Real Estate News and Commentary

October 2, 2008September 27, 2018

Buyer beware when purchasing distressed property

Buying a bank owned home might be a great way to get a great deal on your first home or the home of your dreams. However, you will find that buying a distressed home from a corporate owner is slightly different than purchasing a non-distressed home from an owner-occupant.

When you are purchasing a bank owned home, the bank requires you to sign addenda that favor the bank in many ways. Foreclosed homes that are sold by banks are exempt from many disclosures, including the Maryland Residential Property Disclosure And Disclaimer Statement (which discloses the home condition as well as any latent defects). Additionally, banks selling foreclosures (and their real estate agents) will sometimes want to take control of the entire transaction by coercing you to use their vendors, including their title company.

First and foremost, the bank is selling the foreclosure in as-is condition. This means that “what you see is what you get.” Often, what you don’t see is what you get as well. The bank addenda will warn of possible mold and other hazards that may be in the home. Even the best of homes can develop issues due to having utilities disconnected as well as being vacant for many months. A thorough home inspection, that may include testing for environmental hazards, is highly recommended to determine the condition of the home.

Another consideration in purchasing a foreclosure is that the bank will only offer you a Special (or limited) Warranty Deed. In a typical residential transaction, the seller will provide to you a warranty deed that guarantees that the seller has the ability to sell the home, and all debts held against the home are paid. However, buying a foreclosure is a bit different in that the bank will only provide a deed that covers the period the bank has had ownership of the home. Owner’s coverage title insurance will usually protect you from title defects not corrected by the bank; however, as policies vary, you should read the fine print.

Lastly, your deposit will become non-refundable after a short period of time. The bank will give you a short period for due diligence (obtain financing, conduct home inspection, etc); be prepared to act quickly!

So, is it a good idea to purchase a foreclosed home? Buying a foreclosure could be a real coup for you- but you must do your due diligence. Before you write an offer on a foreclosure, line up your vendors (such as home inspector, title attorney, contractors) so you can act quickly by having your team determine the home’s condition and legal status.

Unfortunately, the proliferation of distressed properties has some real estate professionals believe that consumer protection laws do not apply (such as RESPA and Maryland’s Wet Settlement Act). Make sure you are well represented! As a home buyer, you have the legal right to choose your vendors (including home inspector, title attorney, lender, etc.).

If you are planning to purchase a bank owned home, it is highly recommended that you review these special addenda carefully as well as consulting an attorney if you do not understand what these addenda require of you. Remember, “caveat emptor” applies when buying a bank owned home.

Original published at https://dankrell.com/blog/2008/10/02/buyer-beware-purchasing-a-bank-owned-home/

By Dan Krell

September 19, 2008November 23, 2021

FHA 203k; renovation loans are still available

by Dan Krell
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Are you considering purchasing a distressed property, such as a foreclosed home or a short sale, and need to make repairs on the home prior to moving in? Or maybe you have decided to stay in your present home for a few more years, but want to make updates or possibly expand the present space. The question you may have is, “how can I get a loan for these types of repairs and renovations?”

Even during the ongoing credit crunch, there are still renovation loans. One of the most popular renovation loans today is the FHA 203(k). Much like the FHA loan everyone is familiar with (FHA 203b), the FHA 203(k) loan can be used to purchase a home too! The difference is that the FHA 203 (k) provides funding for necessary repairs, updates and/or renovations on your new home; and it is all in one loan. Additionally, home owners needing funds to renovate, update, or expand their current homes can refinance with the FHA 203(k), as long as they have owned it for at least six months.

The FHA 203(k) was first introduced in 1978 through a change in the National Housing Act, section 203(k), which endorses the maintenance of the Nation’s housing. The FHA 203k is HUD’s primary device to meet their goal of “community and neighborhood revitalization” while expanding homeownership opportunities (HUD.gov). Additionally, HUD promotes the use of the FHA 203k to lenders and community organizations as a way to meet the goals of the Community Reinvestment Act.

Of course not all homes are eligible. Some of the eligibility requirements include that your home must be one to four units, the home must be at least one year old and meet neighborhood zoning requirements. FHA allows for major rehabilitation on homes that have been razed provided that the foundation still exists.

Improvements that are eligible for the FHA 203(k) include (but are not limited to) additions, unit conversions, and cosmetic repairs. However, luxury items and items that are not permanently part of the home (such as hot tubs) are not eligible. With the FHA 203(k), the home owner can add or expand a room, add a deck, convert a 1 unit home to a multi-unit home (up to four units), or convert a multi-unit home to a one unit home, and make cosmetic repairs (including giving your kitchen and bathrooms a facelift).

Do you want to make your home more energy efficient? Making your home “green” can save you lots of money down the road; however the transformation can cost quite a bit of money. The good news is that the FHA 203(k) loan allows for many “green” upgrades! Some items that may be eligible include replacing your HVAC and/or windows, waterproofing your basement, and installing solar panels.

The process of obtaining the FHA 203(k) is a little different than a standard mortgage, as additional underwriting requirements include architectural plans and repair estimates (materials and labor) from licensed contractors. The funds for the repairs/renovations are released in draws to ensure the work is completed as intended as well as meeting all zoning, health and building codes.

For more information about the FHA 203(k) mortgage, or to find a FHA 203(k) lender, you can visit the HUD website (HUD.gov).

This article 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 15, 2008. Copyright © 2008 Dan Krell.

September 10, 2008October 5, 2019

FHFA takes Fannie and Freddie: Government begins restructuring troubled mortgage giants

by Dan Krell

If you haven’t yet heard, the newly created Federal Housing Finance Agency (FHFA) wasted little time in pursuing its regulatory authority over Fannie Mae and Freddie Mac by taking over as conservator. The agency was established as the new regulatory agency for Government Sponsored Enterprises (GSE) when President Bush signed the Housing and Economic Recovery Act of 2008 on July 30th. The takeover is a coordinated effort between the FHFA, the United States Treasury Department and the Federal Reserve.

In a statement made on Sunday, FHFA secretary James Lockhart outlined the reasons for the takeover of Fannie Mae and Freddie Mac as well as the goals of the conservatorship. (The Secretary’s statement can be found at: www.ofheo.gov/media/statements). Secretary Lockhart stressed the importance of Fannie Mae’s and Freddie Mac’s role in the housing industry. However, the FHFA felt it was necessary to take action because of Fannie and Freddie’s ongoing capitalization problems, poor financial performance and deteriorated market conditions.

Treasury Secretary Henry Paulson also underscored the importance of Fannie and Freddie’s survival (the Secretary’s statement can be seen at www.treas.gov/press/releases). Secretary Paulson stated that the failure of Fannie Mae and Freddie Mac would cause great turmoil in local and global markets. The turmoil would in turn negatively impact everyone personally, reducing savings and restricting credit (all forms of credit would be affected).

Due to the fragility and uncertainty of Fannie and Freddie in recent weeks, Treasury Secretary Paulson stated that the risk of funneling money to these institutions “in their current form” was not in the best interest of the tax payers. As the FHFA takes over operations in Fannie and Freddie, the role of the U.S. Treasury will be to ensure that Fannie and Freddie maintain a positive net worth through preferred stock purchases. By maintaining a positive net worth, Fannie and Freddie dodge the bullet of receivership (which could trigger a global financial meltdown).

The Treasury’s second role will be to purchase mortgage backed securities (MBS) from Fannie and Freddie. Although the MBS purchases will be temporary, it is anticipated that the special MBS purchases will increase mortgage availability and affordability.

Additionally, special credit facilities will be made available to the FHFA entities (which include Fannie Mae and Freddie as well as the twelve Federal Home Loan Banks) to sustain their liquidity. Secretary Lockhart stated that the Federal Home Loan Banks will most likely not use the recently made available facilities as they have “preformed well over the last year.”

The conservatorship is intended to be temporary; there is no timeline for transition. However, as Fannie and Freddie are required to reduce their mortgage portfolios starting in 2010, it is anticipated the new model will allow for a more streamlined and profitable organization at both Fannie Mae and Freddie Mac.

Although many agree that the takeover will positively affect interest rates temporarily, modestly lowered interest rates will not be enough to fix the real estate problem. The real story (that will evolve in ensuing months) will be Fannie and Freddie’s encouragement and support of banks to modify delinquent loans rather than foreclosing, which will play a role in the stabilization of home values and ultimately the real estate market.

September 5, 2008October 5, 2019

Has the real estate market reached the turning point? (Market statistics and trends)

by Dan Krell

As indicated by the slight increase in the Consumer Confidence Index (ConferenceBoard.org), which edged up in August to 56.9, signs may point to a slightly improving economy. As consumer confidence increases, we may see home sales increase as well. Take for example the Mortgage Bankers Association reporting an increase in mortgage applications (8/27/2008 mortgagebankers.org), as well as the National Association of Realtors (Realtor.org) reporting that nationwide existing home sales have increased 3.1% in July (which is reported to be a five month high!).

Does this mean that the real estate market has turned a corner? Many remain cautious.

Other housing related reports are mixed, however. The NAR reports that although overall housing inventory (homes listed for sale) is up, single family home inventory has declined. The increased housing inventory is attributed to a sudden increase of condominium inventory.

Locally, Montgomery County single family home inventory has dropped slightly in July 2008, while sales have also dropped slightly in July from June 2008 sales (data reported by the Greater capital Area Association of Realtors). However, a few individual zip codes and neighborhoods continue to show signs of recovery by posting sales increases, price increases, or both (data derived from Metro Regional Information Systems, Inc.; MRIS.com). Neighborhoods hit hardest by foreclosures continue to lag behind in sales.

What do home buyers think? A recent Harris Interactive poll, commissioned by Move.com (news.move.com), reports that 81% of home buyers polled are anxious about the current housing market and feel there are barriers to their homeownership. However, of those polled, 44% of home buyers believe the real estate market will improve with a new president. Additionally, 41% of current homeowners polled plan to purchase a home again, 80% of all renters polled plan to purchase a home someday with 47% planning to purchase a home within the next five years.

Of those reporting barriers to homeownership, the top barriers reported were current home prices (31%), lack of down payment (28%), “lack of confidence in economy” (26%), and various personal and financial concerns. Although many polled report a barrier to home ownership, 78% of home buyers polled report that they were willing to save for down payments as well as compromise on various criteria they are searching for in their home (including neighborhood and local amenities).

So what can we expect? Lawrence Yun, NAR Chief Economist, was reported as saying in a NAR news release (8/25/2008) that home prices could increase in the few localized markets where sales have appreciably improved. He continued to say that many market area inventories remain high and will take time to shrink; however he reports that 2009 will be a more “balanced” market. He expects that “long term appreciation patterns” will eventually return.

According to MRIS’s “Trends in Housing” (mid-year 2008), foreclosures will continue to trouble the local market; the Washington, DC region’s foreclosure rate this past spring (131 per 10,000) has outpaced the national rate (87 per 10,000). However, expectations are that decreased inventory along with increased housing demand (due to job growth and relatively low interest rates) will increase market activity by early 2009. It is expected that close-in neighborhoods will see these signs of recovery first, shortly followed by the outer suburbs.

August 29, 2008August 5, 2019

Irrational home sellers and buyers

Have you wondered why so many people rushed to purchase homes in the recent historic seller’s market? Why have home buyers been scarce, even in a buyer’s market? The man with the answers is Ori Brafman. Ori Brafman has an extensive background that includes organizational speaker and consultant, professor, and writer. His new book, co-written with psychologist Dr. Rom Brafman (his brother), is called Sway: The Irresistible Pull of Irrational Behavior (Doubleday, June 2008). The book is a culmination of research that explains what compels us to act irrationally. And may explain irrational home sellers and buyers.

In a recent personal correspondence about irrational behavior in real estate, Ori offers these concepts to explain such seemingly overt irrational behaviors: loss aversion, “getting stuck in the past,” and value attribution.

Loss aversion, a concept described in Prospect Theory, describes why people focus on limiting their losses as opposed to seeking gains. Ori explains that loss aversion explains why home sellers have a hard time selling for less than their original purchase price, even when it means they could potentially lose more by waiting for the downward market to end. He explains that it is not only psychologically painful, but a shot to our ego. This may explain irrational home sellers who wait for an unrealistic sale price.

This would explain why many irrational home sellers have had a difficult time adjusting list prices in the downward market. Even when a home seller will not realize a loss, they perceive a loss based on home values from a year ago. Based on this perceived loss, home sellers will list their homes for sale at higher than market prices. This fact was validated in a research study conducted David Genesove and Christopher Mayer entitled “Loss Aversion And Seller Behavior: Evidence From The Housing Market” (published in The Quarterly Journal of Economics, 11/2001). This research used data from the Boston real estate market in the 1990’s and serendipitously found that home sellers are unwilling to list and sell for a loss.

Irrational home sellers and buyers can “get stuck in the past,” looking to buy or sell a home for a price they missed some time ago. Rather than pricing their home at a realistic price, many home sellers look to sell for a price they would have sold for a year or two ago. Additionally, this could explain why some home buyers constantly offer low ball prices for homes that have obvious higher values.

Value attribution plays a large role in how home buyers view homes they may purchase. Ori explains that a home buyer might place less value on a home that is priced less than other neighborhood homes, “even when the home meets all of their criteria.” When a home is priced “rationally,” a home buyer might wonder, “What’s wrong with this house?” Home buyers will go through the home and arbitrarily decide which features devalue the home.

Together, these concepts might explain why home buyers have been scarce in this buyer’s market. Many home buyers have placed less value in owning a home in a declining market, worrying about further market declines. Additionally, home buyers irrationally worry about unrealized losses, even when buying a home may be the rational thing to do.

By Dan Krell
© 2008

Original is published at https://dankrell.com/blog/2008/08/29/why-do-people-act-irrationally-when-buying-and-selling-real-estate/
This article is not intended to provide nor should it be relied upon for legal and financial advice. Copyright © 2008 Dan Krell.