Real Estate Basics

Opening Escrow Before the Bank Approves the Sale

July 22, 2009 By Jon Griffith Leave a Comment

All of the short sale listings that I take are accompanied by specific contract terms and conditions that are disclosed to buyers before they submit an offer. It makes it easier to conduct the short sale, and results in greater success.

When a buyer comes to the table on a listing that I have taken, we require that they put some skin in the game. After all, the listing agent does most of the work to obtain lender approval. Of the buyer’s earnest deposit, which could be $1000.00, $5000.00, $10,000.00, you name it, we require that a portion of that deposit become non-refundable from the date of contract acceptance.

Remember, contract acceptance and bank agreement are two different events. A purchase contract is accepted when the owner says, “yes, we believe that this price will be acceptable to the bank.” A bank agreement to sell occurs when the bank says, “yes, we are willing to let the house go for that price.”

In Arizona, the buyer’s due diligence time line, which by default is 10 days in the standard purchase contract, does not begin until the bank delivers approval to sell. That doesn’t mean that the offer hasn’t been accepted. Remember, acceptance is in the seller’s hands, not the bank’s hands.

Why Open Escrow Before Bank Agreement?

We do this because we require a non-refundable portion of the earnest deposit to be held in escrow during bank negotiations, and that amount must be held in escrow. Requiring the deposit ensures that the buyer is serious about buying the property and protects us from accepting offers from buyers who are throwing out multiple offers on multiple properties in hopes of catching just one property. A buyer needs to be prepared to wait it out, and willingness to put $500.00 on the line is typically good enough for us to begin the work of seeking lender approval for the sale. If the buyer walks, they have something to lose, and our time spent working is not spent in vain.

Some Title Companies Won’t Do This

That is true. I have been turned down by title companies who say they will not open escrow prior to the bank letter of agreement. Fortunately, there are smarter title companies out there who know that the industry is in a healing cycle, and if they turn away business, they’ll go out of business. It’s in their best interest to work with us, and most of them do because they understand how much work we do.

Others Will

One of the reasons title companies DO participate is because listing agents develop relationships with reputable, skilled officers who can get the job done quickly and efficiently. While the buyer is the one who typically chooses the Title company to use, the good listing agents have developed systems designed for success that would be complicated by using just any old title company. I can continually send business to a smaller group of escrow officers to ensure the short sale process is as smooth and successful as possible. As a buyer’s agent, knowing that the listing agent on a short sale has a history of successful closings with a particular Title company assures me that it’s okay to direct my buyer to that escrow company.

Filed Under: Real Estate Basics, Short Sales Tagged With: contract acceptance, due diligence, lender approval, non-refundable, open escrow, time line

A Short Sale Will Save Your Credit

July 22, 2009 By Jon Griffith 1 Comment

When you cannot pay your mortgage because it is out of your reach due to adjusting rates, pay reductions, job loss, etc., then it’s likely you have been inadvertently placed on a track that will lead to foreclosure.

Foreclosure occurs when the bank takes your home back because you went too long without paying them. They do this because their money is tied up in your home, and you’re no longer profitable for them. The last thing a bank wants is to own your home. What they want is steady cashflow because they make money when they lend your cash to other banks. If they don’t get paid, they take your house, then they auction it off, and then they come after you for the difference.

The Auction

When the home is sold at auction, it brings less than market value, typically. This means that there’s a deficiency that you are responsible for. That’s the amount that you still owe on the mortgage above and beyond what the home brings at auction. Ultimately, this could lead to a law suit, a judgment against you, and some sort of lien or wage garnishment. Either way, the bank will come after you.

In the process, you lose. Your credit is destroyed, and you’ll be unable to borrow money for five to seven years. This is a bad thing.

The Short Sale

If you are headed down the road to foreclosure, consider attempting to sell the home before the foreclosure happens. In the housing industry, this is called a short sale, because you’re going to be asking the bank to accept less for the home than you owe. You’ll be short the extra cash. IT DOES NOT MEAN IT HAPPENS FAST. “Short” does not refer to the amount of time it takes to get approval from your lender to do this.

Why Sell Short?

Why the hell not? You’re going to foreclose, which is horrible for your credit, so why not attempt to reduce your deficiency by selling the home before the bank gets its hands on it. The lender is going to sell the home for less than market value, and there are attorney’s fees attached to it which means your liability after all is said and done will be greater than if you had a a REALTOR, someone like myself, list your home, market it, and get it sold for as much as possible.

We Don’t Choose Between Foreclosure and Short Sale

100% of the homes that are foreclosed upon have a mortgage. ALL homes that are headed towards foreclosure can be sold short of what is owed. When we speak of Short Sales, we aren’t comparing them to a Foreclosure and then choosing the best option. If you don’t pay your mortgage, you are on a time line of foreclosure.

A recent caller to the Dave Ramsey show had the idea that a “Short Sale” was a process applied to a financial hardship that was different than foreclosure. Here’s the difference. A foreclosure is the result of complacency. Don’t pay your bill, and your bank will boot you out of your house. A short sale is what you do to prevent a foreclosure, if you are unable to pay your bills.

A Short Sale Will Not Hurt as Much

It’s true. If your home is worth less than you owe, whether you can afford the payments or not, if you have to sell it, you have to sell it for less than is owed. If you don’t have the money to cover the difference, you will be required to get approval from your lender to release the home to a new owner. YOU HAVE A MORAL OBLIGATION TO PAY YOUR MORTGAGE PAYMENT. Walking away from the house is a breach of contract. Asking the bank to allow you to sell for less is not. The consequences to your credit, and your tax bill when you ask your lender to forgive you of the remaining balance after you have an offer on your house for less than you owe will make the difference between having a foreclosure on your record, with an inability to borrow for up to 5-7 years, and the ability to borrow within 2 years.

Don’t be a fool. If you’re headed towards foreclosure, try to sell short before the auction date. Your outcome will be much better.

Filed Under: Real Estate Basics, Short Sales Tagged With: banks, foreclose, foreclosure, judgment against, law suit, mortgage, short sale, wage garnishment

How Long Does It Take to Accept a Contract?

June 24, 2009 By Jon Griffith Leave a Comment

Through the short sales that I have been working with, on the listing side, most of the contracts that my clients receive from prospective buyers have one thing in common. The acceptance date for the contract is either omitted, or written out 60 to 90 days in advance.

This does not make sense. If you’re a buyer, and your agent writes a contract on a short sale, or any other home for that matter, take into consideration that line 362 of the Arizona Residential Purchase Contract is where you set the time limit for the seller to accept your offer, not for the bank to approve the short sale.

Seller Acceptance

When you write a contract, you give the seller a time limit to respond to your terms. If the seller does not respond within that time limit, the contract is essentially dead.

Bank Approval

Without Seller Acceptance, bank approval cannot be sought. The process goes in that order. First, you write your offer and you give the seller a specific time period in which they must respond to your offer. Then, when there is an ACCEPTED contract, the offer is submitted to the bank for approval. Bank approval is what takes time. Seller Acceptance does not take that much time. Unless you instruct your agent to do so, setting an acceptance time limit of 60 to 90 days won’t help you.

It is in everyone’s best interest to move quickly through a short sale transaction and that includes a reasonable, realistic time frame given to the seller to accept your offer.

Remember that when the seller accepts your offer, all they’re saying is “yes, we agree that this amount will probably be satisfactory to the bank, and we’ll submit it after we accept it.”

Don’t get an accepted offer confused with a short sale approval, also known as a Letter of Agreement.

I recently presented an offer to my seller that named a month as the cut off date. When I asked the buyer’s agent what their time limit really was, it was made clear to me that the buyer’s agent didn’t know how short sales worked. They said that they just thought that they would give the bank enough time to respond and that they thought their offer was going to the lender for acceptance.

This is not how it works.

Filed Under: Real Estate Basics, Short Sales Tagged With: approval, Bank Approval, contract, Seller Acceptance

The Effects of a Short Sale

June 16, 2009 By Jon Griffith 1 Comment

There is speculation across the industry when it comes to the real effects of a short sale. The truth be told, there is no one right answer to the question, “What are the effects of a short sale.”

So, you say, “What are the effects of a short sale?”

Firstly, as a REALTOR it is my responsibility to understand as much about the legal implications as I can, but I can assure you that I am not an expert in legal issues, and I am not a CPA, so take what I write with a grain of salt and come to your own conclusion between your attorney and your tax advisor before making any extreme financial decisions relating to your real estate.

My job is to effectively market your home and successfully negotiate with the lender’s and/or lien holders on your property to work towards selling it in a timely manner to help you avoid foreclosure.

What are the effects of a Short Sale?

The list could go on, but basically, at the core, the first and most obvious effect of a short sale is that you’ll be selling your house for less than you owe, which leaves a deficiency. Your income taxes can be affected, the neighborhood values will be affected, etc., etc. For now, I’ll just answer some common personal questions regarding the results of a short sale.

What is a Deficiency?

That’s how much more you still owe the bank when you sell your home. For example, if you sell your home for $100,000 and you owe $150,000 then you have a $50,000 deficiency.

Can the Bank pursue that Deficiency?

Yes. The bank can do whatever they want. Whether or not they succeed will depend on the governing laws in your state. Be sure that you check with a qualified attorney to determine if the bank can successfully pursue a judgment against you. Contrary to what people have told you, this is not a black and white issue and each situation, each lender, and each transaction is unique.

Whether or not the bank can pursue a judgment against you involves many different factors. For example, if you borrowed against your home on a HELOC, you probably didn’t know that you personally guaranteed that loan. So, when you sell short, or when you walk away and foreclose, the bank will pursue you, and they’ll probably win. If, however, you took out cash to upgrade the kitchen, you may not have that liability on your hands. Again, it depends on each situation.

How does a Short Sale affect my credit?

I’ve heard so many responses to this question. The easiest answer is, negatively. Prior to selling your home short of what you owe, if you have kept up your payments on time, you will probably not have affected your credit score. If you think your score has been affected, please refer to AnnualCreditReport.com, where you can truly obtain your free credit report (unlike the misrepresented freecreditreport.com which I will not link to.)

How does a Foreclosure affect my credit?

Again, the easiest answer is, negatively. The difference between a short sale and a foreclosure is the verbiage that is used by the bank on your credit report. Each lender reports differently. Basically, on average, someone who has a foreclosure will expect to wait from 5 to 7 years before they will qualify for conventional financing under Fannie Mae guidelines. Someone who sells short will be more likely to qualify sooner than someone who forecloses.

How does a Short Sale benefit me vs. a Foreclosure?

When you have a deficiency, the bank will write it off as a loss. They do this with a 1099-C. On your end, a 1099-C is considered income. Depending on the nature of your financial situation (whether it was a HELOC, refinance, non-purchase money, etc.) it is possible that this deficiency will be recognized as income by the IRS when you file your taxes, and that you’ll owe income tax on it. If this is the case, whether you walked away or sold short, reducing the deficiency is the best way to go, because it means that you will have a smaller deficiency and therefore, less reported income, and thus, a lower tax bill. Some people are protected for a limited time under the Tax Relief Act of 2007. Please research this topic if it is of concern.

Why does credit matter?

In my opinion, credit is the financial worlds way of scoring how successfully you’ve carried debt, and we all trust the financial world, right? We know they’re working towards our best interest, right? Credit scores are pointless. In fact, someone with a zero credit score can just as easily obtain financing as someone with a stellar credit score. It’s the middle score that screws you. Besides, the only reason a credit score is of any value is to become slave to your lender. I personally don’t give a rip about my credit score. Does that mean I don’t follow through with my obligations? Absolutely not. It just means that I prefer not to borrow money, so a credit score holds no value for me, whatsoever.

Lenders who base their decision solely on a credit score are to be avoided. Find a good lender who will weigh your situation, look at all of the pieces of the puzzle, and make a lending decision based on that information. Not a blanket score.

So Why Should I Sell Short?

Maybe you shouldn’t. But, if you are considering foreclosure, at least afford the opportunity to your local REALTOR to feed his family instead of you feeding the IRS and the banks attorneys. We do work hard to get these deals done for you.

If you have any questions about the effects of a short sale on you and your property, please feel free to comment here or contact me directly so we can discuss your situation.

Filed Under: Personal Finances, Real Estate Basics, Short Sales Tagged With: financial decisions, foreclosure, neighborhood values, REALTOR, short sale

What Makes a Buyer’s Market: Supply and Demand

February 9, 2009 By Jon Griffith 3 Comments

This is a pretty simple concept that can be over complicated by economists. A buyer’s market simply means that it’s better to be buying than selling. Why? Too many houses (supply surplus) and not enough buyers (no reckless lending.)

Supply and Demand

When a supplier (people selling homes) floods the market with too much product (houses) the buyers tend to take longer to choose what they want. As a result, sellers who are tired of waiting will lower their prices to spur the buyer into taking action. This is a natural movement that many sellers miss because they don’t understand the LAW of supply and demand. When the supply is low, buyers climb over themselves to bid on what product is available which drives the price up.

The red line represents the supply. The green line represents the demand. The point at which they cross is the market value or market equilibrium. This is the price that we aim for when we price a home.

The graph can be interpreted as such. On the demand curve (green) when the price of the product is $1.00, the number of units sold will be 100. When the price is $10.00, the number of units sold will be about 14. It’s the economists challenge to set the price of his product as close to market equilibrium as he or she can whereby the most money is made for the least amount of production. 100 units sold X $1.00 = $100.00. 14 units sol X $10.00 = $140.00, but 50 units sold at a price of $6.00 each is $300.00.

Shifting Curves

This is the important note for supply and demand. When supply is increased, the entire red curve shifts to the right by the number of units produced. Assuming demand remains the same, the point at which the lines cross will naturally fall and the price will naturally fall. If the price is not adjusted, the product will not sell. If demand increases at the same rate as the supply increases, then the price will remain the same because market equilibrium will simply follow along. True, more product will be sold, but the price will stay put. Remember, when supply and/or demand increases or decreases, the entire line shifts left or right. For example, if demand suddenly dropped off for a given product like homes, and there was an excess of supply or a surplus such as we have now, the price point would fall dramatically.

Buyers Market

In Phoenix, we have a surplus of homes. Nation wide we have a shortage of buyers because of tightened lending. In many cases, the buyers are really still there, but they’re just afraid to move forward and/or they don’t realize they actually can get a home loan. While the buyer’s market exists, it means the influence of movement on the supply and demand curve has shifted to the demand curve. Buyers can ask for more, and have more to choose from than ever before, so why not wait it out?

On the contrary, if it’s a buyer’s market and there is blood running in the streets, take advantage of it because you won’t want to be buying in a seller’s market.

Filed Under: Blah Blah Economy, Real Estate Basics, Real Estate Finances Tagged With: buyers, Buyers Market, market, Shifting Curves

The Benefits of Ownership

February 9, 2009 By Jon Griffith Leave a Comment

Buying a home doesn’t mean all of your problems will go away. There are plenty of responsibilities that come with home ownership, but the benefits far outweigh those responsibilities.

Owning a home involves a down payment, property taxes, potential home owner’s association fees, and other various expenses that can seem at first to be a burden, but when put into perspective, are all positive aspects of home ownership.

Down Payment – the downpayment becomes part of your home’s equity, or the amount of money your home is worth above and beyond what you’ll owe on it. Equity is what you would walk away with if you sold the home. Traditionally, since homes increase in value on average by 3% – 4% annually, your downpayment is now part of that investment.
Property Taxes – Did you go to school? Are you children in school? Will they be? Education is just part of what your property taxes pay for, and as I mentioned, contrary to popular belief, purchasing a home is not the most important investment you’ll ever make.
HOA Fees – The homeowner’s association is responsible for keeping your neighborhood looking good for the purpose of retaining property values. Nobody likes a run down neighborhood. There are other benefits that you’ll learn about in their documentation (Covenants, Conditions, and Restrictions.) Remember, not every neighborhood has one.

The fact that purchasing a home involves large dollar amounts is what typically drives the would-be buyer away. But let’s face it. Most of us don’t have $100,000 sitting around in our bank account, and so we remain stuck in a pattern of believing we cannot afford to buy a home.

So what makes buying a home such a financial benefit?

Tax Deductions – When you finance a home, part of the payment you pay to the bank is interest and part of the payment is equity. During the first 20 years of a 30 year fixed mortgage, the interest portion is actually disproportionately larger than the principle payment. Under current tax regulations, you are permitted to deduct the interest payments from your income to lower your tax liability. Renting does not allow this.
Appreciation – Real estate, over time, will increase in value by an average of 3-4% annually. In some cases more, in some cases less. As your home’s value increases, your equity grows, which equates to you and your family walking down a road towards financial independence and complete freedom from the rat race.
Equity – Part of your monthly payment goes towards chipping away at the balance of your loan and becomes equity in your home. Equity is something you can recover when you sell the house, provided the value has increased. When you rent, you don’t build any equity.
Buying Power – As the equity in your home grows, so does your ability to borrow that equity to improve your home or invest in additional properties down the line. While the reason we’re in this economic crisis is because of cash mongering greed, home equity loans are a potential solution to emergencies should they arise.
Economic Stability – A 30-year fixed loan is just that, fixed. The payment never changes. Rent continually shifts from lease term to lease term and over time can increase. Buying a home ensures your payments will always be the same.
Freedom to Choose – Owning a home gives you the right to do just about whatever you want to it, from the landscaping to interior decorating, you’ll no longer be bound by the landlord’s rental agreement and you’ll have the freedom to express yourself exactly how you want. Not only that, but you’ll also have the freedom to rent your home out to someone else. Renting out your home is a great way to continue to reap all of the benefits above without having to pay for it. In fact, your renter pays for it and helps move you toward financial freedom.

When you own, you have a voice, and you gain a sense of greater community, as though you matter more to the world. I have owned my own home since I was 30. I wish I had purchased sooner because I would be way ahead of the game. Get on it today! It’s time for you to buy a home.

Filed Under: Buying A Home, Real Estate Basics Tagged With: benefits, buyers, buying, equity, ownership

We Don’t Own the Data

November 25, 2008 By Jon Griffith Leave a Comment

Arizona Regional Multiple Listing Service made a recent change to their policies and their data. There were, on the records, about 4750 active listings that had been entered with a checked field. That field was labeled Lender/Corp Approval which was thought by many to be the best option when entering a short sale into the system. Seems logical to me.

Short Sale

If a property is being listed at an asking price less than what the owner owes on the mortgage, the bank needs to approve any future offers prior to closing escrow.

Now, there is a field that is designed specifically for Short Sale Approvals, and the field that was previously Lender/Corp Approval has been changed to Relo/Corp Approval for corporate relocations. This is a good thing.

I’m not a big fan of calling a listing a short sale unless the bank has pre-approved a sale price that is short of what is owed on the note. After all, a sale is a sale, and a listing is a listing, and if it’s being sold for less and the bank hasn’t approved, it should be property marked and stated that short sale approval is required.

Potential Problem

Regarding the recent change, there are probably going to be some problems with the unexpected data modifications. ARMLS has opted to sweep the records to change all listings that weren’t Relocation/Corporate Approval Required so that they weren’t using that field. They updated the listings to show the Short Sale Approval Required field to be marked. In some cases where this is incorrect, you’ll need to ask your Realtor if they have checked into this. Of course, if they’re on top of things, they’ll be calling you to explain what has happened . This outlines another internet issue that we all have to face, and that’s that the data we enter into ARMLS isn’t our data, so they can do whatever they want with it. Granted, an uprising would be few and far between, albeit possible, but I don’t think that ARMLS is going to do anything to hurt their relationships with the techy geeky data guys like myself. I’m fine with positive changes that have slightly adverse short term effects. Bring’em on.

Filed Under: Real Estate Basics, Tech Tips Tagged With: Approvals, armls, Lender, lender approval required, short sale, short sale approval

How Do Real Estate Agents Get Paid?

November 7, 2008 By test 2 Comments

…and who pays them?

Before I was a REALTOR, I was a consumer, and I bought a house. Fortunately for me, or maybe it wasn’t so fortunate, my REALTOR was my father. He also owned the house that I purchased. This worked both for and against me, but we won’t go into that now. The point is, I had no idea how REALTORS made a living prior to diving into the business myself, and you may also have questions about how we get paid.

Real estate agents are 100% commission based jobs. That means, we don’t get a paycheck unless we do business. Makes sense. Open up shop, provide a service, get paid, or sit on the couch all day wondering what to do.

Real estate agents also work as sales agents under a real estate Broker. That broker typically collects a percentage of what we make to cover the costs of running the company. At Realty Executives, we pay a premium to use the name while we conduct business according to their standards and the standards of the Arizona Department of Real Estate and the National Association of Realtors.

If we don’t sell a home, we still pay our broker, mortgage, utilities, etc. So we’re always in a position where cash is flowing out, but not always in a position where cash is flowing in. We’re also in a business where we need to be available when most of the rest of the world is not. This means that we sometimes have to work on the holidays that you get to spend having fun. On the other hand, we have the freedom to “take a lunch” whenever we want.

What does having a Realtor cost the Buyer? Answer: Nothing. Zero. Zip. Nada.

When you meet me for the first time and express an interest in purchasing a home, I assess how serious you are about purchasing, and then I begin to spend money on you to help you find that home. Searching for a home with a REALTOR costs you only time. You will spend nothing out of pocket, but we will commit a large portion of our business day(s) and marketing budget to provide you with the most pleasant showings as we possibly can. We fill our tanks, fill your stomachs, and become your city tour guide for the duration of your search. If you purchase a home without using us after spending all that time, we don’t get paid, but we also don’t hold it against you, because you may not have known, which is why I’m writing about it.

When the seller hires a broker to sell their home, the broker charges them a commission to do so. When that broker lists the property on the MLS, they indicate how much of that commission will be paid to the agent who brings YOU (the buyer) to the table to purchase the home.

The buyer won’t have to open their wallets until an offer is accepted, at which point a series of events begin that justify why the selling broker is willing to pay us in most cases half of the agreed upon commission.

What does having a Realtor cost the Seller?

The seller is the one who has the highest expense. From fixing up their property to staging it, the seller will bear the majority burden of cost in selling a home.

When the seller strikes an employment agreement with the broker, they typically agree to a set commission of the final sales price of the home and they offer a portion of that to anyone who brings a buyer. When the property closes escrow, the funds owed the listing brokerage are distributed according to the agreement between the two brokerages and each real estate agent is paid accordingly.

Filed Under: Real Estate Basics Tagged With: agreement, broker, commission, cost, paycheck, percentage, REALTOR