Save Money: Don’t Pay the Mortgage

Sounds awful, doesn’t it? Contrary to the frugal rules your parents taught you or maybe your grandparents. Well, the Great Depression was a long time ago and we’ve come a long way, baby. No more do trivial items like mortgage contracts bother us because, well, the other partner in the contract, the banks, are showing how little they care for us.

I’ve discussed loan mods ad nauseam in this blog. The fact is for most borrowers either the bank refuses to offer one for a variety of reasons [too much income, not enough income, current in payments] or the loan mod proffered after months of paper-pushing is too draconian for the homeowners who soon fall into arrears again.

What’s the solution?

As mentioned in a recent NY Times article, in practice passive resistance rules . Homeowners simply stop paying on their underwater mortgages. Now, living “rent-free”, they take  whatever money they have and pay down bills, eke out an existence, put it away for the post- foreclosure rent deposit  or do whatever they have to do to make ends meet.

What about the foreclosure?

Don’t the banks swoop down and grab the house throwing its occupants into the streets? That’s what most of us think of when we think foreclosure, but the simple fact is the banks are swamped. In fact, today,  the average borrower in foreclosure has been delinquent for 438 days before actually being evicted, up from 251 days in January 2008, according to LPS Applied Analytics.

In my travels I’ve met plenty of homeowners who manage to stay in their homes rent free for months, even years. Not so long ago I talked to a man whose home in the Hollywood Hills had been in foreclosure for 24 months before the bank even threatened to evict him. He also had a guest house and had been collecting rent for the entire time. By law, his tenant was allowed to stay for another 60 to 90 days, though not rent-free.

More than 650,000 households had not paid in 18 months, LPS calculated earlier this year. With 19 percent of those homes, the lender had not even begun to take action to repossess the property — double the rate of a year earlier. In California, a non-judicial foreclosure state, the process can be fairly rapid, 3 months and 21 days from start to finish. That’s theoretically and legally possible, except, again, it rarely happens. In California, the average is now 415 days and lengthening every month. The reason is the overwhelming number of defaulting mortgages.

Even in short sales, the banks seem to be in no rush to consummate the transaction as borrowers forced to wait for 3 to 6 months have discovered. In the meantime, the homeowner lives rent free or collects rent from tenants Everyone lives in a kind of limbo knowing the ax will fall sometime and some would much rather just move out and get on with their lives and reconstructing their credit reports. For  many, it may not be  much, but it is some small revenge again the behemoth banks who took all that bailout money and turned a tidy profit while the nation’s homeowners bore the brunt. Yes, a small but satisfying revenge.

Great Short Sale News. You CAN Buy Another House.

Losing sleep over the precipitous drop in the value of your home? Wondering how you can continue to make payments on that $500,000 loan when the home now seems worth at most $300,000? Casting  jealous glances at the newcomers in your area who are getting bargain prices and bargain rates?

Guess what? Now you can short sell your home AND  buy another house at today’s prices and rates.

Over 14 million loans in the U.S. are now either underwater or in some stage of foreclosure. About half the nationwide sales to new buyers are either repossessions or short sales.  It seems to most underwater homeowners that there ought to be some way to connect the two–now there is. You can short sale your home and buy a similar property for half the price.

Lenders are  now coming out with new programs, many insured by FHA, which make it possible for homeowners to short sale their homes and simultaneously buy another property at today’s prices and today’s rates. Many homeowners have allowed their homes to go into foreclosure or waited helplessly for the loan modifications that never came simply because they couldn’t figure out where they were going to live if they left their homes. Some decided to stick out the school year. Others couldn’t bear to leave the neighborhood. Now they don’t have to.

Here are a few of the guidelines that will allow homeowners to short sale their current home and simultaneously purchase another home. First, they must be current on their mortgages. So, owners who have “let the property go” or who were not financially able would not qualify. Finally, here is some reward for those who have steadfastly made their payments in the face of dropping values.

Second, they must be able to qualify for the new mortgage.That means a FICO of at least 640 and income sufficient to pay for the new mortgage.That’s not as hard as it may seem. If a homeowner can pay the $500,000 mortgage at 6% or 7%, no matter with what great difficulty, think how easy it will be to pay the $300,000 with a 5% mortgage for an identical property.

Third, the buyer must have money sufficient to pay the minimum 3.5% FHA down payment and the accompanying  closing costs. The short seller will get no proceeds from the sale of his property. That’s a given. So, where will the money come from for the new property? If  it’s an FHA loan, the minimum down payment is 3.5% and that total amount can be a gift. Also, the short seller is eligible for the federal tax credit which goes up to $6500 for move-up buyers. That may be applied to the down payment or closing costs, but this is not yet determined.

Finally, some programs require that the new loan cannot be more than the previous loan. So, in this case the new loan cannot be more than the $500,000 which the  buyer was paying on the previous home. With the drop in prices today, in most markets, this will be an easy criterion to satisfy.

Impetus to do short sales just got much bigger. If you’ve been dithering about what to do and how to house the family after a short sale, these new loans could certainly aid in the decision-making process and give you peace of mind. Short selling your home and buying another one at today’s much lower values may, in fact, result in a significant improvement in your housing standards…

Tsunami of Foeclosures Coming

So much for all the “good” news coming out of  D.C. Goldman Sachs, JP Morgan Chase, B of A are all happy campers with their billions in profits, while the rest of us lose our jobs and watch our state sink into bankruptcy. No one ever mentions that, besides the TARP money since repaid,  Goldman Sachs got $12 Billion from AIG to cover hedge fund losses. And, of course, where did AIG get the dough to cover its insurance policies? Why, funny you should ask, that also came from tax payers…So, it’s kind of an endless circle of taxpayer funds creating “wealth” for these jokers while the rest of us starve. That’s capitalism, right?

But, back to real estate…What does all this have to do with real estate. Plenty, as it turns out. Chase and B of A are, of course, banks, now, in fact, the biggest banks in the country. That means they also control a majority of the mortgage loans and how the rising default rate is to be handled. In case you hadn’t heard, default rates are up and rising. Could that have anything to do with the also rising unemployment rate now over 10% in 30 states and 12.6% in California last time I checked. Here, even the “good” state jobs are now at risk and going down the tubes faster than your 5-year-old at Raging Waters.

With no job or prospect of a job, when underemployed or working only part-time or sporadically, home owners can’t cover their mortgage payments. Add to that, the factor of plunging prices. It’s estimated that by now, after more than a year of record foreclosures and drops in home values, 27% of all California home owners are under water, that is, they owe more than their homes are worth. Of course, the smart ones are short selling their homes. It’s hard to give up the old homestead and all the work and money put into it, but once the underwater mark hits 30% loss of equity, it really makes more sense to let it go. It will be years before that equity returns given the numbers involved.

home floating on waves

What about the refi program discussed in a previous post? For some, that might be an option. It’s no help if you’ve lost your job. You won’t qualify.  If you still have a job and can afford the payments, this is an option. Though, notice–you still owe the money your home is no longer worth. You do pobably have a better rate and more managable payments, but, the debt is still there.

What about the loan mod program also discussed in a previous post? Well, there we’re back to these big banks, Chase, B of A, Wells Fargo and all the rest. These banks do most of the loans in the country, so borrowers  have to apply to these banks to get  loan mods.  Obama’s Homeowners’ Stabilization program, announced amidst much hopeful optimism in March, has proved less than effective, shall we say. Chase trumpets that it has modified 138,000 loans since April. That sounds reasonably good, but the program was supposed to modify more than 4 million in 3 years…Not much of a start, so far…

Then, there’s B of A which says it’s done 45,000 loan mods since April. That’s for the ENTIRE COUNTRY.  Think about this: California ALONE had 135,431 notices of default [NODs] send out from January through March of this year. B of A and its newest acquisition, failed California-based Countrywide, probably account for at least 30% of those loans or 40,000 loans. So, B of A is basically DOING NOTHING to help at this time of NATIONAL CRISIS. And, remember 27% of California homeowners are under water and so need to have their loans modified. How many actual borrowers would that be? I don’t know, but we have 35 million people, so that’s got to be in excess of 1 million loans….Nationwide, in the first quarter 1.8 million homeowners fell more than 60 days behind on their loans, 15% more than the prior quarter [Q4 08]. To repeat: this is a NATIONAL CRISIS.

What is going to happen next? Is B of A going to change its corporate culture and start helping homeowners?  Not bloody likely. Digging deeper into the trough of public money is more apt  to be that bank’s continuing attitude.  Just try to do loan mods with Countrywide and B of A or short sales. They take forever–4 months is the minimum; there is no maximum time.  The paperwork demanded is just stunning. B of A NEVER, to my knowledge, forgives even one penny of any under water loan balance as some banks actually are doing.   Its idea of what it owes to the common good is EXACTLY ZILCH, NOTHING, NADA.

So, those foreclosures, kept off the market by useless cycling of paperwork in rejected refis and loan mods, will come onto the market, especially here in California.  Last summer, foreclosure sales statewide hit a high of 26,500 a month.  Before this year is out, we may well beat that record. I am one of many real estate brokers who supply lenders with estimates of value or broker price opinions [bpo] and I can say, anecdotally, that I am very busy, often doing 3, 4 or even 5 every day.  If  I am that busy, so are the others who do this work. That means so many foreclosures looming…

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Can’t Get a Loan? Try a Lease-Option

It’s no secret that plunging home prices still make home-buying out of reach for many. The reason? Lenders have become tough and tougher. It’s the old shutting the barn door after the horse has run out gambit. Lenders were so profligate with their money before that now in reaction they’ve become regular Scrooges. Today, many of the best deals, the REOs and properly-priced properties, go to those with 20%, 30% or more down payments and A+ credit. Gone are the no-money-down loans, the no-PMI second mortgages and the no documented income loans…Gone, gone, gone.

So, what to do if your credit isn’t quite good enough right now? Or, you want to buy now, but haven’t yet gotten that down payment together? One possible scenario is to bring back the lease-option contract, fallen out of favor lo these many years of booming home prices.house for rent

What, exactly, is a lease-option? A lease-option is a legal contract between buyer and seller in which the buyer agrees to rent for a specified period of time at a specific rent and has the option to purchase the home at a specified time in the future at a pre-determined price. The details can vary wildly…

Often, the buyer/renter pays an “option fee” up-front, sometimes pays more than market rent for the property, both predicated on the seller agreeing to apply part or all of the option fee and the extra rent to an eventual down-payment on the property. So, if I want to purchase a $300,000 home, I might pay $5000 in option fee to the seller and $2500 a month in rent, instead of $2000, applying the extra rent and half, say, of the option fee to the down-payment. At the end of a year, I’d have $8500 or a good chunk of my down-payment. If, at the end of that year, I wanted to exercise the contract, I’d buy the house. If not, then I’d forfeit the option money and the extra rent.

Bear in mind that the details of the agreement are totally up to the buyer/renter and seller/landlord. The contract could say the buyer gets to apply the whole $5000 or the rent is $2300 with $500 applied or the period is 18 months or the purchase price is $320,000 or whatever the two parties can negotiate between themselves.

The good part about this is that sellers get up-front money for their rental properties with a good chance at selling in the future at a fair price to a qualified buyer. They also get a renter who is more likely to take good care of his property. Renters get to become buyers over time instead of all at once. They get to know the property intimately before buying it outright. As always, renters get to walk if the deal no longer appeals to them. And, sellers get to keep their option money or part of it, depending on the agreement, if they do.

But, there are a few downsides. Buyers must beware as sellers still control the property and may take out more loans or have liens placed as a consequence of court judgments, or, may have already done so. Potential renter/buyers should protect themselves by checking with a title company or a real estate lawyer. Buyer/renters should also make their interest in the property public by recording their legal contract with the County Recorder. That way, everyone is aware of the contract.

This type of agreement is potentially a great deal, especially for the buyer/renter. The seller is locked in for the duration, but the buyer/renter can continue to look at other properties and can always decide to buy another property when the time comes.

More About Repos: Avoid Rookie Mistakes

Sign Of The Times - Foreclosure
Image by respres via Flickr

What’s the main attraction in a repo [REO=real estate owned, foreclosure]? Why price, of course. PRICE, PRICE, PRICE. Typically, repos can be priced as much as 30% below the market value of similar homes.

What’s the number ONE rookie mistake in buying a repo? Lowball offers. A lowball offer immediately identifies a buyer who has no idea about foreclosures. Buyers are already “stealing” a property in buying a foreclosure at the list price. Why do so many think they can offer 30% to 50% LESS than what the bank is asking? These very buyers are then “shocked,” “stunned” and out of the game when the word comes back that the property turns out to have 5, 10, 20 or even more offers.  If that property was the dream home, then it will be “the one that got away” because buyers had not done their homework or,possibly, were working with a rookie agent.

Here’s how banks come up with their prices for properties foreclosed upon and then offered for sale. Before foreclosure, the bank typically orders a drive-by BPO[broker’s price opinion] in which an experienced real estate agent takes pictures of the property, which is usually still occupied, from the street and then prepares a comprehensive analysis of the property’s current worth. The agent takes three active listings and three recent sold properties of approximately the same age, square footage, style and location to come up with a potential market price. During and after the foreclosure process, the bank orders up to seven BPOs at the varying stages, reflecting a declining market and, eventually, a vacant property. After the property is vacated and cleaned up, the bank also orders interior BPOs.

What this all means is this: the bank has a very good idea of the value of the property. The list price of a foreclosed home in then put at some point BELOW the normal market value. After all, as mentioned in a previous post, the buyer is not getting any disclosures. The bank will not do any repairs. Often, the bank will not do a termite clearance. The bank provides no home warranty. The buyer cannot talk to the bank to negotiate any little part of the transaction. So, the buyer gets a great deal on price.

If you want to be a successful repo buyer, make reasonable offers. 30% below an already 20%-below-market price is not reasonable.

Here’s another rookie mistake. Some buyers habitually make offers with the idea that after a home inspection, they will renegotiate the price or demand that repairs be made. If this is your strategy to get a repo even cheaper, quess what? It won’t work.  Banks offer their properties AS-IS. ALL banks offer properties AS-IS. If the property has no toilets or the walls are punched in, that’s how you will get it. You cannot do a home inspection and “discover” no toilets and then negotiate with the bank.The bank has already factored no toilets into the list price.

Here’s why this strategy will not work. First, the bank has already sent out contractors, agents, locksmiths, handy people, cleaners  to inspect the property and report back. Repos may be damaged, but they are always clean of debris. All traces of the previous occupants’ detritus have been removed. The repo will be clean, swept and neat, though faucets, lighting fixtures, A/C  compressors and the like may be missing or damaged. The locks will work and the property will be secure.  Second, except under very extraordinary circumstances nothing your home inspector can discover will move the bank to repair anything. Unless something has happened since the property was put on the market–a hurricane, tornado, flood, etc–that has substantially altered the condition of the home, the bank will simply move on to the next buyer or put the home back on the market.

The last rookie mistake was already mentioned in a previous post. Don’t figure you can make your offer and show proof  you can do it later. Make sure you have your ducks in a row BEFORE making that offer to the bank. You MUST have a pre-approval from a reputable lender to accompany your offer. In most cases, you cannot get it later.  Even if you are paying cash and banks, like everyone else, love cash, you still must show PROOF OF FUNDS. That can be a bank statement, a letter from your stock broker or whatever. Most repo sales agents operate on volume and have a fairly bureaucratized sales procedure demanding all parts of the offer, including proof the buyer is viable, be done at the time of the offer. Even most standard sales require this today. Sometimes, banks also require pre-qualification with a particular loan rep at a particular bank. A sucessful repo buyer must provide that pre-qual before making the offer.

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How To Buy A Repo

Elden P. Bryan Residence
Image by Floyd B. Bariscale via Flickr

Everybody wants to buy a repo? What’s a repo? It’s a lender-owned home, a repossession. What’s so special about a repo, you may ask?  Main difference is the price, the price, the price. Lenders have no emotional attachment to a property. They just want it off their books as quickly as possible. To that end, repos are frequently, but not always [pay attention: NOT ALWAYS] priced below market.

So, that’s good, right? What’s not to like? Buyers get a below-market home. Lender/seller gets the property off its books. What’s the problem here?

There are a few issues when buying a repo.. Here are a few for buyers to consider.

Condition

By law, lenders are not required to offer the usual transfer disclosures required in California and most other states in which the seller discloses all the material facts about the home, including any known defects.  Why do lenders not have to disclose? Because the bank has never lived in the home and, in fact, most likely knows nothing about it or its history.

Buyers of repos get none of the detailed information sellers love to impart to buyers about what was done to the house, by whom and when.  Frequently, repos are not in great condition, truth be told, though most of them will have been cleaned of debris and tidied by the listing agent’s cleaning crew.

Remember: the former owners lost the house because they couldn’t make the payments. More than likely, they couldn’t pay for furnace cleaning or roof leak repairs or any of the multitude of tiny and large repairs that homes we live in get from us every day. This deferred maintenance  can cause hidden damage.

Remedy: Get a thorough home inspection from a competent home inspector. If further inspections are suggested in the report–plumbing, HVAC, roof or whatever–get them. This property may be offered as a  may be a bargain price, but it’s still a lot of money. It may wind up as no bargain if the pool equipment is broken or the roof leaks.  Do yourself a favor and spend the money to get the suggested inspections.

The Negotiations

Another area of difference concerns the actual negotiations in purchasing the home. Normally, you make an offer, submit it to the seller, get an acceptance or a counter offer and then go into escrow. The procedure for a repo is relatively the same except the seller is a faceless bureaucracy and usually you and your agent have no communication whatsoever.

It’s often even difficult to get in touch with the “listing” agent because frequently these “agents” are faceless themselves, communication through websites, email and voice mail.  These companies often list   hundreds of repos,   each one as lovingly treated as a disposable fork on a picnic.

Each bank and each “agent” has a different technique in negotiating with buyers. And the strategy also depends on the property. If the property is among hundreds of other repos, as in, say, Moreno Valley or Fontana, it’s all about the numbers and getting a buyer quickly if at all.  If it’s a desirable property in a good area of Arcadia, for instance, it’s a different story, though, again, it’s really about the amount of money involved.

So, for some repos, you make your offer, the agent submits it to the bank quickly, it’s accpeted, and escrow begins. For others, many offers are received, so then the agent ,in consultation with the bank,  takes one of the offers and works with it, going straight to escrow. Sometimes in this scenario, the agent comes back with a multiple counteroffer from the bank asking all buyers for their “highest and best offer”. Then, from  those that come back, the bank selects the best and opens escrow.

What to beware of here? The auction effect…we all became familiar with this during the boom market and it’s far from dead. Buyers will always vie to get a good property at a good price. Prevent yourself from paying too much by keeping your emotions out of it, if possible, and setting a price beyond which you won’t go, no matter what. That will immunize you against the auction effect.

Financing

Is financing any different for a repo? Will I have to use the bank which owns the house? The short answer here is NO and No. Some banks will require that you pre-qualify with a specific lender in order to have your offer considered, but no one can require you to use that lender. As with new homes, though, sometimes the lender will offer more favorable terms just to have control of  the situation. Should you do it? By all means…more favorable terms are always good.

Repos are a bit different as far as the transaction goes. Many banks require their own forms which, of course, are there to minimize the bank’s liability.  California, in particular, has many buyer-protection laws. Banks cannot require you as part of the transactions to give up your rights.

But, the bank may require a shorter inspection term [the normal is 17 days] or provide stringent conditions if the buyer’s loan isn’t funded in the agreed-upon number of days, especially if the buyer is not using the bank’s lender.  That’s not so bad. It may keep your lender and your agent on their toes.

Another issue is termite inspection. Many buyers assume that a termite clearance is required by law. Not so–it’s often required by the terms of the buyer’s loan, but many loans don’t require it.  Many repo listings specifically say that the bank-owner will not provide a clear termite. In this case, it’s up to the buyer to get a termite inspection and pay for any damage.

Got your heart set on a repo? Get over it. Set your heart on a good deal whether it ocmes from a bank or a short sale or even a savvy seller. In fact, buying from a seller who prices his home to sell quickly is the best way to go. At least, that seller isn’t going to walk off with the kitchen faucet or leave a big hole punched in the bedroom door…

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