Home Buyer Tips Archives - Page 9 of 12 - Real Estate News and Commentary

June 6, 2007October 5, 2019

Fair Housing Month 2007

by Dan Krell

April is finally here, which means spring is around the corner and we celebrate another Fair Housing Month. When you think of Fair Housing Month, thoughts of celebrating equality among the diverse come to mind. This year, however, people are talking about the recent sub-prime mortgage meltdown as an indicator of how we are doing in promoting equality and fairness in real estate.

At first you might find it difficult to fathom how lending practices and fair housing go hand in hand. After all, isn’t mortgage lending a highly regulated industry? Aren’t lenders using exacting rules to qualify home buyers for mortgages?

The mortgage industry is vigilant in maintaining strict quality control standards as well as cracking down on abuses such as fraud. However, the saying “where there is a will, there is a way” holds true. There are unscrupulous people who continually scheme to make their fortune through blatant mortgage fraud and other dishonest practices.

Although there are new schemes that pop up every year, most schemes involve the use of straw buyers (fraudulent using another person’s information to obtain a mortgage), giving false information, and/or providing manufactured financial documents to obtain mortgage funding. Fortunately these folks get caught and end up in jail.

Another problem that contributes to issues in the mortgage industry is the forcing of clients to use a specific lender for a kickback (violating federal law). When this happens, it is common for the consumer to pay excessive fees, points, as well as having a higher than average interest rate.

Mortgage schemes like these are just a sample of lending abuses that occur. In addition to other predatory lending practices, all lending abuse preys on an uninformed consumer. Perusing the Mortgage Fraud Blog (mortgagefraudblog.com) you overwhelmingly get an idea of the extent of the problem.

Why talk about mortgage lending practices, predatory lending, and mortgage fraud during Fair Housing Month? The reason is that many of the abuses that occur in the lending industry are due to the targeting of certain classes or sub-classes of home buyers.

The problem does not lie with the mortgage industry per se. The problem extends from the lending industry to other professionals involved in the real estate transaction. If the settlement agent or Realtor is not already aware of the abuse, they may turn a blind eye when they become aware at settlement when they review the closing documents. If the home buyer catches on to the high fees and interest rate, they are sometimes guaranteed a refinance in a couple months by their Realtor or settlement agent (which is a common predatory lending practice).

Like many things in life, it’s not the tool; however, it is the tool’s abuse by the ill intentioned or uncaring that produces disrepute. It needs to be said that Sub-prime and interest only mortgages are needed and can be useful tools in the purchase of real estate. However these tools need to be used responsibly. A guide to mortgages and other consumer information can be found on the National Association of Realtors website (www.realtor.org/housopp.nsf).

This Fair Housing Month, let’s just not commit to practice fair housing, rather let’s assist others to practice fair housing by not turning a blind eye to their lapses.

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 April 16, 2007. Copyright © 2007 Dan Krell.

June 6, 2007November 23, 2021

Sorting Through the Paperwork

by Dan Krell
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Have you read your purchase contract or listing agreement? Many people won’t read the documents thoroughly, if they read them at all, and rely on their Realtor’s explanation to help them understand the legal and binding contract to which they are entering. Unfortunately, there is a chance that your Realtor may not understand the documents either and may have given you misleading information.

What was once a simple two page purchase contract is now an often confusing and seemingly endless forty to fifty pages of clauses and addendums. The contract of yesteryear may have been easier to read, however it was not very specific and was written in favor of the home seller. Today’s real estate contract is very specific to many aspects of the transaction, discussing the terms of the agreement as well as contingencies, notices and disclosures.

To make matters more confusing, there are two contracts in use in our area. The MAR contract is provided by the Maryland Association of Realtors and the Regional Contract is offered by the Greater Capital Association of realtors. Up until recently, there were major differences between the two contracts. Attempts for parity have been helpful, however differences continue. You should consult with your Realtor to determine which contract would benefit your situation.

As hard as it may be to read through the contract and understand its terminology, can you depend on your Realtor to explain it to you correctly? Both contracts along with addendums undergo constant change requiring Realtors to re-familiarize themselves with the documents. Because of this, it is common for even a seasoned Realtor to get tripped up.

When presented with a listing agreement and/or a purchase contract, your Realtor should explicitly explain the meaning of each clause so as you understand it. It is a good idea to even consult an attorney.

Today’s real estate contract specifies the rights and responsibilities of each party. Additionally, the contract defines default, discusses recourse and hiring an attorney. The MAR contract requires you to attempt meditation prior to going to court.

Additionally, you may find that there are many additional disclosures that are part of the contract. Contrary to belief, these addenda are not filler paper; many of these disclosures ensure you understand your rights as a home buyer or home seller.

For example, many home buyers don’t know that they have the right to review condo and HOA docs. You have seven days to review condo docs and five days to review HOA docs. If you find that there is anything in the docs that is not acceptable, you can declare the contract null and void.

Why should you understand the contract? Believe it or not the real estate contract survives even after settlement. This is an important concept as it is mistakenly thought that once settlement occurs there is no recourse. Disputes can arise after settlement if the home seller decides to take items they were supposed to leave in the home, or if there were misrepresentations in property condition.

A real estate contract is not to be taken lightly as there are consequences to any breach of this contract. Make sure you understand your rights and any responsibilities, and if in doubt-consult an attorney.

June 6, 2007October 5, 2019

Subprime Mortgage Woes – Again

by Dan Krell

The adage that we are doomed to repeat history unless we learn from it is once again demonstrated. The recent news that the subprime mortgage industry is in trouble should not be a big surprise. The fact that subprime lenders are in trouble is the consequence for an industry whose foundation is high risk.

If you are unaware of the subprime mortgage industry, here is a rudimentary primer. Subprime lenders provide mortgages to borrowers who would not otherwise qualify for a standard Fannie Mae/ Freddie Mac loan. Most often, these borrowers have credit challenges; however, some have good credit but do not meet the Fannie/Freddie income, asset, and/or employment guidelines.

The subprime lenders’ underwriting guidelines dictated by investors who ultimately buy the mortgages on a secondary market (usually Wall Street). The attraction to investors is that they receive a high yield based on the risk. Generally, subprime underwriting guidelines become lenient when the market is favorable for these loans.

Up until about a year ago, the subprime mortgage industry exploded because the risk was countered by a safety net that was the record sellers’ market. Many subprime borrowers who fell behind in mortgage payments found themselves able to sell their home before foreclosure, pay off their mortgage, and make a little money in the deal.

Since the market has slowed, many subprime borrowers cannot sell to avoid foreclosure. This has impacted subprime lenders by the loss of revenue. Subprime investors have forced lenders to tighten their subprime underwriting guidelines to meet new requirements and lessen their risk.

The subprime mortgage industry has a cyclic history of loosening and tightening of underwriting guidelines. The last time the subprime industry was in a crisis was in the latter part of the 1990’s when mortgage fraud and illegal flipping schemes were widespread and took advantage of the loose subprime underwriting guidelines of the time.

At that time, subprime lenders lost millions on blatant fraud and real estate schemes. Some loan officers and mortgage companies found it easy to perpetrate fraud on loan files so as to have the loans approved. Additionally, schemes using tactics such as straw buyers or fraudulent appraisals were devised either to defraud lenders or take advantage of home buyers, or both.

In response, “due diligence” became the hot buzz word. Subprime lenders were forced to tighten their underwriting guidelines and institute a number of quality assurance checks, both prior to loan approval and post settlement.

Although we may not feel compassion for the lenders and investors of subprime mortgages, the unfortunate casualty is the consumer. The last few years found an explosion of minority home ownership that is unprecedented. Unfortunately, as reported in a front page article in the Washington Post (March 26, 2007), many of those affected by the perfect storm of a declining real estate market and high risk lending are recent immigrants and minorities.

In a year or two the cycle of subprime lending will return to liberal underwriting guidelines. Make no mistake, subprime lending is needed and is beneficial. Hopefully we in the real estate industry have learned the lesson to practice our profession responsibly by ensuring that borrowers understand the risks and realties of subprime mortgages. If we don’t, we are doomed to repeat history.

May 16, 2007October 5, 2019

Home prices, Zillow, and Formulating an Offer

Are you waiting for the bottom to drop out of the local real estate market? Although there has been a market correction, the Greater Capital Area Association of Realtors home statistics report shows that the average home price in Montgomery County increased to $611,443 from $593,801 the same time last year (GCAAR.com).

I hear some out there saying there is more correction to come, but in reality there not much more that the home seller can absorb. Those home sellers who are not in dire financial straights will either wait for the right buyer or take their homes off the market. As we are coming out of winter and the spring market has yet to go into full swing, it seems as if there is no end to the lethargic market. However, like the flowers that bloom every spring, so too do homebuyers.

If you look at online valuation systems such as Zillow, it seems as if home values will continue to fall, because the values listed are higher than the list prices of homes for sale. Although web based valuation systems strive for accuracy, they will continue to offer imprecise data because these sites cannot account for real time fluctuations in the marketplace. If you are a home seller, please don’t solely rely on valuation websites to determine a sale price for your home, as the comps offered by such websites may not be the most recent or may not be directly comparable.

If you are a home buyer, you may want some tips on formulating an offer. Basing your offer on the price the home seller paid or the tax assessment is unreasonable. Many of my clients have told me that that they read somewhere or heard from someone that their offer should be based on the price paid when the home seller bought the home. Will someone please tell me whose idea this is? I neither have read this anywhere nor have I met the original source of this “wisdom.”

Additionally, using tax assessments to determine your offer can set you up for disappointment as well. Tax assessments are typically a fraction of the home value and are calculated by the locality for tax purposes. It is common for a home owner to appeal a tax assessment so as to lower the assessed value and subsequently his tax burden. The price the home seller paid and the tax assessment are mutually exclusive figures that have no bearing on market forces.

If you are ready to put an offer on a home, you should do your research and look at pertinent factors such as recent sales and market trends to assist in formulating your offer and terms. You should find the most recent sales prices for similar style and size homes in the neighborhood of the home you are considering. To determine a market trend, look at sales prices in six, three, and one month increments. Additionally, try to determine the home seller’s level of motivation, as the home seller may be open to lower offers if they are highly motivated to sell.

The real estate market is dynamic and cyclical. In determining list prices and offers, home sellers and home buyers should use the most recent and pertinent information to assist in their decisions.

May 1, 2007November 23, 2021

How to buy a foreclosed home

by Dan Krell © 2007
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With changes in the market, we have seen an increase in the amount of bank owned homes on the market. What’s happening? Foreclosure rates for the entire country are up over forty percent since last year (MSN real estate). However, in the Bethesda-Rockville area the foreclosure rate only increased above four percent and decreased in the Baltimore area. If you live in Northern Virginia, the foreclosure rate increased over fifty percent since last year.

Putting the numbers in perspective, although the numbers seem high for our area, the home owner behavior relatively the same. The difference is that those who are in trouble do not have the parachute of the expanding real estate market.

In the last few years, when a home owner fell behind in their mortgage payments it was almost assured they would be able to sell the home quickly and realize a net gain in their sale. If they were not able to sell and the home went to auction, hungry home buyers and eager speculators were ready to purchase sight unseen.

Boy has the time changed! First of all, many home owners who are in trouble with their mortgage are not in the position to sell as the home value is less than what they may have purchased the home for. Additionally, if they have some exotic mortgage, there is a good chance that the interest has eaten into any equity they may have had, in addition to late fees as well as attorney fees (the mortgage company will charge the defaulting home owner for the cost of foreclosing).

If you have fallen behind in your mortgage recently, you know that banks are becoming more difficult to deal with. I have heard stories from home owners who have been told by a bank representative that because there is equity in the home, the bank is looking to foreclose and resell at a profit. Have the banks become greedy?

No. The banks are the same way they have always been, looking for ways to make money. What has changed is real estate market and technology.

A year ago, a bank owned home on the MLS was almost non existent in the Montgomery County area. Today, there are over 25 active bank owned homes on the market just in Montgomery County. Among the listings are a couple of good buys.

Bank owned homes used to be priced for quick sales. Today, bank owned homes are priced at full retail prices, even though the condition is less than perfect. Additionally, the banks may not entertain a lower offer until the home has been on the market for a while.

Technology has been a driving force in the real estate industry for over a decade. As technology changes and gets better, the valuation models the banks use will also get better. Presently, I believe the banks and REO disposition companies have fallen behind in the curve such that the valuations they are using are skewed to because of higher home prices from last year.

As the market stabilizes, we will see an increase of bank owned homes for sale. Eventually, bank owned home prices will also find their mark as market conditions and home condition are taken into account. If you are in the market for a bank owned home, talk to your Realtor and keep an eye on the bank owned inventory.