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

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

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

It is projected that this stimulus could result in the purchase of a quarter of a million homes in just a twelve month period. 

The link below will connect you to the entire article:
http://realtytimes.com/rtpages/20080201_washingtonreport.htm

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

“…there has been more interest in Chicago on the part of property investors from around the world in the past three years than during any other period in the city’s existence.” (Making a Modern City, Urban Land March 2007)

 Generally I provide a link to any articles I reference, however the urban land website has restrictions on article access.  Here is a link to the site in case you want to become a member.

http://www.uli.org/Content/NavigationMenu/DiscoverULI/LeadersinOurField/Publications/UrbanLand/Urban_Land_Current_a.htm

Certainly part of the influx of foreign investors into the Chicago market can be attributed to the favorable position of the euro and other foreign currencies against our dollar.  But moreover, market forces are directly in contradiction to the strong seller’s market of just a few years ago.  The article goes on to discuss the Chicago’s deverse economic output as it converts from a manufacturing center to a “white collar economic power with global reach.” (Urban Land March 2007)  Due to the surplus of homes currently on the market, buyers and investors are presented a unique oppurtunity.