Over the past couple weeks I have heard tons of questions about “Short Sales” and how they work.  With my next couple posts I will provide some clarity as to how they work and what to expect.  This post will cover the buy side of the transaction.  If you are unfamiliar with the process of purchasing a home as a whole, scroll to the top of the page and take a look at my “How to Buy a Home” page.  It will provide you with a basic understanding of the process and make the rest of this post more cogent.

I chose to separate this post into the following three sections: Qualities that are similar to a general transaction, qualities that are different, and general facts for buyers to know about short sales.

Similar to a Normal Transaction: 

1. Banks look at offers in much the same way an individual seller would.  Meaning a cash offer will be most viable, followed by conventional financing, and lastly creative financing or a home sale contingency.
2. After negotiating with the seller, a buyer can still expect to have a home inspection and an attorney review period, but after this point the similarities come to an end.

Different from a Normal Transaction:

1. Because the seller is distress it is often difficult to negotiate for repairs.  Not to say it can not be done, but not with the flexibility found in a conventional transaction.  So while you should have a home inspection, in a short sale situation it functions more as due diligence for the buyer before fully committing to the purchase.
2. The Bank is making the final decision on rejection or acceptance, not the seller.  Over the past year banks have been inundated with short sales and currently do not have the capacity to process them efficiently, therefore buyers can expect to wait 45- 90 days to receive final confirmation that the offer has been accepted.  Rejections generally occur in a more timely manner, approximately a month or less.  
3. Closing dates are not set in stone and are often not locked in during the initial negotiation with the seller.  Due to the soft time lines, it takes a buyer with a certain level of flexibility to purchase a short sale.

Things to Know:

1. Banks will take between 75%-90% of fair market value.  Due to a declining market and a lack of recent sales, the  issue in many situations lies in determining that fair market value.  So while a buyer can find a fantastic deal, short sales are not absolute fire sales in which the bank will take pennies on the dollar.
2. Because you are buying from a distressed seller, a buyer should expect to do at least some cosmetic work to bring the home to your standards.  (changing carpet, painting, etc.)
3. As a buyer, of course you want the lowest price possible.  From what I have seen and read, the 75%-90% of market value is accurate as to what banks will accept.  The best way to move closer to the low end of that spectrum is to make your offer as “clean” as possible.  Clean meaning low on contingencies and repair requests.  Remember, banks look at this much like a normal seller would.  For example take a $100,000 home.  Given the option would you sell to someone with a cash offer of $75,000 who will buy it as is, or the $90,000 buyer who has his own home to sell before closing and wants you to do $5,000 in repairs?

Short sales are here to stay for the next few years at least.  My goal is to function as a valuable resource for my clients so please feel free to contact me if you have any questions regarding your personal situation or what you have read here.

Best,

JLC

This was posted at www.financialstability.gov yesterday.

“On Tuesday, February 10th, Treasury Secretary Timothy Geithner outlined a comprehensive plan to restore stability to our financial system. In the address, Secretary Geithner discussed the Obama Administration’s strategy to strengthen our economy by getting credit flowing again to families and businesses, while imposing new measures and conditions to strengthen accountability, oversight and transparency in how taxpayer dollars are spent. And Secretary Geithner explained how the financial stability plan will be critical in supporting an effective and lasting economic recovery.”

Geithner’s outline was short on details and even shorter on positive reception from both markets and pundits alike.  There is still much to be sorted out, but here, I’d like to provide you with the basics regarding the First Time Buyer tax credit of $8,000.

* The Tax Credit is available to all “First Time Buyer’s”.  The current definition of a “First Time Buyer” is anyone who has not owned a primary residence in the past three years.

* The Tax Credit is for 10% of the purchase price or a maximum of $8000.00.

* The Tax Credit is available for those who purchase between January 1st of 2009 until December 1st of 2009.

* You must be a U.S. Citizen to qualify

* Single taxpayers with an income up to $75,000.00 and married taxpayers with incomes of up to $150,000.00 qualify for the full tax credit.  Partial credit is available to taxpayers with incomes up to $95,000.00 or married couples with incomes up to $175,000.00.

 * The Tax Credit does not need to be paid back unless the property is sold within the first three years.  In that event the credit is taken back out of the proceeds at sale.

I will follow with more details as they are specified.

Best,

JLC

The debate rages on.  Is it time to step off the sidelines and buy or is waiting the better option since interest rates and prices may continue to fall?  Difference is, instead of local experts supporting one side while the national media suggests the other, national sources are standing on opposite sides of the fence.

In this post I will provide commentary on the following two articles:

For the MSNBC article click here:  The Argument Against Home Ownership by James Surowiecki

http://www.msnbc.msn.com/id/23439843/

For the CNN article click here: Housing: Best Time to Buy in Four Years by Les Christie

http://money.cnn.com/2008/03/04/real_estate/markets_less_overvalued/index.htm?postversion=2008030413

1. Argument Against Home Ownership  (all quotes taken from web copy of article)

The principle argument of this article is that in a falling market, the commitment of owning a home can tie down an owner limiting autonomy and cash flow.  The reasons for these limitations are threefold:

First, it used to be that a hefty down payment was required to purchase a home.  Averaging 18% for first time buyers in 1976.  In contrast, “a National Association of Realtors study of first-time buyers between mid-2005 and mid-2006 found that almost half put down nothing at all, and that the median down payment was just two per cent.”  Therefore, a borrower is in essence starting from zero and paying back their loan month by month.

Second, “homeowners took out more than six hundred billion dollars in home-equity loans between 2004 and 2005 alone — ten times as much as they had a decade earlier — and are spending much of it on personal consumption.”  So now, not only are many borrowers starting from zero equity when they begin paying off their mortgage loans, but also homeowners that do have equity are borrowing against that equity and depending solely on appreciation to pay off those loans.

Third, the article draws a strained correlation between  home ownership and unemployment rates based on a study conducted from 1960 to 1996 by British economist Andrew Oswald.  The research states that a “10% increase in home ownership correlated with a 2% increase in unemployment.”

While the article seems to denigrate home ownership in and of itself, it stands to reason, the true culprits of our current housing slump are the knockout collaboration of irresponsible lending practices and irresponsible consumer spending.  Currently, lending standards have become much more strident.  Moreover, borrowers with a 5 to 10% down payment that do not borrow heavily against their equity are well leveraged and safe.

2. Housing: Best Time to Buy in Four Years (all quotes taken from web copy of article)

There’s no way around the numbers.  Housing prices have dropped in the vast majority of the US over the last 18 months.  While this article illustrates that fact quite well, it also illuminates the silver lining of that downturn.  “Housing valuations are almost back to long-term norms,” said National City’s chief economist, Richard DeKaser. He called current affordability “the best in the past four years.”  He does caution that they could fall further.  The trade off here is that price decline directly increases affordability.  The article goes on to say that “there are still 21 housing markets, or 6% of those surveyed, that are severely over valued…That’s down from 56 overvalued markets at the peak of the housing bubble in 2006.”

As with all forecasting of markets, this article would not be complete without a source of ambiguity.  In determining market value the report “…compares actual median home prices with what the authors determine are proper home values based on population density, relative income levels and interest rates, as well as historically observed market premiums or discounts, to determine whether markets are over or under valued.”  Let me tell you why that makes me nervous, I count one control (median home price) and five variables in that sentence.  We all remember grade school science, it was all about many controls and one variable, right?  The only true source for determining market value is an agreed upon price between a buyer and a seller.  I’ll call it the elusive obvious.

The long and short is there is no clear answer.  A home buying decision must be made individually based on simple personal factors: budget, housing preference.  Each situation will vary so plan to consult with a professional.  A good realtor and mortgage lender can illuminate this murky market.

Best,
JLC

Amidst all the doom and gloom scenarios, some members of the national media are beginning to suggest that it is in fact, time to buy.  In a recent article in Time Magazine Dan Kadlec states, “anything you gain by a further drop in prices might be offset by rising financing costs.” 

Moreover, “Consider a typical home that sells for $218,900. You put down 20% and get a 30-year fixed-rate mortgage at today’s rate of 5.5%. Monthly principal and interest come to $994.31. Let’s say that 12 months from now the same house goes for 10% less, or $197,010. But by then the recession is history and the Fed is jacking up rates to stem inflation. If mortgage costs rise a point, to 6.5%, your monthly payment would be $994.94 and you’d have saved nothing. Meanwhile, home prices might steady and sellers might become less willing to negotiate. And you have spent a year living someplace you’d rather not be.” – Time Magazine

A couple points for clarity:

1. Chicago did not see close to the price drops seen in many other major metropolitan areas.  We saw gains of 2% down to decreases of 4% depending on the index you consult. 

2. “The irony is that in the time Kadlec did his research and when the magazine came out, interest rates were already back over 6 percent, making his example all the more compelling.” – Realty Times

3. While Kadlec mentions the possibility of “living someplace you’d rather not be” for an extra year, his example does not touch on the inevitable loss of equity a buyer will experience by waiting an extra year to purchase.  Equity build up is fundamental to building wealth through real estate purchases. 

For the Time Magazine article click here:

http://www.time.com/time/magazine/article/0,9171,1713483,00.html

For the Realty Times commentary click here:

http://realtytimes.com/rtpages/20080229_realtyviewpoint.htm

 Best,

JLC

I have recently had multiple conversations with prospective buyers.  In these conversations the same concern seems to pop up continually, to paraphrase, “I just want to wait until prices drop a little further and I can still get a low interest rate”.  This line of reasoning concerns me for two reasons.  First, the two factors mentioned here, home prices and interest rates, do not move in tandem.  To that end, we have not seen a major rebound in housing prices, but according to Realty Times’ David Reed, “mortgage interest rates shot up this past week at the fastest pace in 20 years…”  Second, there is no moment of critical mass where home prices and interest rates will be at their absolute lowest and then begin to rebound together.  If this moment existed everyone would take advantage, it is simply not that easy. 

So how do you make a decision?  Look at a number of variables and act when more are in your favor than against you. The following speak to current conditions:

1. Extensive inventory on the market (Sellers competing for buyers who are willing and able)
2. Interest rates are some of the lowest in the last 40 years (Money is cheap to borrow)
3. New construction is at a 17 year low (Inventory will start to diminish allowing prices to rebound)
4. Personal Preference and Judgment (Would you be happier in a home you own?)

Click the link below for the full article:
http://realtytimes.com/rtpages/20080222_realtyviewpoint.htm

 Best,

JLC

 Developers will face quite the quandary in 2008.  While demand is slowly rising, sales of new downtown condominiums and townhomes fell 36% last year.  6,000 new units will become ready for occupancy in 2008 and many developers will not be able to bare the financial burden if they are unable to move these units.  Case in point, the developer of Ashton Lofts on Ashland and Fullerton is facing foreclosure due to their inability to repay the bank for construction loans.  While this will not effect individuals who have purchased there, it will certainly alter the asking price for the remaining units.

Opportunity for buyers reigns supreme as developers offer incentive laden programs to entice the public into buying.  I have even seen developers offer 6 months of assessments, mortgage payments, and help with closing costs just to close out their developments.  Call me if you have any questions or are interested in these sort of opportunities.

View the article below for more detailed information:

http://chicagorealestatedaily.com/cgi-bin/news.pl?id=28206

Best,

JLC

In this post I will outline the process of buying for all first time buyers out there.  Of course, there is more to it than I will be able to fully explain here, but you will understand the major components and know what to look for as you buy. 

Whether you are buying up to your dream home, moving from renting to owning, or looking for investment property, the combination of long market times, low interest rates, and excess inventory on the market has created the “Perfect Storm” for real estate purchases.  Do not wait, at least speak with a lender before you decide to put it off.  Worst case, it costs you nothing and you will be better prepared when you do decide to purchase.  

1. Initial Buyer Interview- Your realtor should explain a general overview of the buying process.  If you have not been pre-approved, ask your realtor to refer you to a quality mortgage Lender.  Additionally, consider what you want in your home and moreover, why.  Why large rooms are important, why you want an open kitchen leading into the dining room.  Is it because you have lots of stuff and need the space?  Do you like to entertain and have guests?  Great realtors are constantly viewing property and if you can tell them why you want the features that you do, their expertise should narrow the search saving you time and energy.

2. Pre-Approval - Here you will sit down with a lender.  Good ones will start bottom up to determine a purchase price that makes you comfortable.  Your lifestyle should determine how much you spend on a home ideally, not vice versa.  If you like to travel or eat out often that should be taken into account when determining your monthly payment.  Once you agree on a monthly payment that is comfortable, your lender will project that out to a purchase price.

3. Needs Analysis - Here you will discuss what you want with your realtor including the why.  After compiling a list of your wants and needs I do a search and provide you with listings online.  I have never found it useful to send my clients twenty properties to sift through because it can be overwhelming, specifically for those undertaking this process for the first time, so I limit to eight to ten and ask for feedback.  Based on the feedback I will refine the search and in the second mailing you will find multiple units you are interested in seeing.

4. Showings- Here is the first time you are out with your realtor viewing property.  A good realtor will be consistently asking you questions about your impressions after each showing.  The goal is to narrow the wishlist you originally amassed and merge it with what exists in the real world based on price point, area preference, and what is currently for sale.

5. Write Contract and Negotiate until Accepted

6. First Earnest Money Payment- This money is held in escrow until the closing.  This amount is counted as part of your down payment and secures the property for you as some form of compensation must be exchanged to make a contract binding.

7. Contingency Period – Three types 1. Inspection - your new home is inspected and a report is generated listing any material defects on the premises 2. Attorney Review – contract, inspection report, and if necessary, condo declarations and bylaws are reviewed by your attorney 3. Mortgage Contingency – Obtain a commitment from your mortgage company stating that they will be able to fund your loan.

8. Balance of Earnest Money – Now that the contingencies have been resolved, you pay the balance of earnest money.

9. Final Walk Through – Here you will view the property just prior to close, looking for any changes since the inspection or work that must be completed, i.e. punch list.

10. Closing- Closings are held at title companies and on average take an hour or two.  You will sign mortgage documents and receive the keys to your new home.

Feel free to contact me with questions about anything you have read here.  Do not wait.  Opportunity is knocking, let the little fella in.

Best,

JLC

In an effort to supplement Chicago Transit Authority (CTA) funding, Mayor Daley plans to fast track a proposal to increase city transfer taxes for real estate purchases.  A long term remedy for the CTA is certainly necessary after using band aids of emergency funding for about the past year.  However, this proposal begs the question, is it fair to punish new home buyers and investors for CTA budgeting shortcomings?

 The city transfer tax for each transaction will be raised $3 for every $1,000 of purchase price, from $7.50 per $1,000 to $10.50 per $1,000.  Generally, buyers are responsible for city transfer taxes while sellers pay the county ($.50 per $1,000) and state ($1 per $1,000) transfer taxes.  Therefore, buyers will be absorbing the entirety of the tax increase.  Grand scheme we are talking about an extra $300 dollars in tax for every $100,000 in purchase price.

 Additionally, “Aldermen briefed Thursday by Chicago Transit Authority President Ron Huberman and a top mayoral aide said an ordinance imposing the increase will be fast-tracked for City Council approval, with a vote expected at the Feb. 6 meeting.” – Gary Washburn, Chicago Tribune

Here you’ll find the entire article complete with links to register your opposition: http://www.chicagotribune.com/news/local/northwest/chi-council_25jan25,0,2809209.story

Best,

JLC

 I recently came across a disturbing phenomenon while doing some industry reading and thought it was worth sharing.  While the debate over precautions against inflation and undeclared recession rages on, it is more important than ever to have a quality mortgage lender in your corner.  The link below will take you to a post from a blog written by a mortgage lender.  I have been a loyal reader for awhile now and am consistently impressed by the content and poignance.  This specific post addresses the dollars and cents cost to a homeowner when their mortgage is “orphaned” due to either lack of follow up or a change in career of their lender.

http://www.themortgagereports.com/2008/01/homeowners-with.html

Kevin J Ferries
Trust One Mortgage
430 W Erie Suite #205
Chicago IL 60610
Office 312-587-7600
Cell 773-425-6276
Kferries@onetmc.com
 
Joe Burke
Mortgage Consultant
National City Mortgage
2021 N. Clark Street
Chicago, IL  60614
Office:  773-665-5290 x. 21349
Cell:  773-742-6707
joe.burke@ncmc.com

This blog is meant to serve as a forum for conversation so please feel free to post comments or questions and I will respond as quickly as possible.