Real Estate News and Commentary

July 23, 2009October 5, 2019

What do FSBOs know that we don’t?

by Dan Krell © 2009
www.DanKrell.com

What do FSBOs know that we don’t?

Whether I drive by a “for sale by owner” sign or I come across an ad while perusing the Sunday real estate section, I often think that FSBOs (For Sale By Owner) are brave for going it alone. Is there something FSBOs know that others don’t?

Being a successful FSBO means taking your home sale seriously. Would you hire a part time real estate agent who is not genuine in marketing and showing your home? Probably not. Then why go half-way when doing it yourself? Having a serious attitude means doing the research, making a plan, and following through.

Research will help you avoid one of the biggest mistakes FSBOs make – pricing the home. If your home is not priced correctly, you’ll not only price yourself out of the market; but you’ll also waste valuable time. Therefore, using accurate and up to date neighborhood information is critical.

Online home sale resources, such as Zillow, Trulia, and tax records are helpful, however you may find that the information is not always accurate and does not tell the whole story. You can get valuable and up to date neighborhood sales information from local Realtors. Although not all Realtors may be open to helping you sell FSBO, some will! Don’t be afraid to explain that you are planning to sell FSBO and you would like a CMA for your home. Also, ask for their opinion and rationale for a list price.

Selling a home is much more than putting a sign in the yard. Having a marketing plan, even a basic one, can make a big difference in attracting home buyers. Write down the classified ads you plan to use, as well as where and when you will place them. Online ads should also be planned in advance; you will find that articulating an honest and exciting description of your home isn’t always easy.

Having an open house depends on your comfort level of having strangers traipsing through your home. When you consult a Realtor for a CMA, you might ask about open house information. You might want to consult with local police about open house safety.

Don’t forget the benefits of selling FSBO; well, there’s one major benefit- not paying a Realtor commission. But according to the 2003 National Association of Realtors Profile of Buyers and Sellers, FSBO sales net less for sellers compared to homes sold by agents. The profile reported that FSBO sales averaged $145,000 while real estate agent sales averaged $175,000 – giving the seller an average net of $19,500 more on the agent sale after a 6% commission (realtor.org).

Selling your home FSBO can have successful results; a FSBO sale can be a rewarding experience if well planned and handled properly. But before you decide to take on the sale on your own, do yourself a favor and visit a few FSBOs to get feedback about their experiences. You might find out that listing and selling real estate is not as easy as it seems; “they” will not come just because there is an ad in the paper or an internet listing; “they” will not buy at any price; “they” will not buy in any condition; “they” are not all qualified; and “they” will not always show up to settlement.

This column is not intended to provide nor should it be relied upon for legal and financial advice. This article was originally published in the Montgomery County Sentinel the week of July 13, 2009. Copyright © 2009 Dan Krell.

July 21, 2009October 5, 2019

Is it a scam, fraud, or legitimate transaction?

Simultaneous Closings

Some say it’s illegal, some say it’s fraud, some say it’s a scam, and yet others say it’s legal if disclosed. This is the mixed response that a real estate investor gets when trying to conduct a simultaneous closing. The fact is that that a simultaneous real estate closing is a legally complex transaction and has many pitfalls as well as consumer protection issues.

This does not stop the real estate investor who is looking to make a quick buck with little or no money down. A simultaneous closing (also known as a double closing) occurs when a single home is sold twice in the same day. The real estate investor (sometimes referred to as the “middleman”) settles his purchase from the owner, and almost immediately settles on the sale of the home to the home buyer.

Because of the obvious questions raised by such a transaction, investors sometimes use a technique called an “assignment” to get around some of the problems they encounter with a simultaneous closing. Rather than closing both the purchase and sale the same day, the investor assigns their sales contract to the home buyer for a fee.

Home buyers and Realtors may come across such sales as real estate investors advertise to attract home buyers to complete these transactions. Real estate investors may list the home in the MLS or place and ad as a FSBO- appearing to be the owner of the home (although they do not actually own the home). When entering into a contract with a home buyer, they may or may not disclose the nature of the sale.

Many times, home buyers take for granted that the home is being sold by the actual owner. As mortgage fraud and real estate scams increase, home buyers are encountering more irregularities. However, it may become evident to you and your Realtor that an investor is attempting a simultaneous closing or an assignment when: 1) the name on the public record does not match with the name of the person who is selling the home; and 2) the home is difficult to show- there are confrontations with the occupant (often the actual owner).

Buying a home through such a transaction poses some problems for the home buyer, including securing financing. A mortgage lender will not lend money to purchase a home from someone who does not actually own the home, an obvious stumbling block for the real estate investor. Although most title agents stay away from simultaneous closings, savvy investors will pressure the home buyer to use their title agent; the investor’s title agent may issue a title binder for the transaction making it appear that the investor owns the home to meet the buyer’s lender’s requirements.

Putting aside the obvious questions of meeting your lenders underwriting guidelines and possible fraud, it’s prudent to exercise your right as a home buyer to choose your own title agent for your purchase; a title agent uses due diligence to ensure there are no irregularities with the deed and title to the home to issue a title binder and title insurance.

The simultaneous closing or assignment transaction is legally complex for the home owner, real estate investor and the home buyer. If you find yourself in a simultaneous closing or assignment transaction, consult an attorney for legal advice.

Original published at https://dankrell.com

By Dan Krell

July 1, 2009November 23, 2021

What Cap and Trade (HR 2454) will require of home owners

by Dan Krell © 2009
www.DanKrell.com

A National Building Code

Get the facts, read the bill. View HR 2454 here:
http://www.govtrack.us/congress/billtext.xpd?bill=h111-2454

If you have heard of H.R. 2454 you may not have thought much about it. Yes, this is the famous (or infamous) American Clean Energy and Security Act of 2009 also known as “cap and trade.” What many home owners may not realize is that H.R. 2454 is not only directed toward commercial uses, it is aimed toward home owners as well.

Title II Energy Efficiency, Subtitle-A: Building Energy Efficiency Programs establishes that effective on the date of enactment, new buildings must meet a national building code to meet a thirty percent reduction of energy use relative to a baseline code. By January 1, 2014 new residential buildings must meet a fifty percent reduction in energy use; energy use reduction in residential buildings will be required to increase five percent every three years thereafter.

This legislation establishes National Energy Efficiency Building Codes for commercial and residential buildings “to meet each of the national building code energy efficiency targets.” The Secretary of Energy is given the duty to create and amend the National Energy Building Codes by determining the percentage of energy improvements that would be achieved by proposed improvements and to propose the improvements necessary to meet or exceed the target (Title II, subtitle A, section 304(a)).

Once the National Energy Efficiency Building Codes are established, state and local jurisdictions have one year to adopt the national code. If after the one year, a state and/or local jurisdiction fail to adopt the national building code, “the national code shall become the applicable energy efficiency building code for such jurisdiction” (Title II, subtitle A, section 304(d)”APPLICATION OF NATIONAL CODE TO STATE AND LOCAL JURISDICTIONS”).

If a building is out of compliance with the national code, a violation may be determined by state, local, and/or federal authorities. Enforcement of the national building code will be enforced by the state (if law is adopted) through random inspections of buildings. (Title II, subtitle A, section 304(e)”STATE ENFORCEMENT OF ENERGY EFFICIENCY BUILDING CODES”).

If a state does not adopt the national building code, then enforcement falls to the Federal level, where the Secretary of Energy will create rules for building code violations and penalties. The Secretary will create “an energy efficiency building code enforcement capability” (which will conduct building inspections). Fees will be collected to “cover costs” of the enforcement procedures (Title II, subtitle A, section 304(f) “FEDERAL ENFORCEMENT AND TRAINING”).

The legislation also creates the Retrofit for Energy and Environmental Performance (REEP) program. The goal of the program is to “facilitate the retrofitting of existing buildings across the United States to achieve maximum cost-effective energy efficiency improvements and significant improvements in water use and other environmental attributes.”

Additionally, the Act creates the Building Energy Performance Labeling Program to provide the public the necessary efficiency information of a building. The information would be made accessible to “owners, lenders, tenants, occupants, or other relevant parties who can utilize it.” Buildings will be labeled at the time of sale, when retrofitted, or by inspection.

Although the Act is well intentioned, specifics are lacking that leave many rules and procedures (including inspections, violations, and penalties) to be decided at a later time at the discretion of the Secretary of Energy and/or state and local officials. Unfortunately, you may not hear much more about how “cap and trade” affects home owners; however, unclear legislation may have unintended consequences to home ownership and the real estate market.

July 1, 2009October 5, 2019

Option Arm resets- the coming crisis

by Dan Krell &copy 2009
www.DanKrell.com

The Next Foreclosure Crisis

As the real estate market appears to be stabilizing, another wave of foreclosures poised and to interfere with a recovery. No, the expected wave of foreclosures is not a forgotten portfolio of subprime loans; rather the expected defaults are expected to come from Alt-A mortgages, the bulk of which are to come from resetting option arms.

The Federal Reserve (federalreserve.gov) describes the option arm (also known as a payment option mortgage) as an adjustable rate mortgage with several monthly payment options. The typical payment options include the traditional principal and interest payment, the interest only payment, and the minimum payment. The traditional principal and interest payment is the payment that you would typically make to have an amount applied to the principal amount of the mortgage to pay down your mortgage as amortized. The interest only option only pays the interest for the month without applying anything to the principal, which does not pay down your mortgage. The minimum payment option is typically less than the interest option and applies the month’s unpaid interest to the principal. Not only does the minimum payment not pay down your mortgage, but using the minimum payment over a short period of time will shortly have you owing more than the value of the home (which is called negative amortization) due to the increasing principal.

When the option arm mortgage was first conceived, it was initially used by sophisticated and affluent home owners mostly to assist with cash flow. However, the option arm became increasingly attractive to home buyers who wanted to purchase the maximum home they could qualify for during the market buildup earlier this decade. The option arm allowed the home buyer to be qualified at the very low initial interest rate (do you remember those 1% teaser interest rates?). The interest rate initially resets (or recasts) to market rates after three to six months, and again in three or five years.

When the interest resets, the payments increase. If you used the minimum payment option, then the monthly payment increases significantly due to the increased principal amortized at the new interest rate. Because of the potential for negative amortization, the lender can adjust the mortgage before the recast period if the principal amount grows beyond a predetermined number (usually 110% to 125% of the original principal loan).

Some financial experts have called the expected foreclosure crisis (which will peak in 2010 and carry through 2012) a tsunami as compared to the recent foreclosure wave. Fortunately, due to low interest rates, option arm defaults have remained relatively low after the recast. However, as interest rates begin to rise, we will see the foreclosure wave swell. Prashant Gopal reported in Business Week (Good News: Option ARM Resets Delayed; April 16, 2009) that the problem will increase beginning in spring of 2010 and peak in 2011. Gopal stated that (according to Barclays) there is a 4% to 5% default rate for option arms originated in 2006-2007.

The increased default potential is sure to overwhelm the already over burdened system. Home buyers looking for bargains will likely have another large pool of foreclosures in the next two years. Home sellers will have increased competition for home buyers. If you have an option arm, weigh your options now – before it’s too late.

June 23, 2009November 23, 2021

What are the risks of owning a home?

For many, owning a home is part of their long term financial and personal plan. Unfortunately for some, the responsibilities and risks of home ownership are not well thought out; many first time home owners are unprepared. The benefits of home ownership are often presented to first time home buyers, how about the risks?

During the recent real estate market boon, it seemed as if there were no risks to home ownership. Homeowners, who felt that their home was too much of a financial burden, were able to sell their home quickly and sometimes made a profit. However, when home values began to depreciate, it become all too clear that there are inherent risks to being a home owner, which include decreasing property values, increasing home related expenses, and poor home maintenance.

The real estate market, like other financial markets, is cyclical. There have been escalating market cycles, like the recent “seller’s” market; and there have been depreciating market cycles, some down cycles being much like what we are currently experiencing. Many first time home buyers, who bought homes as a commodity often analyzing their purchases as if it were a mutual fund, are now finding that (unlike mutual funds) selling a home may not be as easy as previously thought. Selling a home in a down market has many considerations, such as an increased marketing time and the possibility of owing more on a mortgage than the value of the home.

During an escalating market, it is easy for people to talk about home value appreciation as one of the benefits of home ownership. Unfortunately, in the recent boon market, many home buyers were caught up in the exuberance of rapid appreciation such that they believed that home value appreciation is guaranteed- no matter the type or condition of the home. Some home buyers are now lamenting their purchases because they bought homes they did not much care to live in but rather for the perceived “investment” value.

Many first time home buyers are also not prepared for increasing monthly housing expenses. Keep in mind that a first time home buyer’s monthly mortgage payment is already more than their monthly rent. Because of rising property tax and increasing utility costs, home buyers need to consider that the associated cost of home ownership will most likely increase over time. Although some of the initial increase may be offset by an interest tax deduction, the increases often add more to monthly expenses than the savings of the deduction.

Maintenance is an ongoing expense that is often overlooked by home buyers; all homes, including new homes need regular maintenance. Lack of home maintenance becomes a threat to anyone’s home leaving the home’s systems, walls, and foundation vulnerable to the elements, which can erode the home’s value.

Be prepared to take on the risks of home ownership. Take into account the reasons for owning a home as well as the financial responsibility you place upon yourself. Although long term home ownership has proved to be a good investment for many, value appreciation is not guaranteed. Additionally, the cost of home ownership along with future increases should be anticipated. You can get more information about the benefits and risks of home ownership by visiting HUD (HUD.gov), Fannie Mae (FannieMae.com) and Freddie Mac (FreddieMac.com).