Category Archives: Real Estate-Purchases

Help I’m stuck in an Illinois real estate closing and can’t get out!

Mortgages, Real Estate-Purchases, Real Estate-Sales

With the new, red hot real estate market, the length of real estate closings has increased dramatically. In the good old days, closings took 1 hour. Now, we routinely endure closings of 2 to 3 hours.

Why? Well, there’s a lot of reasons and we’ll get to those in a minute. First, here’s what happens at an Illinois real estate closing:

  1. Parties gather. The sellers’ attorney, buyers’ attorney, buyers and real estate agents meet at the title company location selected by the sellers’ attorney. The “closer” is there too and he or she is an employee of the title company whose assignment is to close the loan for the lender. The lender and loan officer usually don’t attend. The sellers rarely attend closing because they presign the documents. Some states handle closings in escrow where no one attends, but in Illinois we don’t use escrows and closings are done with everyone present at the title company.
  1. Buyer signs loan documents. The buyers sign their loan documents and those documents are sent by fax or email by the closer to the lender for “funding.” Funding means that the lender has checked the final loan documents, approved the figures on the final HUD statement, and has given the okay to disburse. Lately, lenders require 60-150 pages of documents to be send back for approval. The entire process of loan funding has pretty much gotten out of hand.
  1. Wired funds are received. The closer checks to see if the lender’s funds and buyers’ funds have been wired to the title company’s bank. At least 40-50% of the time, the lender’s funds have not been wired. Be sure to tell your lender that you expect the funds to be at closing. I have found that lenders do listen to this. (Side note: Title companies are so busy that at least 50% of the time we get no final figure for the buyer prior to closing. We have to estimate the amount and the final figure is a mystery until you get to closing.)
  1. Lender okays final documents and loan is funded. It usually takes anywhere from 30 to 90 minutes for the lender to review the documents and fund the loan. Often, they require picky changes and that slows things down. Some closers wait 60-90 minutes to send the documents to the lender for approval and that will slow things down for sure.
  1. Checks are issued and everyone is happy. Once all of the above happen, the closer issues the checks, gives the buyers their copies and everyone is happy happy.

Some of the reasons closings are slower now that in the past are as follows:

–Title companies are understaffed and overbooked. Real estate was deader than a doornail from 2007 through the beginning of 2013. Now it is up 30-50%, but title companies have not added employees. I recently slogged through the swamp that was a 3 hour closing and our closer had 18 closings the next day. That is not even remotely possible. Given that it took her 3 hours to do my closing, I pity the poor buyers stuck in one of those 18. Most (90%) title company closers are really good and efficient at their jobs. It is not easy. There are a few, though, that are phantoms. If your closer leaves the room and disappears you are in for a long wait.

-Title companies don’t get HUD preapproved. The better title companies will get the HUD closing statement pre-approved by the lender before everyone gets to closing. This will speed up the closing a lot. A closer for a besieged title company will say “I didn’t have a chance to look at the package” and will print out the 150 page loan package from a pdf file and start on it while everyone sits there. Be sure to pack a sandwich if this happens because it will be a long wait.

-Buyers show up late. A surprising number of Buyers show up very late to closing. Last week, at a 9 am closing, we waited 1 hour while the buyer did his walk through of the property. He showed up at 10 am and the closing was a 3 hour blockbuster.

–Loan funding process is fundamentally flawed. The entire process of getting a loan “funded” is a joke that should be revised. The whole thing is self-serving and the lender is trying to protect itself from getting stuck with the loan for some minor defect.

So what can be done to speed things up? If you’re a Buyer, show up on time. Be sure that funds are wired to the title company the day before closing. Insist that your lender wire the funds in advance of closing (not during the closing). The rest is pretty much out of your control, but don’t be surprised if you are at closing for 2 plus hours.

Illinois Deficiency Judgment: Still rare, but it can happen

foreclosures-shortsales, Strategic Default

I had a phone conference with a client whose house in the northwest suburbs was nearing the end of a strategic default. He stopped paying the mortgage about 1 year ago due to a divorce and the fact that the property was $100k+ underwater.

The sheriff’s sale was already done and he wanted me to review the order entered in court that confirmed the sheriff’s sale.

I almost spit out my morning coffee as I read this part of it:

“That there be entered an in personam  deficiency judgment in the amount of $136,000 against the Defendants _____________,  with interest as provided in Section 1508 (e) of the Mortgage Foreclosure Act.”

This meant that the lender, Harris Bank, went through the cumbersome, seldom used process of obtaining a deficiency judgment against the owners. The chances of this happening very slim, but it is allowed by law.

Usually the order confirming the sheriff’s sale says that a deficiency judgment is entered in rem against the property. Seeing this freaks out the client, but the words in rem  are nothing to be concerned about it.  The key words in this order that make it white hot are in personam, because when you see that, it means you have been hit with a personal deficiency judgment.

The client only had a few options:

  1. Pay  the lender.
  2. File a chapter 13 bankruptcy (he didn’t qualify for a chapter 7).
  3. File a motion to vacate the judgment and try to work something out with Harris.

I’ve written before about deficiency judgments and how they are extremely rare except when the bank is a small local lender or if the loan was a commercial loan (used to by an investment property).

This does not mean that the world is ending and everyone will now have a deficiency judgment entered against them. Anyone who has a mortgage with Chase, Bank of America, Wells Fargo, US Bank, Nationstar and the rest of the herd of residential lenders has a slim chance of having a deficiency entered against them. If you have a first mortgage with Harris Bank, I would be very cautious.

To me, this reinforces a couple of things:

  1.  It is almost always a good idea to try a short sale first before moving to a strategic default. Why? Because if the short sale closes, we can usually get a full release of deficiency from the lender, cutting off all liability to the lender.
  2. Deficiency judgments can’t be entered unless the defendant is personally served with the summons at the start of the case. If you are served by publication, no deficiency judgment can be entered. Clients have to be aware of the implication of being personally served with the summons and proceed accordingly.
  3. Filing bankruptcy is your final line of defense. If you have a high income, it is likely that you will have to pay the lender back some or all of the judgment, but if you qualify for a chapter 7, you will not have to pay anything to the lender.

Deficiency judgments in Illinois are still very rare, but they are allowed by law and lightning can  strike.

 

Buying a FNMA foreclosure gets a little more expensive

foreclosures-shortsales, Real Estate-Purchases, Uncategorized

If you buy a FNMA foreclosure, watch out for the fine print.  There’s a new paragraph recently added to the infamous foreclosure rider that could cost you some money.

I’ve written before about how FNMA buys are quirky and about what to watch for when buying one.

Starting in December 2012, the FNMA foreclosure rider that’s required was amended to include this more-than-a-little-overbroad statement:

Par. 10 (e) “Regardless of local custom, requirement or practice the Purchaser shall pay all costs and fees incurred in the transfer of the property, including all lender related costs and recording costs, except as expresly assumed by the Seller in this Addendum.”

This paragraph was not in prior versions of the rider and I don’t know how far FNMA will go  to collect from the buyer.

FNMA has to pay for title insurance, pay the real estate commission and give a tax credit under the rider, so those costs are “expressly assumed,” but that’s about it.  In the closing I handled,  the Seller used Par. 10 to charge  my client for state and county transfer stamps and for the $400 cost of obtaining the paid assessment letter from the association. Both of these costs are normally paid by FNMA. But, due to the brand new rider clause my client was stuck paying them.

There is not much that can done to prevent this, except to change the rider under the attorney approval clause (good luck with that). So all of you FNMA buyers out there, please beware that you might be stuck with some extra costs at closing.

Illinois cash for keys payments increasing

foreclosures-shortsales, Strategic Default

hopslamRecently, I went to a birthday party at a Palatine bar not known for its fine beer selection. I looked across the place expecting to see Bud Light or some other run of the mill offering, but like a distant mirage I saw  the words “Bell’s Hopslam” engraved on a tap handle. This is a world class,  high abv beer and it’s not easy to find. My main emotions were surprise, joy, elation and concern that I would spend the next morning in an iron lung recovering from this happenstance.  Mainly, it was a nice surprise and it made for one fun evening.

Those in the middle of a strategic default or foreclosure may be in for a nice surprise too.  Relocation assistance payments (more commonly known as “cash for keys“) are becoming the norm and the payments are getting larger.

In a foreclosure, the lender is entitled to possession of the property after the sheriff’s sale is confirmed in court. But it  became common practice for the lender to pay the occupant between $1000 and $2000 for the keys to the property. This was done so that the property is delivered to the lender in good, clean condition. The lender would rather not physically evict the occupant because the property may be stripped or damaged by the owner.

Here is what is new in the cash for keys arena:

1. Payments higher. The last two cash for keys arrangements that I worked on were $7800 and $4000 respectively. These required possession in 30 days and a check was given when the keys were delivered. It seems like $3000-4000 is obtainable now, whereas $1000-$2000 used to be about the max payment.

2. Don’t expect an offer until after sheriff’s sale confirmation. Clients sometimes want me to ask for relocation assistance during the middle of a foreclosure. I tell them it’s not possible. The only time a lender will offer cash for keys is after the sheriff’s sale has finished AND the motion to confirm the sale in court has been heard and entered.

3. Real estate agent will leave calling card. I have had little to no luck calling the foreclosure attorney to initiate a cash for keys. They always say “call the lender” which is pretty much a fruitless exercise. Have your ever tried to just ring up B of A or Wells Fargo with no contact person? Not fun. Here is what I see most of the time:  After the confirmation of the sheriff’s sale, the REO real estate agent hired by the lender will put a card or flyer under your door with his or her phone number. They are very responsive when called because they want you out of there so they can sell the property and earn a commission.

4. Most checks are given when keys are delivered. I prefer that the agent give the owner a check at the appointment when the keys are delivered. Most of the time this is was happens. Sometimes the agent says that the check will be mailed. No one likes this. I try to speficy in the cash for keys agreement that the check will be delivered in exchange for the keys and will not be mailed afterward.

5. Can’t always get what you want. About 20-30% of the time the lender will not offer a cash for keys. Often, the REO real estate agent initially will say that no relocation assistance is offered and then will come back a week or two later and offer it. So hang in there and wait a few weeks.

6. House has to be occupied. It is best to leave curtains up at the property and some personal property there. If the house/condo is clearly and obviously vacant, the REO real estate agent may just re-key the property and you will not get a cash for keys payment. I have had 2 instances in the last year when REO agents trotted into occupied properties and changed the locks. They are not supposed to do this. In both cases, when I called them the locks were changed back and we later received cash for keys payments. If the property looks like an abandoned haunted mansion, don’t expect to get a cash for keys.

Masochists guide to buying a HUD foreclosure

foreclosures-shortsales, Real Estate Rental, Real Estate-Purchases

Everyone and their brother is buying real estate to rent to a tenant now because prices are low and the rental market is red hot. Most investors pay cash and buy low priced condos. More and more, I see well-meaning folks choosing to buy HUD foreclosures that are $100,000.00 or less. These are properties that had FHA mortgages, were foreclosed and HUD is reselling them after the foreclosure.

Buying a HUD foreclosure is a quirky mess and much harder than buying a Fannie Mae or Freddie Mac foreclosure, which I wrote about here.

In fact, you pretty much have to be a total masochist to put yourself through buying one of these. I don’t recommend buying one of these as your primary residence. Many of the properties are a wreck and you will have problems with the appraisal (see number 2 below). Only seasoned investors should buy these, and even they should be aware that they are marching into a swamp and should proceed with caution.

Here’s why HUD buys are so painful:

1. Earnest money will be gone if you cancel. I often tell clients that there is no way they will lose any earnest money on a purchase because I watch the date deadlines carefully and I know how to get the earnest back. Scratch that on a HUD buy. It is VERY LIKELY that you will lose your earnest money if you cancel a HUD purchase after the home inspection or later. Generally, the earnest money is only $500 to $1000, but who wants to flush that down the drain? HUD is terrible about returning deposits and if you cancel, the earnest money is toast and most likely you will never see it again.

2. Watch out for the appraisal if you get a mortgage. If you try to get a mortgage to buy a HUD property, most likely the appraiser will find problems with the property and will require that these things be repaired before closing. I recently had a Buyer try to purchase a HUD and the appraiser wanted a structural engineer to check the foundation and required thousand in repairs. That deal was dead on arrival. The problem is that you can’t make the repairs since you don’t own the property and HUD will refuse to make them.  There is a type of FHA mortgage called a 203k loan that you can get to make repairs on the property, but getting a 203k loan is like scaling Mt. Everest barefoot.

3. No attorney approval clause. Your attorney can’t make any changes to the HUD contract. You are stuck with it. It is an “as is” sale. You can’t cancel the contract 5 business days after signing it, like a traditional contract.

4. No title insurance from seller. HUD does not pay for title insurance, so you will have to pay $1500 to $2000 for an owner’s title insurance policy. Normally, the seller does buy title insurance, but HUD buys are different and the buyer has to pop for it.

5. With a condo, you will get stuck with 6 months of the foreclosed owners dues (plus attorney’s fees). Illinois law allows condo associations to charge the buyer for 6 months of the foreclosed owner’s condo dues, plus attorney’s fees. Usually, the seller will pay this (about 65% of the time) but not on a HUD buy. You will get sacked with this extra cost which ranges from $900 to $4000. Freaked out about buying a HUD yet? I don’t mean to be so negative, but I speak the truth here and it is not pretty.

6. You pay for extensions even if it’s the seller’s fault. This is perhaps the most annoying facet of buying a HUD. HUDs often close late, mainly due to the seller’s delay in ordering the paid assessment letter from the condo association if the property is a condo. If the closing does not happen in 45 days,the Buyer has to sign an extension form AND pay for the extension. The payment depends on the sales price and is about $200. The buyer has to do this even if the delay is the seller’s fault. The selling real agent has to handle this chore. If the agent doesn’t ask for an extension, the property goes back on the market and you lose your earnest money.

7. Waiting on the RESPA at closing. Assuming you finally get to closing, you have to sit at closing and wait until HUD signs the RESPA form that has all of the closing figures on it. They will not let you sign it until HUD signs it. Make sure you have three books fired up on your Kindle because you will be waiting for some time my friend.

8. Buyer pays for local transfer taxes. If you buy a property in a town that has a local transfer tax (that the seller would normally pay) like Elk Grove or Schaumburg, you Mr. Buyer will have to pay for and obtain the transfer tax stamp before closing. The seller will not pay for it or go get it.

You are far better off buying a Fannie Mae or Freddie Mac foreclosure (although they have their own quirks), but please be careful with HUD buys.

Mortgage Debt Forgiveness Act extended through 2013

foreclosures-shortsales, Mortgages, Strategic Default

As part of the fiscal cliff bill passed early this morning, the Mortgage Debt Forgiveness Act (MDFA) was extended for an additional year through 2013. It expired on 12/31/12.

As long as your short sale closes before the end of 2013, and provided the property was your primary residence, there will be no income tax due on the 1099 that is issued after closing.

The same will apply to properties foreclosed in 2013. If the foreclosure is completed in 2013 (sheriff’s sale held and confirmed by the court), then there will be no tax owed on the difference between the market value of the property and the outstanding mortgage amount. This will only help owners of properties already in foreclosure. Since foreclosure takes so long in Illinois (14-20 months), you will have to carefully examine if beginning a strategic default makes sense now makes sense or not, because the law will likely expire again before the foreclosure is completed. And who knows if it will be extended again.

 

 

 

Illinois foreclosures speeding up (imho)

foreclosures-shortsales, Strategic Default

The Chicago Tribune reported that the average time for a foreclosure in Cook County was 682 days. That’s about 22 months and it sure seems like a long, long time to me. Plus, that’s the average, so many cases took much longer.

I hate to be a contrarian, but lately my experience is that foreclosures are going faster, not slower.  My own purely unscientific guess is that 14 months is about the norm in most cases.

There are two factors that are at work in determining the length of a foreclosure:

1.) When the bank obtains the Judgment of Foreclosure.

2.) How fast a Sheriff’s Sale can be set up in your county.

I should back up a minute and say that I am only talking about uncontested foreclosures here, meaning that you or your attorney did not file an appearance in the case and you are not actively defending the foreclosure. If you file an appearance in the case, show up to plead your case and/or file contested motions, the case can stretch on for many moons. In Lake County, IL it takes about 8 months to get a hearing date for a contested motion. By the time the parties get to court, no one even remembers what the issue was.

Let’s take a look at the two factors that affect the length of a foreclosure:

1.) When the bank obtains the Judgment of Foreclosure.

The faster that the bank gets a “judgment of foreclosure,” the faster the case will move. The pic below shows a fast moving case. (As you can see, my dream is to be a graphic artist.)

Here the bank gets its judgment of foreclosure before the redemption period expires. The redemption period (the owner’s right to sell the property even though they are behind on payments) has to expire before the sheriff’s sale can be held and the owner officially loses the property.

This pic shows a slow moving case. It’s slow because the bank dinks around and waits until after the 7 month redemption period is over to get the judgment of foreclosure. Doing this extends the redemption period another 3 months and slows the case down. (The redemption period is 7 months from service of summons or 3 months from the entry of judgment of foreclosure, whichever is later.)

 

2.) What county you live in.

In Cook County, the sheriff’s sales are handled by many outside companies, not the sheriff, so the sales are scheduled within 30 days of the redemption period expiring. Like clockwork, your Cook County sheriff’s sale will follow within 30 days of the redemption period expiring, so it is by far the fastest county in that regard. This company seems to handle a large share of the Cook County cases.

Will, Lake and Kane Counties are slow because the sheriff handles the sales and they are still overrun with cases, so it can take 4-6 months to schedule the sheriff’s sale.

So most Cook County cases are on the express track these days, while the collar counties are by and large slower.

GMAC: My short sale BFF

foreclosures-shortsales, Mortgages, Strategic Default

I just closed a short sale with GMAC Mortgage and it only took 3 months to close from the date of the contract. In the normally slow moving short sale world, that’s blindingly fast. So GMAC is my short sale best friend forever. Closing one of these makes up for the many death march short sales I’ve endured with the likes of Citibank and B of A.

My clients bought their home in Pingree Grove in 2006 and paid $250,000. They listed it for a short sale and got an offer for $150,000.00. GMAC short sales are initiated on the online Equator system and they quickly ordered the broker price opinion (BPO) and asked the buyer to raise the price by $5k. The buyer agreed to this and the short sale was approved in about 45 days. GMAC did not ask for a seller “contribution” despite the fact that the married couple selling were both employed and had good incomes. GMAC shorties also include a waiver of deficiency, so the seller is released from liability on the note (which is one of the main reasons to do a short sale in the first place).

When the buyer applied for his new loan, the property appraised $4,000 under the agreed short sale price after the increase. GMAC agreed to reduce the price back down to the appraised price, which was a minor miracle. Appraisal problems are everywhere now and a week does not pass without a property under-appraising, but that’s a post for another day.

GMAC also agreed to extend the initial short sale approval while the buyer finished his loan approval. For some reason, when lenders approve a short sale they put a very short wick on the time for closing, often less than 30 days. In this market, it takes a buyer a minimum of 30 days to obtain financing, so a short sale extension is often needed. Extending short sale approvals can be a mess. I am working on another short sale and the lender did a new BPO when asked to extend the short sale approval and increased the price $10,000 in mid-stream. That was not fun.

GMAC has a simple, final approval process for closing. The final HUD-1 closing statement is uploaded 48 hours before closing and, in this case, it was approved in about 1 hour. The final approval is fast and easy and not the extended nightmare of say, a Wells Fargo short sale.

So if you have an underwater home with a GMAC mortgage, you might consider a short sale. My unscientific guess is that you have an 85% or better chance of closing your short sale quickly and with a full release.

Stripping foreclosed home can lead to a lawsuit

foreclosures-shortsales, Strategic Default

A client called to say that he just moved out of his home in foreclosure and, on the way out,  he took the following:  Stove, refrigerator, washer and dryer.  Not satisfied with taking just these items, he disconnected and hauled away the exterior air conditioning  and put that big whopper in a storage locker. He had moved all the way across the country, so he really had no use for any of this stuff and it struck me as kind of excessive. His lender thought so too.

The reason for the client’s call to me was that his lender had called demanding  the  a.c.  be returned and threatening to file an insurance claim on his homeowner’s policy if it wasn’t returned. I told him to return the a.c.

Increasingly, lenders  will file claims against an owner’s homeowner’s policy if a home in foreclosure is stripped of fixtures. The lender is an additional insured on the insurance policy and is entitled to payment.  Homeowners need to be careful about this because after the insurance company pays the claim, the insurance company will sue the homeowner for the money it paid out.

Generally, it’s okay to take appliances like washer, dryer, refrigerator or stove. When I arrange “cash for keys” agreements for clients at the end of foreclosures, the lender will usually allow the owner to take these appliances along. But taking a furnace, a.c. unit or kitchen cabinets from a home in foreclosure is crossing the line and should not be done unless you want to be lit up with a lawsuit later.

How to combat a 1099 if the MDFA expires

foreclosures-shortsales, Strategic Default

 

 

 

 

 

 

 

 

 

 

I sure hope the Mortgage Debt Forgiveness Act (MDFA) is extended soon, so clients can relax their collective minds. It expires in 4 months.  I thought it would have been extended by now.

The MDFA says that if a homeowner is foreclosed upon or short sells his or her primary residence then no tax is due on the 1099 issued afterward.   For foreclosures, the mortgage amount minus the market value of the property is taxable to the owner under the 1099. For short sales, it’s the total mortgage amount minus the amount repaid in the short sale that’s taxable.

The graphic above from the Chicago Tribune shows that the AVERAGE foreclosure case in Cook County taxes 682 days. So, If you started a strategic default one year ago you have almost one more left to go. Meanwhile, the law is about the change and leave you hanging with one foot over a cliff. A big 1099 will be dropped in your lap at the end of the short sale or foreclosure and that will send many over the financial edge.

Short sales will no longer be an attractive option if the MDFA  expires. It’s great to get a release of deficiency in a short sale, but if a lender is shorted $100,000 after a short sale (not unusual) the owner faces a $25,000 tax bill (at an estimated 25% tax rate). That’s rough. Unless a client can claim insolvency and thereby knock out a 1099, a short sale will make no sense in many cases.

One strategy that will become very popular if the MDFA expires is the surrender of a property in a chapter 13 bankruptcy. This is not a new method of avoiding tax on the 1099, but it will take on new importance if the MDFA expires.

If we lose the MDFA, there will be three ways to avoid tax on the 1099:

Surrender house  in a chapter 13. The law allows a homeowner to file a chapter 13 bankruptcy and surrender the underwater house. This means the owner stops making payments on the house and it returns to the lender in a foreclosure.  It doesn’t matter what assets or income the owner has (there are limits on the size of the mortgage).  The owner does not have to pass the means test required in a chapter 7. The owner stops making payments, files the chapter 13 and stays in the home until the end of the foreclosure. The 1099 is wiped out by the chapter 13 and the owner is released from any deficiency judgment. The owner makes a few payments to the bankruptcy trustee for attorney’s fees and other costs and then is discharged from all liability including the 1099. Sweet, right? The negatives: attorney’s fees are about $3500.00 and the owner’s credit is damaged.  If the client has a second mortgage, there is a chance that the second mortgage company might file a claim that the mortgage is unsecured, but that usually does not happen. Very few clients other than real estate investors needed to use this .  That’s because in Illinois, there are few to no deficiency judgments on first mortgage foreclosures and the 1099s after a foreclosure were blocked by the MDFA, so there was no need to file a chapter 13 for the vast majority of primary residence foreclosures. I look for this to become a much-used strategy if the MDFA goes away.

Insolvency. A 1099 after a foreclosure is wiped out if the homeowner is insolvent, meaning that the sum of all debts is greater than the owner’s assets. I find that many clients do qualify as insolvent, which would mean they would not need to file a chapter 13. This is a simple remedy, but it’s all or nothing. You either are or are not insolvent.
Chapter 7. Filing a chapter 7 bankruptcy will knock out the 1099, but homeowners have to pass the means test which requires a relatively low income. Also, there are asset limits that have to be met. Generally, we use chapter 7s only when the owner passes these tests and has a large second mortgage or only a first mortgage and high credit card debt.

Of these three solutions, the chapter 13 surrender will be only  remedy that works for many clients and should at least be considered when constructing a strategy for an underwater property.