Category Archives: Real Estate-Purchases

FHA 90-day seasoning requirement is back for flips

Mortgages, Real Estate-Purchases

Be careful if you are buying a property that the seller is trying to flip. WIth a flip, the seller buys a distressed or foreclosed property, fixes it up and then quickly resells it. If you are getting an FHA mortgage to buy a  property being flipped, you will not be able to sign a contract to purchase the property until 90 days after the seller has owned the property.

The 90 day time period is measured from the date the seller acquired the property (closed on the property)  to the dale the seller signs a contract with the new FHA buyer.
The purpose of this FHA “seasoning” rule is to prevent sellers from acquiring a property, doing cosmetic repairs and then reselling it at an inflated price. For the past few years, during the depressed real estate market, FHA waived this rule and allowed the buyer to sign the contract earlier than 90 days, but that changed on January 1, 2015.
But now, FHA is back to enforcing the seasoning requirement.
I have also found that many lenders will require two appraisals to be done if the buyer is buying a flipped property. This will often delay closing because the parties have to wait for the second appraisal.

Mortgage Debt Forgiveness Act extended thru 2014

Mortgages, Strategic Default

Both the House and the Senate finally agreed to pass an extension  of the Mortgage Debt Forgiveness Act.

It expired at the end of 2013.

But now that it is revived, those homeowners whose primary residences were foreclosed or short sold during 2014 will NOT have to pay income tax on the difference between the mortgage balance that was unpaid and the market value of the property.

 

Update to Real Estate Disclosure Form

Real Estate-Purchases, Real Estate-Sales

On January 1, 2015, the Illinois Residential Real Property Disclosure form will be changed.

The words ” windows and doors” will be added to question 6.

So, sellers will have to disclose any known defects to windows and doors. These changes are the result of a case where the court held that leaking windows and doors were not included in the definition of walls, and thus the seller had no obligation to disclose defective conditions involving windows and doors.

Mold & Radon: Scourges of real estate sellers

Real Estate-Purchases, Real Estate-Sales
mold
If I was looking to start a new business, I would get into the mold and radon game. Those guys are busier than sin and they have a captive market: Home sellers in the middle of a contract.

It used to be that about 5-10% of home buyers did radon tests. But home inspectors must have gotten discounted memberships to the National Society to Eradicate Radon in Our Lifetime. Now, about 70% of buyers do radon tests. Well more than half of the radon tests flunk. The seller has to install a radon mitigation system for about $1200.00. That consists of capping the sump pump pit and using a small fan to push all of the radon gas through a pvc tube outside. Radon has a standard of 4.0 pcl or less. Anything higher than that has to be mitigated (brought down to under 4.0).

Those same inspectors are crawling into the attics of homes and finding boatloads of mold on the plywood sheathing. The mold appears because bathroom fans were vented into attics and over many years, mold grew. If mold is found, then the seller has to have a mold remediator get rid of the mold. That costs between $1200.00 and $3000.00. The mold remediation business has grown tremendously in the past few years. I wrote this post in 2004 saying that mold problems were increasing, so this is not an overnight occurrence, but  since then they have exploded.

Mold is found by the home inspector by simply looking at the plywood in the attic of a house and if there is mold there is a dark staining on it. There are two approaches to mold remediation once it is found:

1. An Industrial Hygenist (who is paid about $400-$500) tests the mold then draws up a remediation plan for a mold remediator (other than the hygenist) to work on.

2. A mold consultant comes in and does NOT test the mold, but just removes it all.

Most sellers taking the route described in number 2. Many times the mold will not be harmful or will be in a small area. Since the parties are in the middle of a real estate contract (and there are people who could get sued) everyone takes a scorched earth, remove every spec of mold approach.

I see little to no testing done.  My opinion is that air quality testing is a waste of money. I was surprised that the Illinois Department of Public Health has NO STANDARDS for mold testing and does not recommend testing the mold or the air at all. So why is everyone freaking out and removing all this mold? I’m not sure, but buyers want the mold gone, so that’s what happens. The unlucky seller whose buyer gets a flunking radon test and a flunking mold test will be out of pocket $2500.00 or more before he knows what hit him.

Here are some mold remediators that I have seen on files:

Mold Solutions

Indoor Air Repair

Mold 911

Alliance Restoration 

Appraisals coming in short this spring

Mortgages, Real Estate-Purchases, Real Estate-Sales

appraisalLast week, I had 6 properties appraise for less than the contract sales price. It ‘s not real fun when this happens. No news is good news when it comes to appraisals, but when I get an email with an appraisal attached I know things are about to come unglued.

Seller’s instant reaction = “I am getting scr**** by the buyer’s lender and I am NOT cutting the sales price.” The seller’s  second stress induced reaction is “I’m going to “fight the appraisal” (good luck with that, tiger).

Buyer’s instant reaction = “I can’t believe I overpaid for the casa of my dreams and I hope the seller doesn’t cancel the contract.”

Fortunately, the amount by which these properties under appraised was between $5000.00 and $14,000.00 and the parities were all sensible. All of them were resolved without tanking. Half of them “met in the middle” and for the other half, the seller reduced the price to the appraised price.

Usually when a property appraises low, I estimate that about 75% of the time the end result is that the seller cuts the price to the appraised price. If the appraisal is for an FHA loan, the seller will be stuck with that appraisal for 1 year even if the contract cancels (and a new FHA buyer comes in).

I find that it is nearly impossible to “contest” the appraisal. Appraisers rarely change the result of an appraisal. There is supposed to be no way to communicate directly with the appraiser. I find that when the parties try to contest the appraisal that 2 to 3 weeks are wasted while the loan processing comes to standstill and closing is delayed.

The spring market has been very fast moving with multiple offers on many homes within a day or two the listing hitting the internet. I’ve seen a lot of contracts at or over list price. Sellers are getting more for than they expected in some cases and there are not the comparable sales to support the appraisals.

If you are a buyer be sure to add an appraisal contingency to the contract. The mortgage contingency will act like an appraisal contingency unless you are putting a ton of money (50%) down and then it won’t work and you need a separate appraisal contingency. If you are a seller, just be aware that selling for list price is cool, but it may be cut after the appraiser trots through.

Internet lenders: Take a pass

Mortgages, Real Estate-Purchases

I love buying stuff online. Here’s some of the things I’ve bought on the internet recently: a living room couch, a rowing machine and a 10 speed road bike (fully assembled). I trust online buying and hardly ever have any problems.

The one thing I would NOT get online is a mortgage.

About 25% of the buyers that I see use an  internet lender. I specifically recommend against selecting a lender online when I describe the closing process to new buyers.

The advantage of getting a loan online is that the rate is usually pretty low.

There are many reasons not to get a mortgage online. First, almost every time the approval and closing process turns into a semi-nightmare.  With online lenders, there is no single responsible party who can answer questions and resolve issues. The online lenders use a team approach, but usually no one knows what is going on. Our Illinois closing process is kind of quirky compared to other states and funds need to be at closing when it starts, not 10 hours after closing. Online lenders often don’t wire the funds to closing under after the loan is ‘”funded” at closing rather than sending the funds before closing.

If you are near a computer, go ahead and google “best mortgage rate.” Near the top will be Quicken loans, Bankrate.com and Lendingtree. Lendingtree takes you through a series of screens that ask you questions about the loan you are seeking and then suggests some lenders for you. Click here to read some reviews of Lendingtree. They are absolutely scathing. Same here for Quicken loans. Brutal reviews. There are many accusations of pulling credit reports without authorization and endless complaints about lack of communication. Many complain of constant spamming the minute they enter data on the site.

Go ahead and scan through them and I doubt that you will have a warm fuzzy feeling about internet lenders.

My recommendation is to pick a good, local lender referred by someone you trust. The online mortgage market is not ready for prime time. Do you really want to be a beta tester?

RIP: Illinois short sales

Bankruptcy, foreclosures-shortsales, Strategic Default

The year 2014 is here and short sales are the year’s first casualty. They are dead on arrival. Gone, done. The final nails in the coffin were the expiration of the Mortgage Debt Forgiveness Act (MDFA) and the sudden increase in deficiency judgments in Illinois during late 2013.

Now, I recommend short sales to almost no one.  Three reasons you should NOT do a short sale.

  1. Deficiency Judgment may be entered. To get a short sale approved you generally have to be behind on payments. Once you stop making payments and try a short sale, there is a 50% chance that it will close. If it does not close, it will end up being foreclosed and there is a strong possibility that a personal deficiency judgment will be entered against you. Not fun.
  1. You will get a taxable 1099 EVEN if the short sale closes. Many, many short sales do not close and end up as foreclosures. If you are foreclosed upon, there will be a 1099 issued even if the property was your primary residence. The MDFA expires on December 31, 2013 and this means that tax is owed on the 1099 issued after a short sale. Why would you do a short sale if you have a huge tax bill on the back end? Due to the 1099, it makes no sense to do a short sale (unless you are insolvent.
  1. Process is too difficult. I closed a lot of short sales in 2013. We became pretty good at getting some of them approved, but we still lost quite a few. The process is even worse now. Many lenders “service release” a mortgage to a new lender in the middle of a short sale. It seems that the new lender is almost always Bayview Loan Servicing. That means you get to start the short sale over again. Bayview has a crazy process and requires that it “net” 95% of the broker price opinion (BPO) amount. Considering the real estate commission is 6%, how are they supposed to net 95%? The buyer has to agree to pay more than the BPO for the closing to happen. If they net less than that, Bayview requires that the property be listed auction.com., which is an online auction site. The chances of closing one of these is slim.

The Chicago Sun Times had a nugget yesterday that 25% of Chicago area homes are deeply underwater. What are these people supposed to do now? With the death of short sales, there are two options: Stay in the home until the value increases or file bankruptcy.

 

Illinois deficiency judgment update

foreclosures-shortsales, Strategic Default

Deficiency judgments are still being entered in Illinois. Two more clients had judgments of around $50,000.00 each entered in the last two weeks. Oddly, the mainstream media has ignored this, probably because it is a confusing topic.

Before 2013, your chances of having a deficiency judgment entered were slim to none. Half way through 2013, we started to see deficiency judgments entered frequently. My unofficial, unscientific estimate is that there is about a 50% chance of having a deficiency judgment entered against you in an Illinois foreclosure now.

What happens after the deficiency judgment is entered?

In one case, the lender sent a letter asking for payment of about 5% of the judgment amount for a full release. This was a tremendous deal and the client just paid it. I hope that we see a lot of these settlement offers. In several cases, the client has heard nothing from the lender. This does not mean the judgment will just go away.

If a client does not settle, we have to assume that the lenders will place the judgment with a collection attorney and that the client will receive a “citation to discover.” This is served by the sheriff and the client has to go to court to tell what his/her income is and what assets the client owns. The purpose of this is so that the creditor can garnish the wages or take non-exempt assets from the client to pay the judgment So far, I have not had this happen to any client after a deficiency judgment was entered, but that does NOT mean it won’t happen. A judgment is good for 7 years, so time is on the lender’s side.

Can I be arrested due to the deficiency judgment?

No, debtor’s prison, popular in merry olde England, doesn’t exist here. Charles Dickens Dad spent a long time in Marshalsea debtor’s prison, which was the basis for Little Dorrit, a great book/movie. You will not be arrested. The only way that could happen is if you don’t show up to court after you were served a “citation to discover.” The judge has the authority to issue a warrant for your arrest if you are a no-show, so be sure to appear in court.

Will bankruptcy get rid of a deficiency judgment?

Yes, in fact, most clients have filed for chapter 7 to eliminate the deficiency judgment. This knocks out the judgment altogether. The filing fee in a chapter 7 is $306 and attorney’s fees are about $1000.00 so this is a very cost-effective way to solve the problem. If the client has a high income or the assets are over the exemption amount ($4,000.00 of non-IRA assets like checking/savings is exempt, $2400 for a car is exempt) then they have to file a chapter 13, which is more expensive and requires the client to make payments back to the lender over a period of either 3 or 5 years. If payments are completed in a chapter 13, then the judgment is vaporized. Filing a chapter 13 after a deficiency judgment is more involved and expensive than a chapter 7, but it stops collection efforts by the lender and it is the last defense if chapter 7 or a settlement are not possible.

Will I still get a 1099 if a deficiency is entered?

No, you won’t get a 1099. If the lender gets a deficiency judgment, there will be no 1099 (for the difference between the value of the property and what was owed the lender). Note: There WILL be a 1099 if you settle the judgment for less than the face amount without filing bankruptcy.

Will the deficiency judgment hurt my credit?

Yes. Like any other judgment, it will drag down your credit score until it is removed by bankruptcy, payment or settlement.

 

 

Deficiency Judgments popping up everywhere in IL

foreclosures-shortsales, Mortgages, Strategic Default

A few years ago, I wrote a post about how a subdivision in Florida called Lehigh Acres  had so many deficiency judgments entered against foreclosed owners that it should be called “deficiency judgment acres.” Unfortunately, the same can now be said for the Chicago area.

Foreclosure cases are way down in Chicago. They have dropped almost 60% over since last year. But, with the slowdown, lenders are now entering deficiency judgments  against homeowners on first mortgages in droves. Deficiency judgments were rare to nonexistent for the last 5 or 6 years (although they were always allowed by law in Illinois).

A deficiency judgment is a personal judgment against the homeowner for the difference between the market value of the property at the end of a foreclosure and the amount owed to the lender. The lender can try to collect the judgment by filing a wage garnishment or taking non-exempt assets from the homeowner. The only remedy for a homeowner is to settle the judgment, or to  file a chapter 7 or chapter 13 bankruptcy.

In the last 5 years, I did not see a single deficiency judgment entered (on a normal residential mortgage). In the last 4 weeks alone I’ve seen these deficiency judgment entered:

Deutsche Bank $58,000.00 – Lake Co. condo.

Nationstar $50,000 – Chicago house

Nationstar $105,000 – Northwest suburban condo

Citimortgage- $25,000 – Northwest suburban house

Now, any time a mortgage company gets personal service on an owner in a foreclosure case (or substitute “abode” service on someone who answers the door) there is a real risk of a deficiency judgment being entered. If the lender is not able to personally serve you with the foreclosure complaint at the beginning of the case, then a deficiency judgment cannot be entered.

Why are so many deficiency judgment being entered? I don’t know the answer to this. For one thing, the volume of foreclosures is way down. Also FNMA and Freddie Mac have said that they intend to pursue strategic defaulters for deficiency judgments. Chancery court judges have clearly reversed course and now routinely enter them when they previously refused to do so.

So what does this mean to Illinois homeowners who have underwater properties?

  •  Strategic Default is dead. There used to be little to no risk in stopping payments on a first mortgage in Illinois. The 1099 issued at the end of the foreclosure was wiped out by the Mortgage Debt Forgiveness Act. That expires at the end of this year and I doubt it will be renewed. Also, the risk of deficiency judgment is now so high that it makes no sense to stop paying on a mortgage unless you plan to file bankruptcy.
  • Short sales are close to dead too. A favored strategy was to attempt a short sale, because the homeowner could get a release of deficiency from the lender.  But the Mortgage Debt Forgiveness Act is about to expire, meaning the homeowner will have to pay tax on the 1099 after the short sale closes AND if the short sales doesn’t close, the risk of deficiency judgment is way too high to try a short sale.
  • Bankruptcy’s the only route. The only sure-fire way to get rid of a deficiency judgment is to file a chapter 7 or chapter 13 bankruptcy. Chapter 7 is cleaner than Chapter 13, but there is an income limit (called the “means test”) that has to be met and an asset limit. I’ve had to file several bankruptcies for clients lately after deficiency judgments were entered. Chapter 13 bankruptcies are less desirable because the creditors have to be repaid, but the income and asset limits are very broad and most people can easily meet them.

 

By-owner sales are back

Real Estate-Purchases, Real Estate-Sales

 

When the real estate market crashed in 2008, the for-sale-by-owner market died along with it. I’ve handled maybe 3 or 4 for-sale-by-owner transactions in the the last 5 years, But, they are picking up now and I’ve had 5 by-owners in the last few months alone. Recently, a property even sold by-owner using zillow.com’s make me an offer feature. Here’s how to sell by owner:

 

How do I set the selling price?

Look at zillow.com and eppraisal.com and that will give you a rough idea. Most sellers interview at least one real estate agent and get a comparative market analysis from the agent and that will help to set a selling price.

 

What do I do when I find a buyer?

When you find a buyer, you should verbally agree on a price and ask the name and phone of the buyer’s attorney. Don’t sign any notes or scraps of paper indicating what the price is because that could be construed as a contract. Verbal agreements to sell real estate are not enforceable. It is just a way to narrow the issues and reach agreement later in writing.

 

How much earnest money do I request?

I don’t think that large earnest money deposits do anything. Usually the amount is between $1000 and $5000. Earnest money is returned to the buyer if agreement can’t be reached under the attorney approval, inspection or mortgage contingencies. The earnest money is sent to the seller’s attorney after the contract is fulled signed.

 

Is the earnest money check cashed?

I am shocked by the number of people who think that the earnest money check is not cashed. It will be cashed and held in the seller’s attorney’s trust account to be released to seller at closing.

 

Should I fill out disclosures before I get a buyer?

Yes, it is helpful to complete the required disclosures before you have a buyer. Then the buyer can just sign your disclosures with the offer. The required disclosures are: Real property disclosure, lead paint, mold and radon.

 

Who prepares the contract?

Generally, the buyer’s attorney will prepare the contract. The buyer’s attorney send it to the seller’s attorney by email to review. Then the buyer signs it and it is sent to the seller to sign. The buyer signs the seller’s disclosures (completed by the seller in advance) with the offer. I use an esigning program called rightsignature to let buyers/sellers easily sign and initial contract using their computer or Ipad. It works great and everyone gets a final signed copy once it is esigned.

 

How long does it take to get the contract signed?

It will take far longer than anyone wants. Often, it takes up to one week from the time of verbal price agreement to get the contract signed. Some attorneys are stuck in the past and can’t create a real estate contract quickly even though with document assembly software it takes very little time.

 

Who handles the scheduling the inspection, the appraisal and walk-through?

The seller and buyer have to coordinate these times between them.

 

Who signs the contract first?

The buyer signs the contract first and then the seller accepts it.

 

Should I get a mortgage pre-approval letter from the buyer’s lender?

Sure, why not. Many, many sellers tell me how great their new buyer is because he is “preapproved.” This always makes me laugh because I have seen many pre-approved buyers get shot out of the saddle and fail to qualify for a mortgage. In reality, all it means is that the buyer talked to a lender, but there is no guarantee that the buyer will be approved for financing. It’s better than nothing though.

 

What if a real estate agent asks to show my house?

Some real estate agents will agree to show your house, but they will ask you to sign a one-time listing agreement that pays them a commission if their buyer writes an offer. Generally, the agent will want a commission of at least $2000.00 and up to 2% of the sales price. It is negotiable. In the old days (80s and early 90s) this never happened, but is is fairly common now.