1st Time Homebuyers

Short Sales: Walk, Run, or Run Away?

A short sale is a sale in which the lender(s) agree to take less than the amount owed upon the sale of the property. The problem in a nutshell: because so few short sales have historically resulted in closed deals they can amount to a colossal waste of everyone’s time. The Washington Post has written about the problem: “Why Short Sales Stumble.” There are a number of reasons for problems with short sales, some of which can be blamed directly on the financial institutions involved (which, in their defense, are typically overwhelmed these days), but others can be blamed on good old-fashioned PPP (poor prior preparation). In the words of the Washington Post, “Too often, sellers and their agents are calling a listing a ‘short sale’ or saying that ‘offers are subject to third-party review’ without even having talked with the lender. They plan to get a live fish on the hook before they try to tempt the lender. Do you want to be that fish?” While banks were formerly very reluctant to approve short sales, the word on the street is that they have found religion, and are now more willing than ever to short sell than ever, to avoid adding to bloated REO inventories and the costs of the foreclosure process.

How can the buyer – or, more likely your agent – separate the wheat from the chaff? Frank Llosa, a Virginia-based real estate broker (and blogger) has created an excellent and very comprehensive screening list of screening questions for the listing agent of a short sale, (assuming, of course, you can get them to answer). Mr. Llosa’s suggested email questions include:

1. Have you closed a Short Sale before?

2. Have you requested and received the short sale package from the bank, including the hardship letter?

3. Have you sent the package AND have you confirmed receipt?

4. What communications, if any, have you had with the bank?

5. Has the bank approved the list price?

6. Have you received any other offers that you are waiting to hear back from the bank on?

7. Does the loan have PMI on it? (Private mortgage insurance)

8. [Are] there one or two trusts? Any other liens?

9. What are the names of the banks? Are these FHA or VA loans?

10. How long do you estimate that the lender will take to provide an answer to an offer?

11. Has your seller completely stopped making payments on their loan.

Unfortunately, as even Mr. Llosa concedes, the chances of getting a response to all of these questions is not great, particularly via email. I prefer to just cut to the chase and see if the property is worth further evaluation with a “quick and dirty” list. Here’s the minimum questions I ask before conducting any further investigation or even thinking about showing a short sale to a client – most likely over the phone:

1. Have ALL the lenders involved approved the short sale price? If not, why do you think they will?

2. Are there any other offers on the property?

3. Do you know how long the lender typically takes to respond to an offer?

If the answers to these questions are satisfactory, and everything else pans out, I may well advise my client to put in an appropriate offer. My next advice is to move along, and continue the house-hunt as if the first offer does not exist. The reason for this is that it can easily take three months or longer to even get a response on a short sale offer, and I don’t want my clients to miss any deals that come along in the meantime. If they find something else, we simply withdraw the original offer. (As you can tell, the short-sale game is particularly suited for investors: I’m not expecting my investor clients to fall in love with a property: if it makes sense, they buy, if not, they should move on. As someone once said, “real estate deals are like buses – if you miss one, there will be another coming along any minute.”)

The New Real Estate Feeding Frenzy – Are You A Shark or A Minnow?

The last investor-friendly house we looked at was a fixer in West Hills. Within a couple of days of it hitting the market, it had attracted 8 offers. I’m confident it will sell for well over asking price. No wonder that the San Fernando Valley Business Journal reported on May 11, 2009 that “first time homebuyers and investors are snatching up an increasing number of homes in the San Fernando Valley . . ..” It is well past the stage of a few isolated occurrences. When I recently looked at two months worth of closed transactions in Encino, the average sold to asking price was slightly over 100%. These are strange times indeed. When you figure that some of the inventory had to be “normal” – i.e., not distressed properties, that typically sell for some kind of a discount from asking, the fact that the average house sold for more than asking gives you an idea of the way that the REOs and short sales are affecting the market. How to play this game? You have to be aggressive, have all your financing together (or cash – best case scenario) and jump on a property before someone beats you to the punch. The days of waiting around to see if someone else bids are history — at least if the property is distressed.

Is this the “Golden Age” for First Time Homebuyers?

“Five or 10 years from now, when the financial crisis has ended and housing prices are up smartly once more, we will look in the rearview mirror and realize that we missed a golden age for first-time home buyers.” So says the New York Times.

Something tells me that a lot of potential homeowners aren’t thinking this way. Perhaps, instead, you feel that it would be completely nuts to be considering buying your own place, given the awful state of the economy? I feel your pain. In fact, I’ve been there myself: my husband and I bought our first home in 1996 at a time when things were not looking good at all. The market had never even started to recover in the six years since the crash that started in 1990. We certainly never bought the house thinking that we’d get any kind of decent appreciation out of it: we bought in order to have our own house, and, frankly, to save a bit on taxes. In retrospect, it has turned out to be the best investment of our lives.

Will you have a similar experience? Only time will tell, but the only way to experience the benefits of homeownership is to get into the game. Find a starter house that you can afford, and make the most out of the government programs designed for first time homebuyers.

The FHA’s “Anti-Flipping” Rule and Dorothy, the Wannabe First Time-Homebuyer.

Once upon a time, there were fantastic loans widely available that were backed by government “FHA” insurance. Down payments as low as 3.5% were made available to encourage homeownership by The Wizards of Oz, and homebuyers flocked down the path of golden bricks. All was well in the land of first time buyers until the Wicked Witch of the East decided to throw a flying monkey wrench into the game and passed the evil anti-flipping rule (as codified in 24 C.F.R. § 203.37a) which prohibits the FHA from insuring loans on properties which have sold within the last ninety days. While the Good Witch of the North temporarily suspended the anti-flip rule, it is currently scheduled to go back into effect in June of 2009.

Thus, these days, even if you are a legitimate flipper (and add value to the property), the buyer won’t be able to get an FHA backed loan until your ownership is property “seasoned” – i.e., aged to perfection. The upshot: If you plan to flip to FHA buyers, expect that you’ll have to wait 90 days before you get the property under contract and then perhaps even longer get to closing. (This may not be a problem if you have a lot of work to do). This can be avoided by simply using conventional financing, but that eliminates a lot of buyers, and profits.

In our opinion, the anti-flip rule needs to go – all it does is discourage people from fixing distressed properties and making nice housing affordable to all, including Dorothy, the Tin Man, and the Cowardly Lion.

Don’t Be Surprised By a Bad Credit Report!

First things first – you need to know what your current credit report looks like. You have a legal right to a free credit report only once a year from the three credit reporting agencies. However, many smart people check just one of the three every four months (spaced out) to keep from being surprised at the end of the 12 month period by a bad credit report.

Here’s how to get your report (courtesy of the FTC)

How to Order Your Free Report

The three nationwide consumer reporting companies have set up one website, toll-free telephone number, and mailing address through which you can order your free annual report. To order, visit annualcreditreport.com, call 1-877-322-8228, or complete the Annual Credit Report Request Form (PDF) and mail it to: Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281. You can use the form in this brochure, or you can print it from ftc.gov/credit. Do not contact the three nationwide consumer reporting companies individually. They are providing free annual credit reports only through annualcreditreport.com, 1-877-322-8228, and Annual Credit Report Request Service, P.O. Box 105281, Atlanta, GA 30348-5281.

You may order your reports from each of the three nationwide consumer reporting companies at the same time, or you can order from only one or two. The law allows you to order one free copy from each of the nationwide consumer reporting companies every 12 months.

You need to provide your name, address, Social Security number, and date of birth. If you have moved in the last two years, you may have to provide your previous address. To maintain the security of your file, each nationwide consumer reporting company may ask you for some information that only you would know, like the amount of your monthly mortgage payment. Each company may ask you for different information because the information each has in your file may come from different sources.

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