  It is also common that it will become more difficult to obtain financing for larger ticket items such as autos or furniture — or any other type of revolving account after walking away from a mortgage.

Deficiency Risks

Depending on which state you live in, there are varying deficiency risks associated with walking away from your mortgage. (See anti-deficiency laws by state)

Translation: Your lender may sue you for the difference between what you owe and what your short sale or foreclosure proceeds were.

Anti-deficiency protection is limited to a minority of states and for most states in the U.S., there is no protection for homeowners from a lender pursuing the difference between what they owe and what the home sells for in foreclosure.

Further, even if your state has anti-deficiency laws in place, don’t think you are free from deficiency risk.  Whether you have deficiency risk or not, depends on factors such as: whether you have a second mortgage; did you refinance and take cash out; is your mortgage the one you got when you originally bought the house, and more.

Which is why when it comes to managing your deficiency risk, keep this saying in mind:

Nothing is more expensive than cheap legal advice.

If you are concerned that you may have deficiency risk, you should speak with a real estate lawyer who can provide legal advice for your particular situation.  Only a real estate attorney can accurately provide you the specific advice for your situation. Don’t rely on your neighbor’s advice or your brother-in-law who just short-sold his house and recommends that you should be okay by just walking away.

Tax Consequences

If you are considering walking away from a mortgage on your primary residence, there is a chance that you may have some tax liability.  If you are considering walking away from a mortgage on a second home or investment property, there can be a significant tax liability and you should consult your tax accountant.

Moving Costs

One of the commonly under-estimated consequences of walking away from a mortgage is the expense and process of moving.  Some of the common concerns related to moving include:

• Moving into a rental — perhaps after decades of being a homeowner.
• Possibly explaining to the landlord any credit report concerns as a result of missed mortgage payments.
• Paying for moving expenses. Utilities, deposits, moving trucks and other expenses can add up fast.
• Moving family members school, work or community activities they have gotten used to.

Many of the people I have talked with who have went through the process of walking away from a mortgage cited “moving” as the one consequence they hadn’t fully considered before actually doing it.

Professional Implications

Depending on what you do for a living, you may have professional consequences as a result from walking away from a mortgage.  The number of professions where your credit profile matters has grown over the last decade and if you are in a situation where your credit profile matters, you should know what the professional implications are before you walk. After all, you don’t want to lose your house and your job at the same time.

Walking Away from a Mortgage: The Single Biggest Mistake You Can Make

When making the decision to walk away from a mortgage, the consequences are certainly something to consider as part of the decision process.  And in my our experience of handling many short sales for our Clients we discovered that  there is one big mistake that you can make in the process:

Not being fully informed of what the consequences are of walking away from a mortgage.

Once you have educated yourself about the consequences and researched all of the possible options…

… the choice is still yours.

Source: Justin McHood of Academy Mortgage.