Friday, November 30, 2012

Higher Fees on Illinois Homeowners?

The Federal Housing Finance Agency (FHFA) is pursuing a proposal that calls for higher fees on Illinois homeowners on their new mortgages in the state.

The Federal Housing Finance Agency oversees Fannie Mae and Freddie Mac.  Attorney General Lisa Madigan sent a letter to Edward J. DeMarco, acting director of the FHFA in which she asked the agency to abandon this proposal.  The higher fees proposal will affect Illinois, Connecticut, Florida, New Jersey and New York.  The FHFA claims the fees are necessary because these states enacted additional legal protections for borrowers to help fight off foreclosure.  Fannie Mae and Freddie Mac claim that this translates into higher fees for them when they have to carry out a foreclosure.

Madigan along with other attorneys general argue that the legal protections enacted are crucial protections for homeowners either facing or going through foreclosure.  Madison also argues that the FHFA’s proposal ignores the fact that lender and mortgage servicer misconduct is a major factor in the rising costs to borrowers that is also passed on to Fannie Mae and Freddie Mac in many situations.  These statutory consumer protections are not the main factor in higher foreclosure costs for Fannie Mae and Freddie Mac argues Madigan.

This is viewed by some as simply a threat to compel these states to accept higher costs for borrowers In their states or eliminate many of the legal protections afforded borrowers altogether.

This is certain to garner attention as the proposal gains steam.  Historically low interest rates have helped revive the housing market in many parts of the United States.  Low rates combined with a decrease in the number of foreclosed properties available for purchase continues to encourage individuals to pursue home ownership.  The lower number of foreclosed properties and the drop in the Foreclosure Discount encourages buyers to purchase homes because they feel that the market is improving and the chance of their property dropping in value has decreased.

Mortgage companies garnered a lot of attention as they faced lawsuits over their misconduct in dealing with borrowers.  Potential borrowers see these companies facing stiff penalties and huge legal settlements and this creates a feeling that the mortgage industry is under control.  Plus, states like Illinois have enacted statutes protecting borrowers in the foreclosure process.  It has become a lengthier and more difficult process to foreclose on a homeowner and seize their property due to new legislation.

It appears based on Attorney General Madigan’s argument that Fannie Mae and Freddie Mac are simply trying to pass the higher costs on to the consumers without fully examining the causes behind the increase in the cost of doing business.   If the proposal is approved and implemented, Illinois homebuyers will most likely feel the effect through higher interest rates.  The other option Madigan sees is to eliminate some of the legal protections for borrowers.  The cost of borrowing would be lower, but homeowners would lose some of the protections that guard homeowners against abusive or unlawful foreclosure practices.

See Our Related Blog Posts:
Be Wary of Cement Blocks Disguised As Rescue Floats      
What is a Deed In Lieu of Foreclosure?

Wednesday, November 28, 2012

Is my Earnest Money Deposit Gone?

The overwhelming majority of real estate transactions will entail the buyer depositing earnest money into the escrow agent’s account to hold while the home is under contract.  The escrow agent is typically the real estate attorney who is the third party conducting the closing so it does not have an interest in the money.  Individuals unfamiliar with the home buying process might mistakenly believe that the earnest money is turned over to the seller to hold.  This is not the case.  Buyers might be hesitant to deposit earnest money due to the fear that once the money is deposited, it is gone for good.  This is also false.  Earnest Money may actually work in the buyer’s favor and help the buyer’s chances for convincing the seller to go through with the sale.  The money is held in the escrow account and what happens to it depends on what happens with the sale of the property.

In a successful purchase and sale situation, the earnest money is applied to the purchase price.  The earnest money could also end up in the seller’s hands even if the sale does not go through.  It could also end up back with the buyer if the contract is cancelled.  This last situation is the focus of today’s blog post.

As discussed in a previous post about financing and a later post about inspections, certain contingencies must be satisfied for a sale to close.  A seller will most likely be reluctant to take a property off of the market and stop advertising it for sale unless he knows the buyer is serious about going through with the purchase.  The earnest money is the opportunity for the buyer to put the seller’s concerns to rest.  The amount of the deposit might be a percentage of the sales price or it might simply be a dollar amount that is substantial enough to indicate the buyer’s intentions to go through with the purchase once certain conditions are met.  Real estate contracts are designed so if the buyer makes a good faith effort to purchase the property, but due to insufficient inspection results or inability to secure financing and is unable to go through with the purchase, the buyer can legally demand and receive all earnest money deposits back.

The buyer must be careful to follow the guidelines within the contract if he is to receive the deposit back.  If the buyer is going to cancel due to something discovered through the property inspections, he must do so within the inspection time period and must provide inspection reports if so required.  As long as he does so, the escrow agent is legally required to return the deposit.  With a financing contingency, the buyer must inform the seller within the financing period in order to receive the deposit back.    

Just because a buyer does not want to go through with the purchase it does not necessarily mean he gets his deposit back.  Once certain dates have passed and contingencies released, the earnest money goes “hard” or is non-refundable.  At this point, the earnest money will end up with the seller whether the sale goes through or not.    

There is no shortage of lawsuits surrounding earnest money deposits.  Buyers and sellers should be wary of how purchase contracts handle situations where the earnest money is refundable versus non-refundable.  Earnest money deposits are intended to show good faith on the part of the buyer to honor his side of the contract and to convince the seller to let him have some time to try and make the purchase work.  Buyers need to understand the contractual obligations outlined in a real estate contract.  Sellers need some recourse in the event that a buyer tries to cancel the contract absent a valid contractual reason.  The buyer may not be able to perform and go through with the purchase so demanding a buyer close will not work.  The earnest money is the seller’s best chance for some form of remedy.  It might not prevent a lawsuit, but a seller might be more willing to let a buyer walk away from a deal if he at least has the deposit to help soften the blow.

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Why Purchase Property under an LLC?

Saturday, November 24, 2012

Housing Continues to Show Signs of Life

The Commerce Department recently released figures that show new-home construction reached a four year high in October according to a recent article in Businessweek.  New-home starts rose 3.6 percent to an annual rate of 894,000.  Eighty two economists predicted an 840,000 pace for new starts.

Experts point to a number of causes.  The Federal Reserve is buying $40 billion a month in housing debt to help keep the cost of borrowing down.  More individuals are drawn into the real estate market by the historically low mortgage rates.  With rates this low, many individuals opt for mortgage payments over higher monthly rent payments.  As the market shows additional signs of improvement, potential buyers are less fearful of drastic value drops so they are more willing to take the plunge into home ownership.

The number of foreclosures continues to drop which helps to cut back on the excess supply of available homes on the market.  The builders who have managed to survive the last couple of years are primed for success because they can take advantage of bank-owned lots and subdivisions that offer opportunities to buy dirt at discounted prices.  In various parts of the country, builders are working with developers to buy neighborhoods that went into foreclosure and then building new homes to sell at prices below what many buyers would expect to pay for a new home.  These developers will oftentimes work with banks to offer special financing incentives to help first time buyers who qualify purchase new homes.

The article also points out that additional analysis shows that homebuilder sentiment rose to a six-year high in October.

The total number of applications for building permits dropped in October, however the analysis reflects fewer applications for multifamily construction.  Applications for single family units were the ones to reach the highest level since July of 2008.

The article pointed out that two of the four regions of the country showed increases in home starts in October.  The West had a 17 percent surge and the Midwest had an 8.9 percent increase in new construction.  The Northeast had a 6.5 percent drop and the South a 2.5 percent drop in new construction.

The National Association of Home Builders/Wells Fargo index of builder confidence also showed an increase in November to a six-year high.  This same association reports that sales of already built single family homes rose to the highest level since May of 2006.

This blog has truly thrown out lots of numbers and statistics.  The general takeaway is that the real estate market continues to show signs of recovery.  Previous blog posts pointed out the drop in the foreclosure discount, another sign that the market is improving.  Some economists continue to fear that there is a huge shadow inventory of bank-owned properties that have yet to hit the market.  The fear is that these homes will eventually flood the market with a fresh crop of bank-owned properties just when the market is improving.  That has not happened and banks continue to work more efficiently on short sales thus helping to decrease the number of foreclosures.

Regardless of which report you focus on, it is apparent that foreclosures and short sales will continue to impact the real estate market for years to come, but the increase in new home construction shows that the positive aspects of the market are finally starting to overshadow the negatives.

See Our Related Blog Posts:
Short Sale Snafus
Turning the Corner on the Housing Market?

Thursday, November 15, 2012

Contract Contingencies: Inspections

As briefly discussed in a previous blog post, contract contingencies give buyers the opportunity to walk away from a contract for sale and purchase with limited if any repercussions provided they abide by the guidelines governing cancellation due to a particular contingency.  Financing contingencies are a hot topic due to the recent financial meltdown that was largely a result of real estate financing.  Financing is not however a contingency found in every contract.  In the vast majority of contracts for sale and purchase, you will find some form of an inspection contingency.  The inspection contingency is a very important card the buyers have to play, but care must be taken to abide by the timelines and requirements that govern your particular inspection clause.  Miss a deadline and your inspection results will only serve to let you get an early start on all the repairs you have to make on that new home you are buying instead of having the seller make the repairs or cancelling the contract.

Contracts for Sale and Purchase will almost always have language already built into the contract concerning inspections.  Normally there will be a specific section in the contract that deals specifically with what types of inspections a buyer can do, the timeline to complete the inspections by, the ramifications of the inspection results, an outline for cancelling the contract due to the inspection and the seller’s responsibilities based on the inspection results.

House/Condo Inspections

 Most people associate inspections with what they did prior to buying a house or condo.  They received a real property disclosure from the seller where the seller was supposed to answer a series of questions regarding the condition of the property, but it is of course in the seller’s best interest to answer the questions in a way to paint the property in as good a condition as possible.  An independent inspection done by a licensed inspector is needed.  An inspection is for the buyer’s benefit so the buyer almost always orders and pays for it.  These types of inspections will check for plumbing and electrical issues, mold, wood rot, minor structural issues and a full spectrum of other issues.  Based on what the inspector finds, a seller may be contractually required to make certain repairs or the buyer has the option to cancel the contract.  Your specific real estate agent or real estate attorney will be able to examine the contract and explain your rights regarding the inspection.

Vacant Land Inspections

When inspecting vacant land, you are usually checking to see if the land is suitable for a particular use.  If you are buying land to build a home, then you may check the size, the soil content, building restrictions or zoning to make sure that you can build your desired house.  If it does not suit your needs, then you can cancel.

“As Is”

When purchasing a piece of property, “As is” the buyer still has the option to inspect the property, but cannot ask the seller to make any repairs or changes to the property.  If the inspection shows termite damage or a faulty electrical circuit, two items sellers are commonly required to repair, then the buyer  must decide to continue with the purchase and accept the issues or cancel the contract.  Many people associate “as is” properties with foreclosures, but a typical seller can sell a property “as is” simply because he does not want to be required to make any repairs prior to closing.

What is the Point?

It is important to know what you are buying.  You do not want to buy a house only to find it has issues that could have been discovered in an inspection.  That could result in lawsuits between parties over what the seller should have disclosed.  It is important to know exactly how your inspection contingency operates.  If you have 14 days to inspect and cancel based on the inspection, finding out 18 days after the effective date that there is a problem might not help you cancel the contract and get your earnest money back.  Now there are situations with latent defects that might override contractual timelines, but those are for another day.

Inspections are designed to benefit the buyer, but can ultimately save both parties to a deal from lawsuits down the road.

Please See Our Related Blog Posts:
Why Purchase Property under an LLC?
What is a Deed In Lieu of Foreclosure?

Wednesday, November 14, 2012

The “Foreclosure Discount”

The “foreclosure discount” is the difference in sales price between a property that is bank-owned and a property that is sold by a person.  It is the discount that a buyer expects to get on a bank-owned property as opposed to a regularly owned property.  The perception in the general public is that foreclosures are much cheaper to buy than a normal property, but the tradeoff is the condition of a bank-owned property might be much worse and the buyer must purchase the home “as is.”

What Affects the Discount?

Different factors contribute to the amount of the discount rising or falling.  The part of the country the property is in impacts the discount in several ways.  Different states have different foreclosure laws and regulations.  If these laws work to lengthen the time it takes for a bank to complete the foreclosure process, then that can lead to a higher foreclosure discount.  A longer time period means the property is more likely to fall into greater disrepair since it will have been neglected for a longer period of time.  The low price of the bank-owned home compared to what one might normally expect to pay for a home reflects the likely potential for many repairs.

The region of the country also can impact the discount due to the fact that certain areas of the country are more maintenance intensive than others.  Homes in climates with extreme temperature changes need consistent interior temperatures to keep wooden floors from buckling and mold from growing just to name a few potential repair scenarios.  The type of property and location relative to the lender can also impact how much upkeep the home receives during the foreclosure process.  Banks are not in the home maintenance business, however some lenders have started taking proactive steps to keep bank-owned properties in somewhat decent shape as a way to protect what is left of their investment.    

Why is the Discount Important?

Nick Timiraos writing for The Wall Street Journal points out that the decrease in the foreclosure discount is a good indicator that the housing market is improving.  The article cites analysis from Zillow that puts the national foreclosure discount around 7.7%.  That is down from 9% last year and the 24% discount peak 3 years ago.

More Zillow analysis shows that many “Sunbelt” markets showed either no foreclosure discount or discounts of just over 1%.  Midwestern and Northeastern cities had higher foreclosure discounts due to the factors discussed earlier; longer foreclosure processes and expensive maintenance.  Several major cities including Chicago, New York and Boston had foreclosure discounts greater than 15% according to the article.     

As the number of foreclosures continues to drop in many areas, home sales are starting to increase.  Bank-owned properties tend to pull prices down thus depressing the surrounding inventory.  Lenders have also become more adept at pushing short sales through the system which is helping to reduce the overall inventory of distressed properties.  The laws of supply and demand come into play as the supply of cheap bank-owned properties decreases the prices of the remaining inventory naturally increase.  The banks who own properties understand this concept so they are less likely to deeply discount their properties. 

To put it simply, falling foreclosure discount rates even in cities where the rates are still relatively high indicate that the real estate market is improving.   
What does this have to do with you?

If you are facing the possibility of foreclosure or are considering the short sale option, it is important to understand the current state of the real estate market and how lenders are currently handling these situations.  Changes in the markets or changes in mortgage regulations might translate into a more positive direction for you and your situation.  Our experienced real estate attorneys will work with you to assess your situation and devise the best strategy for you to move forward.

Please See Our Related Blogs:
Be Wary of Cement Blocks Disguised As Rescue Floats
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Friday, November 9, 2012

Contract for Sale and Purchase: Financing Contingency

Real Estate contracts can be long intimidating documents filled with language that most people cannot or would prefer not to decipher.  It is a legally binding agreement with a host of obligations built into the provisions that you as a buyer or seller need to understand before signing.  There is an important clause found in every real estate contract that states, “This is intended to be a legally binding contract.  If not fully understood, seek the advice of an attorney before signing.”  We encourage parties to a real estate transaction to seek the advice of an experienced real estate attorney, but we want to help explain a key element of every contract today.


When the buyer and the seller agree to the terms of the transaction and sign the contract, the deal is almost always far from over.  Real estate agents will oftentimes refer to this phase as “contingent.”  A buyer will almost always have at least one contingency built into the contract so that despite the fact he has signed a contract, he can still cancel the contract without losing his earnest money.  One caveat being that in certain situations, a seller might require a buyer to deposit earnest money that is non-refundable for one reason or another.  In this situation, the buyer might still have the right to cancel the contract if a particular contingency is not satisfied, but the earnest money would be lost.  There are several contingencies that are common to most contracts, but today we are focusing on the financing contingency.


Different financing contingencies might have different specifics, but the general concept is that the buyer is only obligated to go through with the purchase if he is able to obtain the necessary financing to make the purchase.  Many contracts have blanks so that the buyer will fill in the type of financing he hopes to obtain along with the terms of the loan.  Other contracts might simply say that the buyer hopes to obtain a loan for the purchase according to the prevailing rates at the time he or she applies for financing.  We have even seen contracts where the buyer simply says he is financing the property and lists no other specifics giving him the option to pursue any loan possible to close the deal.

In order to get financing approval from a lender, the buyer will have to show that he is financially able to perform under the terms of the loan and the property must meet certain requirements to prove it is a sound investment on the lender’s part.  The buyer must make a diligent effort to obtain financing.  The property must appraise for the sales price, otherwise the lender will refuse to loan the full amount needed.  If these two requirements are not met and the loan is denied, then as long as the buyer has complied with the time limits and other provisions of the financing contingency, he may be able to cancel the contract and get back any earnest money.  This does not mean that the deal has to die.  If the appraisal comes in lower than sales price, the buyer and seller can try and reduce the sales price to allow for financing approval.  The buyer could also agree to pay a larger part of the purchase in cash to compensate for the lower loan amount.  These are not required steps, but could work as options if both parties are determined to get the deal to close.      

A financing contingency can be a turn-off for some sellers.  An overpriced property has little chance of appraising for the sales price if no other comparable sales in the area support such a high price.  The seller might be reluctant to agree to a contract contingent on financing because the property is not being marketed for sale while the buyer is trying to get the financing together.  The seller might miss out on a cash buyer in this time period.  Of course the seller must make a decision to either sell for a lower price so that the buyer can get financing approval, or hold out for a higher offer that must be cash in order to close.

Financing contingencies are important for many reasons including the fact that real estate loans were such a huge factor in the economic downturn over the last couple of years.  Real estate financing has become a hot topic for debate as the housing market finally starts to improve.  Loans are still not as easy to come by for many buyers as in previous years, but that is starting to change.  If both sides of the transaction have done their homework, then there should not be a question on whether or not financing will be approved.

Many financing questions are best directed to the lenders as legal questions are best directed towards an attorney.  It is important to at least understand how different contractual provisions work either for or against you.  In future blogs we will address other contract contingencies such as inspections, zoning for specific use and other sales occurring first.

Please See Our Related Blogs:
Why Purchase Property under an LLC?
Turning the Corner on the Housing Market?

Friday, November 2, 2012

Short Sale Snafus

As documented in one of our previous blog posts, short sales continue to grow in popularity.  Lenders both large and small have learned to cope with short sales and work to make the process a smoother one than in the past.  Sellers more times than not prefer to short sell their home as opposed to going through the foreclosure process.  People still hear horror stories about short sales taking up to or longer than one year to close, but those types of deals are becoming more of the exception than the rule.  Despite positive advancements in the battle to simplify and shorten the short sale process, numerous pitfalls must still be avoided to get from contract to close. 

The National Association of Exclusive Buyer Agents (NAEBA) provided a list of some of the most common situations that can lead to the demise of a short sale deal.  We will discuss a couple of these with some added commentary.

Multiple Remedies for Lenders

Although the seller may focus his attention on working with the lender to get the short sale approved, the lender may at the same time have plans to foreclose if the short sale gets sidetracked.  A foreclosure in some instances can take place at any time during the negotiations.  The lender can foreclose on the property and kill a deal even if the buyer and seller have been under contract for several months.  The lender ultimately controls the situation so if the lender does not like the terms of the short sale, then it can kill the deal.  The seller might also discuss modifying the loan as a way to keep the home.  As the lender is working on approving the deal, if it sees that modifying the existing loan is a better financial decision than a short sale, then the lender or seller can cancel the contract.

Pricing Issues

Not every seller has a lender approved list price before putting the home on the market.  The seller wants to have the home under contract as fast as possible and a way to do this is list the home at a very low price.  That way the seller is certain to at least get one buyer to make an offer and start the approval process.  However, the seller might not have a very good idea of what the lender will accept as a sales price.  We have heard seller’s agents comment to potential buyer’s agents that they just need an offer to start the process and see what the bank says.  The seller is essentially going on a fishing expedition.  The first offer could end up being a guinea pig for the seller.  Both the buyer and seller could end up wasting time, money and effort on a contract price that is destined to fail from the onset.

Uncertain Time Periods

A lot can happen in a month, six months or a year.  The buyer and seller face many unknowns as they begin the short sale process.  The stories of short sales taking one year or longer are less common than when the first wave of short sales hit, but most buyers still prepare for a process that will take several months.  The real estate market continues to change so a price that seemed financially reasonable one day might not appear so reasonable six months later if the market shifts one way or another.   If the lender sees that the contract price is much lower than the current market conditions support, it can kick the contract back to the buyer and seller and say renegotiate or start over.

Once the buyer and seller get approval from the lender, the lender might require the deal to close in a short time period.  Now the buyer has to hurry to have the home inspected and tie up any loose ends with financing.  The buyer’s financing might have expired while waiting on approval thus throwing one more variable into the equation.  It is often a hurry up so you can wait type of situation where the buyer and seller rush to provide all the necessary paperwork as quickly as possible only to have the lender say “thank you” and that we will get back to you as soon as we know something.  Then the lender comes back and approves the deal and says close in one week.    

The lender is truly the rules official and timekeeper who can speed up or slow down the clock at any time.

It is important given all of the unknowns involved with a short sale for the seller and buyer to enlist the services of an experienced real estate attorney.  Certain documents must be provided to the lender at each step of the process.  Explanations or legal arguments are oftentimes needed to support why the seller’s deficiency needs to be reduced or eliminated and the short sale approved.  The lender will certainly have attorneys working on the deal from its side and so should you.

See Our Related Blog Posts:

What is a Deed In Lieu of Foreclosure?
Bank of America Pays for Short Sales