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.

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What is a Deed In Lieu of Foreclosure?

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
The Anatomy of a Foreclosure

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.

Contingencies

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.

Financing

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.

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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

Why Purchase Property under an LLC?

There are several reasons to purchase property under an LLC as opposed to your real name.  Many people use LLCs to purchase property in order to hide their identity.  A recent article in The Wall Street Journal by Alyssa Abkowitz points out the fact that “when set up properly” deals constructed under legal entities are “virtually untraceable.”  The article went on to state that in the last year 27% of U.S. homes that sold for over $5 million were bought by LLCs.  That number drops off significantly as the sales price decreases.   Given the difficult economic times over the last few years, many buyers of expensive properties want to hide their true identities to avoid the potential for negative publicity over extravagant purchases.  There are other advantages to using an LLC that the average person can take advantage of when purchasing property. 

Protection from Personal Liability

The article explains that one of the key protections offered by an LLC is the legal protection from claims against you personally that arise out of the property.  The prime example being if someone is injured while on your property, the person would have to sue the LLC as the property owner and not you personally.  Your personal assets are protected from such a claim as long as the LLC is set up correctly.  It is wise to use an attorney to set up an LLC for real estate purposes to ensure that you are protected.   The liability advantage is used by a full spectrum of real property owners.  Large investors who hold extensive portfolios of residential and commercial rental space utilize the LLC to avoid potentially devastating lawsuits arising from any one of their many tenants.  Families who own a vacation home that doubles as a rental income generator utilize the liability protection to make sure a careless spring break renter does not come after their personal assets over an injury that occurred at the home.  This protection gives more individuals the peace of mind to own rental properties because they know that their liability is limited to the LLC’s holdings and insurance policies.     

Taxes Advantages

LLCs have “pass-through taxation.”  Any profit or loss associated with the property is passed through the LLC and onto the individuals who own the LLC.  These individuals report the gains or losses on their personal tax returns thus providing opportunities for additional tax advantages.  The capital gains tax rate is lower on a single-owner LLC than on other entities according to David Hryck, an international tax expert quoted in the article.  So if you use property for rental income or other investment purposes, it is to your financial advantage to do so under an LLC.

“Funnel” Expenses through the Entity

With any property, there are expenses to pay.  A member of the LLC can funnel property related expenses through the entity.  This is helpful for tax purposes as well as maintaining the financial independence of the LLC from the individuals.  Expenses like maintenance, homeowner-association fees, taxes and utilities should be paid from the LLC’s account.  You want the LLC to operate as an independent entity and not be too closely tied to you personally or you might lose some of the legal protections afforded an LLC.

What are the Disadvantages?

Not every purchase is eligible for an LLC.  Lenders have different rules for loans given to LLCs versus private individuals.  In some instances, the rates and required down payments are higher for an LLC loan versus a private loan.  Some lenders go as far as not allowing buyers to finance certain types of purchases through an LLC.  There are also certain filing requirements associated with LLCs that must be complied with each year.  Different states have different regulations regarding annual reporting fees and taxes so you should consult with an experienced real estate attorney to ensure proper compliance.

Buying through an LLC is not for everyone, but more real property buyers and owners could benefit by utilizing the advantages offered by this option.  The housing market presents multiple challenges for investors or buyers of all budgets so it is important to know all of your options that might lead to increased success.

See Our Related Blog Posts:
Turning the Corner on the Housing Market
The Anatomy of a Foreclosure

Be Wary of Cement Blocks Disguised As Rescue Floats

In one of our previous blog posts, we wrote about the Hardest Hit program that helps people with temporary assistance to avoid foreclosure.  That post talks about keeping a bad day from getting worse, but today we are reporting about scams that do the opposite.  An article in the Chicago Tribune entitled “Foreclosure rescue scams add insult to injury” highlights the trouble a growing number of distressed homeowners are facing--foreclosure rescue scams.

Foreclosure activity continues to grow in Illinois at a rate higher than the rest of the county.  The three month period ending in September saw a 31 percent increase in foreclosure activity over the same period in 2011 according to the article.  The government is reaching out to homeowners not yet in foreclosure through various programs like the Hardest Hit program while at the same time scam artists are reaching out to the same segment of the population.

Types of Foreclosure Rescue Scams

Fraudsters implement a number of schemes to defraud property owners who are on the verge of foreclosure and are looking for a way out.  Loan Modification programs can in some instances be legitimate means for an individual to avoid foreclosure.  However, certain scams promise lower monthly payments as part of the loan modification agreement.  However they may also include stiff penalties for any late or missed payments, automatic payment increases after a certain period of time and other contractual provisions virtually assuring that the property owner will end up right back in default.  Lease-buyback plans give the owner the right to lease their home from the new holder of the title.  The lease payments are supposed to count towards what will hopefully be the eventual buyback.  These plans may include high lease payments that individuals are not able to pay as well as high buyback prices that the owner cannot afford thus losing the property after all.  Renegotiating Consulting Services offer to help individuals renegotiate their current loan for a fee.  Be wary of the consulting firms who demand partial payment upfront.  Individuals reported forking over fees to these “firms” and then never hearing from them again.  In some instances, the firms instructed the individuals to stop making any payments until they heard back from the consulting firm so by the time the property owner realizes they have been scammed, they are even deeper into default.        

How Prevalent are these Foreclosure Rescue Scams?

According to the article in the Tribune, if the national rate of reported suspicious activity continues for the rest of the year at the pace it did during the first half of 2012, the total 2012 rate could be up 70 percent from 2011.  As the housing market lags in various parts of the country, real estate brokers, lending institutions and other financial services involved in real estate transactions look for new ways to make a profit.  Unfortunately a number of the individuals at these businesses find that property owners on the doorstep of foreclosure are desperate for help and tend to drop their guard when the possibility of a rescue comes up.  This situation is primed for fraud.  The sophisticated fraudsters hide the fee increases and triggers for automatic foreclosure deep in the language of the contracts thus bolstering their position that they are not breaking the law.  This reemphasizes the need for an experienced real estate attorney who will be able to effectively explain the pros and cons of signing on to a loan modification or consulting contract.

The silver lining to this news is that the increase in reports is due in part to a heightened awareness of these schemes by the public.  Property owners also see other people being scammed and are thus less embarrassed to report their own misfortune.  Groups investigating the fraudulent scams have more evidence to work with and can effectively spot and stop new scams based on their knowledge of previous schemes.

There are signs of improvement in the housing market, but foreclosure rescue scams continue to keep many property owners in the depths of foreclosure.  If you suspect that you may be caught up in one of these schemes, do not hesitate to contact our office in Oak Park to avoid additional financial harm.

What is a Deed In Lieu of Foreclosure?

Many people have heard the term “Deed in Lieu of foreclosure” or “Deed in Lieu” for short.  A quick polling would most likely reveal that the majority of people think that a deed in lieu simply means that you turn over the deed to your house to your lender and the lender goes away.  In short, those people would be correct to a certain extent.  However, a deed in lieu situation has multiple parts to it that require the advice and services of a real estate attorney.  If not handled correctly, the deed in lieu will not accomplish the goal of eliminating your financial liability in relation to your property.

Why the Deed in Lieu Option?

The deed in lieu should be considered for individuals who:
·      Are behind on mortgage payments
·      Owe more on the home than it is worth
·      Are facing a long-term hardship (a “hardship” must be proven)
·      Are unable to sell their home
·      Can no longer make mortgage payments
·      Are unable to refinance

Who is Eligible and how does a Deed in Lieu Work?

Not everyone can go through the deed in lieu process.  The lender must qualify you through some eligibility process.  The lender’s qualification process involves them determining the value of the property versus the amount you still owe.  The lender will also review your situation to analyze the “hardship” that you claim has led to you seeking a deed in lieu.  The lender might require you to put the property on the market for a period of time before accepting a deed in lieu.  If you can short sale your home, then lenders would prefer to go that route.   If you are unable to sell the home and you meet the lender’s qualifications, then you must vacate the home and leave the home in good condition.  Different lenders and areas have different expected time periods for completion of the deed in lieu process, but many say that 90 days is about the average.   Do not be surprised if your case takes longer or shorter than 90 days.

What are the Advantages to a Deed in Lieu?

The deed in lieu offers many attractive advantages as opposed to foreclosure.
·      Avoid the negative impact on your credit that a foreclosure would cause
·      Begin repairing your credit more quickly than you would after foreclosure
·      Completely eliminate or reduce your mortgage debt
·      Potentially qualify for relocation assistance through certain lender programs
·      Avoid handling the sale of your property; hand over the deed and the lender takes over
·      May qualify for a Fannie Mae mortgage sooner than if you went through foreclosure

What are the Disadvantages to a Deed in Lieu?
There are some disadvantages to this process for you to consider.  Lenders might not be willing to accept a deed in lieu.  Many lenders might already be sitting on piles of real estate where they would rather have cash.  The last thing they want is another distressed property to try and deal with.  You may not qualify for a deed in lieu if you have a home equity loan, multiple mortgages or certain liens against your property.   You will take a hit to your credit score so you have to be prepared for that.   You may also be forced to pay taxes on the amount of the deficiency that was wiped away by the deed in lieu.  The Mortgage Debt Relief Act of 2007 addresses this problem for now by giving tax exemptions up to a certain amount for qualified individuals, but this might not last.

As with any situation dealing with distressed property, you should consult with an attorney experienced in dealing with short sales, foreclosures and other real estate transactions so you are fully aware of the impact the deed in lieu will have on your financial well being.

See Our Related Blog Posts:
Bank of America Pays for Short Sales
The Anatomy of a Foreclosure