Real Estate Pros and Cons

Today’s current real estate market can be quite challenging to maneuver.  Not only are we dealing with foreclosures and short sales, but a recession, frozen credit lines and uncertainty of the economy as a whole.  But to any situation, there are 2 sides: a pro and a con which we will go over.

Pro – Very Low Mortgage Rates

It seem surprising that even now, rates are continuing to stay at historical lows and for many borrowers with good credit, a mortgage can now be much more affordable at hundreds less a month, savings tens of thousands from the life of the mortgage.

Con – Frozen Credit Lines

Banks are no longer lending freely.  Even though they received quite a bit of money from the bank bailouts, they are holding on to much of the cash.  Many are looking for reasons not to lend.  Although, placing better restrictions on the lending process is still a good idea, some lenders are waiting for real estate prices to bottom out so that they do not end up in a situation where most of their assets/collateral are worth much less tomorrow.   Many are asking for more of a downpayment to cover this vulnerability.  You may also need to be prepared to pay an extra point when obtaining your new property.

Pro: Finally, some good housing deals!!

Real estate prices have fallen dramatically over the past 2 to 3 years.  Prices have flatten to property values equal to 2003 in some areas.  The real estate market is still falling down and there has been no appreciation for these past few years.  Thus, many desperate sellers and bank owned foreclosures are willing to sell for a lot less.

Con: Watch what you are purchasing!!

Values are “great” in many areas, but you still need to be watchful of what you are buying at an amazing deal.  Many problems can be found when purchasing a short sale or foreclosure.  Check out projects that are incomplete, a ruined carpet, missing appliances, and much more.

Pro: Plenty of time to check out the growing inventory of homes!

There are many homes to search through on the MLS sitting for many months (and some for over a year).  Shopping around for the perfect home is quite nice in this market to ensure you get the most home for your money.  Take your time and check out all the homes.  In most cases, you’ve got time.

Con: What if the real estate housing bottom is still far away?

Lenders or banks are looking for when the housing market will “bottom” out before lending more freely again.  The residential market appears to be correcting itself a bit.  The economy overall has everyone’s attention – who knows how long it will take to strengthen consumer confidence again but for sure, when things start to “recover” overall…housing will be climbing in price again.

California lenders are subject to 2 regulations tht work in favor of the borrower:

1. When pursuing any secured obligation like a home loan, they must collect from collateral first.
2. California has the One Action Rule, which one collecting a debt, you can only get one shot.

How does this help the borrower?  Most loans in California are secured with a Trust Deed which allows the lender to foreclosue on a house non-judicially, without going to court.  This route is much cheaper than foreclosure judicially, through the courts since the courts are slow and quite expensive.

In order for the lender to get a deficiency judgement, they have to go to court.

It goes to show in this economy, anyone can be effected as the row of dominoes fall down.  Anyone can be a victim, especially if the economy becomes more turbulent.

Before going into a panic, there are a few ways to prevent foreclosure.  There are a number of options available, but the best way to handle a foreclosure is by understanding how they work.

Here are some foreclosure basics:

• Foreclosures can be stopped, even when it may seem final.  There are measures that can be taken, such as: refinancing or loan modifications are some more popular ways.
• Foreclosures don’t happen right away.  The foreclosure process can take several months depending on your state.
• The law has rules on foreclosures.  Mortgage companies do not have their own set of rules.  Evicting a family from a home or foreclosing on a property is very much regulated by the law.
• When facing foreclosures it is highly recommended to seek professional legal advice.  Real estate lawyers will be able to provide you with valuable information to help you save your home.  In addition, the lawyer will be able to help you with your particular situation.
• Government and other institutions implement programs aimed at providing assistance to foreclosured homeowners.  You can probably find one that best suits your situation.

Unfortunately though for families that want to live in the home, will not be looking to purchase these homes.  Investors may like this idea, but the investor/landlord will have to deal with the tenant that Fannie Mae decided to keep in the property.

In many cases for these situations…

• The family that is looking at the property to purchase, will pass on the property because they cannot immediately live in the house.
• Quality landlords may pass on the property since they have no prior relationship with the tenants and there may be a high risk to taking it over.
• The property sells for less, or doesn’t sell at all, and then continues to depress the property values.

Getting a home and paying for a home mortgage is a large step for any homeowner.  Often, by the time you’ve finished paying off the loan, you’ll have paid double or more with the interest included.  If the borrower fails to make the scheduled payments on time, they will risk losing their home to bank foreclosure which is a lose-lose situation both the lender and the borrower.  Whether it be the 1st or 2nd mortgage that has defaulted, it is a headache for everyone involved.  No banks like having an REO on their record and borrowers do not want to lose their home.

In addition to losing their home, they will have a poor credit rating for many years, which can make it difficult for them to get credit in the near future.

If a borrower cannot make payment on the loans and the loan goes into the 1st and 2nd mortgage foreclosure, the first lender will get money before the 2nd mortgage.  If there is a 2nd mortgage foreclosure but not a 1st mortgage foreclosure, the 2nd may end up being allowed to make payments to the 1st lender mortgage holder.

Short Sale List Prices

The list price of a short sale home has little bearing on the actual acceptance of the bank on the purchase.  The list price may be too high to attract an offer, but if it’s priced too low the bank may not accept the offer.  Some agents advertise short sales at unbelievable prices, in hopes a buyer will be willing to submit an offer.  There is no guarantee if the seller accepts the offer that the bank will agree to a short sale.

Short Sale Definition

Short sales happen when a bank agrees to accept less than the amount of the mortgage the seller owes to the bank.  The property may have 2 loans or one loan.  If it has two loan, then both lenders must agree to accept a short sale.

Why Banks Reject Short Sales

Banks demand plenty of documentation before approving a short sale.   Sellers do not need to be in foreclosure or have fallen behind in making payments on their mortgage for a short sale to occur.  Here are a few reasons why a bank may turn down a short sale request:

• Short Sale Price is Too Low – Banks will request an appraisal and will order a BPO to get an idea of how much the property is worth.  When the listing agent submits the short sale offer, the agent must include a comparative market analysis to justify the offer price.  If the bank thinks it can make more money through foreclosure proceedings, the bank will reject the offer.
• The Short Sale Package is Incomplete – Many times the bank will lose documentation.  Every single document is required for a sale to be granted.  Make sure to ask for a list of documents, make copies and send the complete package to the bank or lender.
• The Seller Does Not Qualify – If the seller is asking for debt forgiveness, the bank will want to see a hardship letter to explain why the seller cannot afford to pay back the difference.  Sellers who have taxable assets are at a disadvantage if the sellers are unwilling to work out a repayment plan with the lender or bank.
• The Buyer Does Not Qualify – A desire to buy a home and the financial means to afford a mortgage payment does not mean a buyer qualifies to buy a home.  A buyer’s lender will look at credit history, length of time on the job, debt ratios, and other borrower qualifications.  To gain credibility with seller’s bank, the buyers must submit a loan prequalification or preapproval letter with the offer (pre-approval letters carry more weight).
• The Bank Sold the Loan – Sometimes the bank will not realize that they no longer hold the mortgage on the property till many months after the short sale negotiations.  If the loan has been sold to another bank, the bank has no authority to approve the short sale since they have released the asset.  The seller may continue receiving statements from the bank, the bank may be servicing the loan but may not own it.  Make sure to ask the title company to check the public redocrds for an assignment of deed of trust or other documents that reflect the loan has been sold and redirect the short sale package to the new lender.

Myth #1:  You should move as soon as possible once foreclosure proceedings start otherwise you will be forcibly thrown out on the street.

Truth: Foreclosure proceedings can take several months from the time that the first notice of default is sent and the time your home is put up for sale at the public auction.  The new owner then must follow the state legal procedures to evict you, which will require at least some notice (from 3 to 30 days) and a court order.

Myth #2: When facing a foreclosure, the best option is to do a short sale.

Truth: A short sale occurs if you can convince the lender to sell the property for less than what is owed.  A short sale will only be granted is the case of hardship has been made.  Part of the problem with short sales, is upon the close of escrow, you will give up the opportunity to live in the house for many months, payment free.

Myth #3: If your home is being foreclosed upon, there is no reason to file for bankruptcy.

Truth: If you plan on staying in your home payment-free as long as possible, then a bankruptcy could delay the foreclosure auction.  Talk with an attorney.

Myth #4: Your home won’t be sold in foreclosure while you are negotiating with the bank.

Truth: Once the foreclosure proceedings begin, negotiations with your lender must be successful prior to the date set for the foreclosure sale.  Lenders often state right up until the date of a scheduled foreclosure sale that the negotiations are on track and then pull out at the last moment.  It may be a result of disorganization.