Disclose, disclose disclose

by Dan Krell © 2005

It is not unreasonable for homebuyers to seek assurances about the homes they purchase. One method for obtaining a sense of confidence about the home is having a home inspection. Sometimes it is not as much as wanting to know what needs to be fixed as much as wanting to know what they were getting into, as one of my clients casually stated. However, home inspectors are not perfect and there are numerous conditions in the home that could go undetected.

In the past, it used to be buyer beware. As you could imagine there were many complaints and lawsuits that were filed with state officials which prompted them to enact a property disclosure law. Property disclosure laws have been enacted in about thirty states. Here in Maryland, the disclosure just changed this last Saturday (October 1). The previous law was around since 1994.

Before Saturday, homesellers, had the choice of either disclosing facts about their home or they could offer a disclaimer that the home was being purchase “as-is.” Among some of the items that would be included in the homeseller’s disclosure include, but is not limited to, plumbing, heating, electrical, and home structure. If there was any knowledge about any past or potential problems, the homeseller would disclose that information.

If the homeseller chose to not disclose any information, the seller chose to offer the homebuyer a disclaimer. The disclaimer stated that the homeseller did not warrant the condition of the property and the home was being purchased “as-is.”

It had been incorrectly thought by homesellers and some Realtors alike, that if the homeseller provided a disclaimer, the homeowner did not have to provide any information at all about the home-including relevant material facts about the condition of the home. In fact, some homesellers would offer a disclosure statement and still withhold some important material fact about the home which was not apparent.

Many law suits have been filed by homebuyers who, after years of living in a home, have discovered latent defects. The lawsuits typically claim the home seller and the listing agent knew about these defects. Latent defects, as presently defined by section 10-702 of the Real Property Article of the Annotated Code of Maryland, are 1) defects which could not be reasonably expected to ascertain or observe by a careful visual inspection of the real property and 2) would pose a direct threat to the health and safety of the purchaser or an occupant of the real property.
Like the previous law, the new disclosure law requires the homeowner to provide either the disclosure statement or disclaimer, except with a little twist. Since October 1, if the homeseller chooses to provide a disclaimer (sold “as-is”), the homeowner must still provide a statement that lists all latent defects in the home.

If you are selling your home or thinking of selling your home in the future, you should discuss the disclosure/disclaimer statement and the new law with your Realtor. If you have any doubt about your obligations as a homeseller or do not understand the disclosure law, you should consider consulting with your attorney.

I was taught the golden rule of disclosure to be: disclose, disclose, disclose. A problem that is disclosed to a homebuyer before they enter into a contract with you is a piece of information that the homebuyer will keep in mind as they purchase the home. However, a problem that is not disclosed remains a problem and has potential to become a law suit.

This column is not intended to provide nor should it be relied upon for legal and financial advice.
This column was originally published in the Montgomery County Sentinel 10/3/2005.
Copyright Dan Krell 2005.

Real estate market report 2005

by Dan Krell © 2005

Many experts are not only talking about the real estate bubble, but how it’s about to burst. I was interested in finding out how many articles and proclamations exist about the bursting bubble, so I googled “housing bubble Washington, DC.” There were over 800,000 links to people and articles (some going back to 2002), talking about how the bubble is about to burst. Many talk about concerns of financial impact and others talk about a doomsday scenario when the bubble bursts. It sounds a bit negative if you ask me.

If you look at the mid year statistics, it seems that the Washington D.C. real estate market is still in full swing. You can decide for yourself based on the statistics for single family homes in Montgomery County. So, here is the mid-year report card, based on the statistics compiled by the Greater Capital Area Association of Realtors (GCAAR). Homes listed for sale for June 2005 totaled 2,004, up from the 1,971 homes listed in June 2004, an increase of 1.7%. The fact that more homes are coming on the market sounds encouraging, however, the total active listings in June 2005 (homes listed for sale but not under contract) are down 4.5% from the same time last year. So, although the supply of homes being listed for sale rose, the actual amount of homes available on the market has reduced because there are homebuyers ready to gobble these homes up as they come onto market.

It seems as if the homebuyers’ appetites for homes are insatiable. The number of contracts and settlements are up for the period of January to June 2005 as compared to the same time period in 2004. The number of houses where status changed from active to contract during the first six months of 2005 increased 1.3% compared the first six months of 2004. Additionally, the number of homes that were settled during the first six months of 2005 increased 2.5% compared to the same six month period in 2004.

Interestingly, I would like to note the sales of homes that sold for $1,000,000 or more increased from last year. There were 389 of these million dollar plus homes that sold in the first six moths of 2005, compared to the 265 sold in the same time period in 2004, that is a 46% increase! So far, for 2005, the average sale price in Montgomery is $544,719. Compared to $477,937 for the same time period in 2004, it is an increase of $66,782! (These statistics can be found at the GCAAR website www.gcaar.com).

Looking at the statistics above, you may ask yourself, “can prices continue to climb and record numbers of sales continue year after year?” Looking at the big picture, the real estate market is like all other commodity markets, such that it is subject to economic influences. Rather than having a bubble burst and having residue all over the floor, the real estate market may correct itself as economic factors change. Don’t get me wrong, a correction in the market is not pretty, but it does not mean the end of the real estate market either (does anyone remember the correction in the real estate market in the early 1990’s).

This column is not intended to provide nor should it be relied upon for legal and financial advice.
This column was originally published 7/18/2005.
Copyright Dan Krell 2005.

Finding a real estate bargain

by Dan Krell © 2005

Many first-time homebuyers and investors I encounter always ask about foreclosures and handyman-specials. Essentially what they are trying to communicate is that they want a bargain. What are foreclosures and handyman-specials? In the past, it was assumed that if you buy a foreclosure or handyman special, you really got a bargain. Is this still true?

A foreclosure is a home that has been repossessed by the holder of the mortgage note, usually a bank. The process of foreclosure varies depending in which state the foreclosed home exists and what type of mortgage document exists on the home. To make a long story short, the home is either auctioned to the highest bidder, or the home is taken over by the bank to be sold on the market. The foreclosed homes that are put on the market are also called REO, which stands for real estate owned by bank.

Auctions for foreclosed homes are usually conducted at the courthouse by a local auctioneer. These types of auctions are also known as a trustee’s sale or substitute trustee’s sale. If you are interested in attending an auction, you can find the advertisements for the auctions in the local papers’ classified section. To bid on the home, you must have the minimum deposit in the form of certified funds. The minimum deposit is usually posted in the advertisement. If you are buying a foreclosed home at auction, you are essentially buying it “as-is” without the ability to view the interior.

When the bank has taken title to a foreclosed home, a Realtor is usually hired to list the home on the Multiple List Service (MLS). In this scenario, you have an opportunity to view the home before you decide to submit your offer. The home is generally sold “as-is.” Hopefully, you will have a Realtor of your own to advise you of the value and general condition of the home.

Generally, a foreclosed property has issues due to the time involved in the foreclosure process. Sometimes the previous owner will trash the home, or take the copper or other fixtures out of the home. Additionally, the home will be closed up with no utilities connected for months. This may lead to mold growth, water penetration, and/or other structural and environmental concerns.

A handyman special is typically a home that is owned by a person who either lives in the home or uses it as a rental property. The home is usually aged a bit, and has not been looked after or updated. Many times, a handyman special will require mostly a great deal of cosmetic work, such as painting, carpet, etc. Sometimes, there are some structural concerns, such as (but not limited to) replacing a roof, or fixing walls.

Overall, whether you are looking at a foreclosure or a handyman special, you will have to determine if the home is worth the price you want to pay. In addition to the acquisition cost, you will have to consider all the costs to repair the home, as well as the costs to make updates if necessary. It is also important to look at the recent comparables in the neighborhood to see if the price or adjusted price (price plus costs for repairs) is in line.

One final word; in this seller’s market, there are very few bargains. Foreclosures that once sold for pennies on the dollar, are selling at market price. Handyman specials are often marketed “as-is” and offered not much less than market price. The most important thought to consider is “can you see yourself living here.”

This column is not intended to provide nor should it be relied upon for legal and financial advice.
This column was originally published in the Montgomery County Sentinel 6/27/2005.
Copyright Dan Krell 2005.

Searching for your home on the internet

by Dan Krell © 2005

Most homebuyers today use the internet to look for homes. These homebuyers are either looking at various sites to find homes that are still on the market, or are receiving listings from their Realtors by e-mail. This is no different with my clients. Clients that I work with always find a discrepancy or two on the homes that still say “active” (meaning they are available to see and place an offer). Sometimes the home that is marked “active” will actually be under contract, or “off the market” for one reason or another. The question that is asked is, “if the home is no longer available to show, why is the status still active?”

That is a very fair question. The answer lies in several factors. The first factor is the technology itself. The second factor lies in procedure and etiquette for entering information in the Multiple List Service (MLS). The third factor is human error.

Many Realtors and Brokers have web sites where homebuyers can search for homes that are for sale. You can get an idea of the abundance of these sites by going to an internet search engine and type in “home search Silver Spring.” The thousands of sites that exist all are run by different forms of technology. Although these websites pull information from the local MLS, the nature of the software running the websites will update the listings at different times. Some websites are actually a day or two behind the actual MLS. So, a home showing “active,” may actually be under contract.

Some websites are updated sooner than other websites, however, some are easier to navigate. If your desire is to find the home and jump on it before anyone else, relying on internet listings is not the way to go.

So much for technology. How about the human element? Realtors inputting information into the MLS also must follow a precise procedure and etiquette. The reason for the procedures is to ensure the accuracy of the information. A Realtor must input their listings within twenty-four hours of obtaining the listing, and must input all subsequent information accordingly. When the status for a home changes, such as having a contract or settling, the Realtor must input this information as well. It gets a bit sticky when the Realtor is working on final negotiations for a contract, but the contract has not been ratified. There is no contract yet so the status can not be changed. The Realtor won’t change the status until the final signatures are on the contract, and this limbo time will create some confusion and frustration for some homebuyers and Realtors.

The final reason for discrepancies to exist is human error. There are times when the listing agent (Realtor who represents the seller) will forget to change the status of the home. This is mostly unintentional, however, it does add to the homebuyer’s frustration.

Searching for homes on the internet is helpful, fun and convenient. It is not perfect. Before running out to look at the home of your dreams, make sure it is still available by asking your Realtor to check the status. This will reduce your frustration and make home buying a more pleasant experience.

This column is not intended to provide nor should it be relied upon for legal and financial advice.
This column was originally published in the Montgomery County Sentinel 6/20/2006.
Copyright Dan Krell 2005.

Risky mortgages

by Dan Krell © 2005

Reading Friday’s Washington Post Article about Alan Greenspan’s comments on the housing market does not surprise me. Mr. Greenspan was concerned about the increase in the use of what was termed “exotic mortgages,” specifically interest only mortgages. A lot of media focus has been given to this type of loan lately because the national housing market. Locally, there has been media attention as well. Like me, the Washington Post has recently written about the potential hazards of interest only mortgages. In addition to interest only mortgages, there are many other non-traditional mortgages that are popular as well, which include 100% financing, no-doc loans, balloon notes, option arms, “sub prime” mortgages, and their many variations of each. I will only describe interest only mortgages and 100% financing. You can contact your local lender for more information regarding all non-traditional mortgage programs.

These non-traditional mortgages were designed to increase home ownership and to help those that can qualify for traditional mortgages. However, many more homebuyers are looking toward these non-traditional mortgages to help them purchase more expensive homes which they might not otherwise qualify.

An interest only mortgage is just that, it is a mortgage where the borrower’s monthly payments only go to pay off the interest of the loan. The principal is never paid back until the home is sold or the mortgage is refinanced. There are several varieties of this type of loan but the underlying goal is the same, which is to allow a borrower to have lower mortgage payments. The intent for this program is to lower the mortgage’s impact on the borrower’s cash flow. In reality, however, the borrowers’ cash flow has been increased because of the added debt from the higher priced homes they purchase. Doing so only puts the borrower at a higher risk because the borrower’s cash flow has not been reduced and the mortgage principal never decreases during the life of the loan.

Another popular mortgage program is the no down payment mortgage, or 100% financing. This program helps borrowers who have little cash for down payment and closing costs. The program provides the borrower with a loan that is one hundred percent of the purchase price. Typically, the borrower relies on a long term approach for building equity. However, recently, borrowers have relied on the strong real estate market to grant them short term equity gains.

These are two wonderful mortgage programs, when employed properly help homebuyers. The risk in these two programs is paradoxical. What was devised to help homebuyers with limited funds and/or cash flow becomes a tremendous burden when the borrower has a financial set back. Because the principal on the loan is either not reduced at all or is reduced marginally within the several years of the loan, the borrower could easily become “upside down” if they fall behind on their mortgage. Added interest and penalties on unpaid amounts quickly add additional thousands of dollars to the overall mortgage. Being upside down is a term used to describe when you owe more than the home is worth.

Again, these mortgage programs are great devices that have helped to increase home ownership across the country. All mortgages are risks, some are riskier than others. Homebuyers should understand the risks involved before choosing any mortgage program.

This column is not intended to provide nor should it be relied upon for legal and financial advice.
This column was originally published in the Montgomery County Sentinel 6/2005.
Copyright Dan Krell 2005.