About Dan Krell

October 1, 2009October 5, 2019

What happens to your earnest money deposit?

by Dan Krell &copy 2009
www.DanKrell.com

Nothing confuses home buyers and sellers more, than earnest money. Simply put, earnest money is given as consideration money for the home seller to accept the home buyer’s offer, to take the home off the market and deter the home buyer from defaulting. For a home seller, the larger the earnest money the better; the home seller will surely be happy with a nice chunk of change deposited as earnest money. The home seller views the earnest money deposit as a possible source of compensation for damages in case of buyer default (but is not guaranteed).

Although the amount of earnest money is negotiated between the home buyer and seller, a home seller may sometimes require a minimum amount of earnest money to be held as consideration for the purchase. However, the amount offered as earnest money varies. Factors often taken into consideration when deciding on an amount to offer as an earnest money deposit includes: the price of the home being purchased and the amount of money the home buyer has available.

Many home buyers have the notion that the higher the amount of the earnest money, the more apt the seller would accept the offer. But this is not always the case. During the huge seller’s market earlier this decade, it was not unusual for home buyers to write very large earnest money checks, sometimes up to ten percent of the sales price! Home sellers required these large amounts as consideration and to differentiate the best offer from the many they received. However, as the market cooled, home sellers were happy to receive any offer – even with a modest earnest money amount.

Earnest money is not used much now to differentiate home buyers. The bottom line for many home sellers (especially for foreclosures and short sales) these days includes the net at closing and ensuring the home buyer completes the purchase. Because buying distressed properties can take longer than a usual sale, many home buyers are deciding to offer low amounts for earnest money so as to not tie their money up for several months.

Most often earnest money is given in the form of a personal check that is often held in an escrow account by the buyer’s broker. Sometimes, the seller requests that their broker or title agent hold the deposit. Additionally, the seller sometimes requests the earnest money be in the form of certified funds (such as a cashier’s check or money order); this is to ensure the funds are available.

If the home sale goes as planned, then the earnest money is credited to the home buyer at settlement. However, the fate of the earnest money is often in question when the sale is not consummated. If the home seller feels that the home buyer is in default, the seller will often try to claim the earnest money; but it is not always easy.

There is nothing more contentious than earnest money in a real estate deal that did not close. If you have questions about the disposition of an earnest money deposit, you should always consult an attorney. If the deposit is held by a Maryland real estate broker, the broker can only distribute the earnest money deposit in accordance with Title 17 Maryland Business Occupations and Professions of the Annotated Code of Maryland 17-505.

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 September 7, 2009. Copyright © 2009 Dan Krell

September 14, 2009October 5, 2019

Options to lower mortgage payments

by Dan Krell © 2009
www.DanKrell.com

If selling your home is not in your near future, you may be indifferent to real estate market trends. But, would you be interested in lowering your mortgage payment?

Several months ago I told you about the government push to modify and refinance mortgages to assist home owners to keep their homes. The Obama Administration’s Making Home Affordable program (makinghomeaffordable.gov) is up and running and gaining momentum!

If you are facing financial challenges and need assistance to lower your mortgage payment, the Home Affordable Modification may be able to help you. To qualify, the mortgage must be on your principle residence, must not exceed $720,750, and must have been received prior to January 1, 2009. Additional requirements include having difficulty in paying the monthly payment due to: having increases in monthly payments, having a reduced income, experiencing hardships that increase your expenses; and/or your mortgage payment exceeds 31% of your gross income.

If you are current on your mortgage but find it difficult to refinance because the mortgage balance exceeds your home’s value, the Making Home Affordable Refinance may be for you. The Making Home Affordable Refinance program allows home owners to refinance mortgages up to 125% of the value of the home. To qualify you must be current on your mortgage, the mortgage must be on a residential building (up to four units) that was bought by Fannie Mae or Freddie Mac. To find out if your mortgage was sold to either Fannie Mae or Freddie Mac, you can either call your servicer or you can check on your own by going to their corresponding websites (loanlookup.fanniemae.com or freddiemac.com).

You can determine if you qualify for the Home Affordable programs through completing a brief questionnaire on the Making Home Affordable website (makinghomeaffordable.gov). If you qualify for these programs, you will need to contact your mortgage servicer and request one of the Home Affordable programs (refinance or modification). The servicer will need your income and asset information (hardship information is also required to process the Home Affordable Modification) to assist them in processing your request. The process will be slow, but making frequent calls to follow the progress is necessary to ensure you don’t miss a step.

What if your mortgage balance is less than your home’s value and your credit is excellent? If you haven’t yet taken advantage of recent mortgage interest rate lows, you might consider an automatic rate reduction loan (ARR mortgage). An ARR mortgage is a loan where the rate automatically lowers as mortgage rates fall. ARR mortgage programs have been around for some time, but haven’t received much press lately because mortgage rates have been relatively low.

Although not many lenders offer ARR mortgage programs, ARC Loan (arcloan.com) has been offering “mortgage management” since 1993. According to the ARC Loan website, the program seeks to take advantage of mortgage cycles to assist their clients in saving money and reducing debt. Because everyone’s needs and situations are different, ARC Loan consultants take the time to provide a personalized analysis to determine if you qualify and if an ARC Loan can improve your financial picture.

Many options now exist to lower mortgage payments for home owners in various financial situations. If you qualify, taking advantage of these programs may lower your monthly payments.

September 8, 2009October 5, 2019

Incentives get consumers to buy

by Dan Krell &copy 2009
www.DanKrell.com

As “Cash for Clunkers” (C4C) winds down this week it is clear that consumers are pushed off the fence to buy cars when given a financial incentive. Housing’s stimulus, in the form of a first time home buyer tax credit, is said to have been pushing home buyers off of the fence too.

The first time home buyer tax credit was first introduced in the Housing and Economic Recovery Act of 2008. The initial credit allowed first time home buyers, who purchased a primary residence in the United States in 2008, to claim a tax credit up to $7,500 on their 2008 federal tax return that was to be repaid in 15 installments beginning in 2010. First time home buyers must meet specific criteria to qualify for the credit (IRS.gov).

The tax credit was extended and expanded to include first time home buyer purchases in 2009. The expanded credit that can be claimed is currently up to $8,000, however does not have to be repaid. Home buyers can claim this credit in several ways. The current first time home buyer credit is set to expire (to qualify, the home must be purchased before December 1st) December 1st, 2009 (IRS.gov).

Some housing experts point to recent spikes in home sales as success for the first time home buyer credit. In an August 12th podcast, National Association of Realtors Chief Economist Lawrence Yun stated that there has been “consistent momentum” with the first time homebuyer credit such that there is pressure to expand and extend the program. Comparing the C4C stimulus to the first time home buyer tax credit, Dr. Yun explains that the effects of the C4C on the economy is temporary whereas the effects of the home buyer credits have a longer lasting effect on the economy and real estate market (Realtor.org).

As the window to claim the first time home buyer credit is quickly closing, there is strong support to extend and expand the current first time home buyer credit. In a June 10th press release (Isakson.senate.gov), Senator Johnny Isakson made a case to expand the current incentive. Senator Isakson stated; “The first-time homebuyer tax credit has made a difference. First-time home buyers used it and the market stabilized, but we don’t have a recession in first-time home buyers. We have a recession in the move-up market…”

Senator Isakson, expressing concern over the inability for “move-up” home buyers to buy and sell homes due to a lack of equity and liquidity, introduced bi-partisan legislation on June 10th. The bill seeks to expand the incentive to home purchases made in 2010, increase the tax credit from $8,000 to $15,000, and eliminate home buyer income caps. Basically, if the legislation passes, any home buyer would be able to claim the credit. Currently, the bill (S.1230) is in committee.

Other bills to extend the tax credit were introduced earlier this year in the House of Representatives. Among them, H.R. 1245 (introduced by Rep. Ken Calvert) also calls for an increase in a home buyer tax credit to $15,000.

It is clear that the current tax credit is effect to motivate first time home buyers to get off the fence. However, some experts state we cannot know the full effect of the incentive until we measure the data.

August 31, 2009October 5, 2019

Is there risk in buying distressed properties?

by Dan Krell &copy 2009
www.DanKrell.com

It’s not a secret that home buyers are flocking to distressed properties for the perceived bargains. Bargain distressed properties (including bank owned homes and short sales) are listed below retail prices, mostly due to the condition and other factors. “Buyer beware” is a saying that home buyers should consider when purchasing distressed properties.

Experienced real estate investors know the risks involved in distressed propeties, which they calculate in their purchase prices. However, the average home buyer may not know the extent of the risk at the exciting prospect of buying a lower priced home.

Not all distressed sales are the same. To understand the differences, you have to know who owns the home as well as the lender’s role in the sale. A short sale is an owner resale where the home owner is selling for less than what is owed to the lender. Although approval from the seller’s lender is required for such a sale, the bank is not the owner yet as the home has not been foreclosed on. On the other hand, bank owned homes (also known as REO property), has been foreclosed on and is now owned by a bank due to non-payment of the mortgage.

During a short sale, the seller’s lender goes through the loss mitigation process to determine how much of a loss they are willing take on the sale. This process is what typically extends the time to closing, sometimes more than three months. Whereas the loss mitigation process is usually completed prior to listing the home, the sale can be delayed too – but usually for title issues.

Both sales require you to purchase the home “as- is;” however because the short sale seller is usually accessible, you may have the opportunity to negotiate some repairs. Additionally, the short sale listing is sometimes in better condition than a bank owned home because the home is usually still occupied by someone as well as having recent updates.

Bank owned homes are vacant and the condition may vary due to the bank’s decision to make repairs prior to listing the home. However, since the home is vacant, vagrants, animals and weather can further deteriorate the condition of the home. If the home is in need of repair, the bank will not make the repairs nor will they allow any repairs to be made prior to settlement. If the previous owner made improvements without permits and/or there is termite damage, you are stuck with any remediation.

A short sale home seller will usually provide common ownership community (such as HOA) resale documents to you as required. Fines incurred for late fees and other issues are usually cleared by the seller. However when purchasing a bank owned home, you typically need to approach the common ownership community to negotiate any fines and pay for the resale documents.

Additionally, sellers in both sales urge you to use the title agent assisting them with the sale. However, you should choose a title attorney to represent you to minimize title issues and ensure you have a marketable title.

Without risk, there is no reward. You cannot entirely eliminate risk; however, due diligence, conducting inspections, and hiring the proper representation can reduce the risk that is inherent in purchasing a distressed property.

August 13, 2009October 5, 2019

Market stabilization or evidence of a two tier market?

by Dan Krell &copy 2009
www.DanKrell.com

A tale of two markets

As signs of economic stabilization are being reported throughout the world, markets begin to show signs of activity. Global housing markets have also reported increased activity and signs of a stabilizing real estate market.

Julia Werdigier recently reported in a recent New York Times article (British Real Estate Market Seems to Be Thawing a Bit, August 4, 2009) that British home prices have increased 1.3% since the beginning of the year. Although this is still quite a difference from the almost 15% slide in UK home prices since 2007, it is sure a welcome statistic as the British expect home prices to end positively.

In China, ShaignhighDaily.com (August 11, 2009) reported that home prices across seventy Chinese cities increased one percent from the same time last year. Additionally, Chinese home prices have increased for five consecutive months after a six month slide.

Here in the United States, the National Association of Realtors (NAR) recently reported that the number of pending home sales continue to increase (a five month increase). This successive increase is the first since 2003. Signed real estate contracts increased 3.6% in June from May’s Pending Home Sales Index (PHSI) of 91.3 and 6.7% from June 2008’s PHSI of 88.7 (August 4, 2009).

Additionally, the S&P/Case-Shiller Home Price Index (StandardandPoors.com) showed signs of relief of downward pressure; however, home prices are reported to be at 2003 levels. Freddie Mac reported that its Conventional Mortgage Home Price Index (CMHPI) fell 5.3% in the first quarter of 2009 compared to the 18.4% decline in the fourth quarter of 2008.

NAR Chief Economist, Lawrence Yun, was quoted in the NAR press release as attributing increased activity to “historically low mortgage interest rates, affordable home prices and large selection are encouraging buyers who’ve been on the sidelines. Activity has been consistently much stronger for lower priced homes…” Dr. Yun also stated that many first time home buyers are acting to meet the November 30th deadline to qualify for an $8,000 tax credit.

Although the data may seem encouraging, the numbers may be telling the story of an emerging “two tier “market. A two tier market is a description used when prices vary significantly for seemingly similar homes; a closer look reveals that well kept and updated home owner resales fetch a higher price than the poorer condition distressed properties.

Because home owner resales typically peek in spring and summer months, we can expect the number of home owner resale listing to decrease as winter approaches. Combined with another expected wave of home foreclosures (from resetting adjustable rate mortgages and option arms), recent real estate market gains may be temporary.

Even the venerated Alan Greenspan recently warned on the August 2nd airing of “This Week With George Stephanopoulos” (ABC.com) that there may be a “second wave down” in home prices; stating that the real estate market has stabilized temporarily, and real estate data is very difficult to measure because the data is regional.

Much like last summer’s real estate market blip (where the NAR reported a five month high in home sales for July 2008), we may be headed into another downward winter market. However, any downturn will be temporary and further indication of a two tier market as home owner resales increase next spring and summer.