Sweet Home Chicago

Bankers/Lenders Holding Up Real Estate Market Recovery - Part III

Please read my prior two posts for more on this topic.

The Foreclosure Dilemma

When a bank forecloses on a home, the homeowner is usually in a very bad financial situation.  They didn’t just wake up one morning to find their banker knocking on the door to take possession of their home.  In Illinois they usually have missed at least a year of payments before the bank will actually move forward with the foreclosure process (though by that time they have already sent several legal notices and warnings).  So it should not be a surprise to anyone that some of these home owners go take unusual steps to get some cash.  It is not uncommon to find a bank-owned home that is missing things like doors, door knobs, appliances, lighting fixtures, etc.

I was working with some buyers that found a terrific bank-owned home that was in fairly decent condition, except for the kitchen.  The former home owners had hired someone to remove everything from the kitchen and sell it so they could get some cash.  All that remained in the kitchen was the walls and hookups for gas, water and electricity.

My buyers were actually happy about the kitchen because they were planning to start building their dream kitchen immediately after the closing.  Unfortunately, their financing fell through just days before the closing.  The bank they were working with denied the loan because there was no kitchen in the house!  The buyers were willing to put money in escrow for the kitchen build-out, but that did not change the banks’ position – no kitchen, no mortgage.  I’ve learned that this is a fairly common issue these days when people try to purchase a foreclosed home.  And of course the bank that owns the property has no plans to put in a basic kitchen in order to get the house sold.

The only buyer that will be able to purchase this home is someone that has cash or someone that can get a construction loan.  I’ve learned that a construction loan requires a higher down payment and has a higher interest rate than a conventional, FHA or VA loan.  There does not appear to be a lot of buyers in this market that are in a position to get a construction loan.  And so this house will continue to sit on the market and the neighbors will continue to be concerned about the vacant home on their street, and the bank that owns the property will continue to rack up holding costs while the value of the home continues to decline.

Why can’t someone at one of these banks make an exception to their rules in order to get this house off of the market?  The bank that owns the property can put in a few basic appliances, cabinets and a sink, and then the home will sell and they can get it off of their books.  Or, why can’t a bank give a mortgage to a qualified buyer that is willing to put money in escrow for the kitchen build-out?  The buyer doesn’t want/need a construction loan – they are just building a new kitchen.  I really don’t see how  this is different from a home that has a very old out-of-date kitchen that a new buyer is going to rip out and re-build.  I just sold a home like that – they buyers are going to re do the kitchen before they move in.  If anyone knows why this is a GOOD reason to block the sale of a home, I’d love to hear about it.  It makes absolutely no sense to me.  And given all of the foreclosures out there in the same or worse condition, there has to be some logical way to get new owners into these homes quickly.

Your comments and insight are welcome!

Thank you for reading!

Bankers/Lenders Holding up Real Estate Market Recovery, Part II

As a real estate agent the scenario that I described in my last post is very frustrating on a personal level.  Many agents, including me, find themselves going through the sales process multiple times for each buyer.  Unfortunately, we only get paid when there is a transaction.  This is a real hardship for the agents. 

Unfortunately the real "crime" here affects the whole market.  There are many of these short sale properties sitting on the market and the banks still have not figured out how to improve the process so that these homes can be sold in a timely fashion.  It is perfect example of the lack of understanding the banks have for the real estate market.  Once a buyer finds a home that they want to buy, they are not usually willing to wait for several months to find out whether or not they CAN buy it. 

Here is my next story about "banks behaving badly"

The Short Sale Side Step

I was representing a seller of a short sale property.  We had several offers that were very low, and then finally one offer came in that was more reasonable.  We sent the offer into the bank with the short sale package.  In this case there were two banks involved (1st mortgage and second mortgage).  After months and months of negotiation with both banks about a short sale deal that would be acceptable to everyone involved, we finally had a deal.  But then in the 11th hour, the bank with the first mortgage backed out of the deal and decided to just go forward with the foreclosure instead.  Why?  Well, it turns out that someone in managment at the bank with the 1st mortgage decided that they didn't want to do a deal with the other bank - they didn't "like" them and didn't want to do business with them! 

And now the house is foreclosed and the value has gone down further (it is almost 10 months since the original offer, and about 5 months since the bank denied the short sale).  They former owners are about to move out, and the home will be vacant.  The buyer from the short sale still wants to purchase the property and has asked me to represent him.  He would prefer to buy it as soon as possible so that the amount of time that the property is vacant is minimized. We submitted a written offer to the bank immediately after the foreclosure for the same amount as his offer 10 months ago.  (Now that the property is foreclosed there is only one bank to deal with.)  Since there is only one bank, and my buyer offered to pay ALL of the closing costs for both sides, this would be an incredible deal for the bank.

And, to our amazement, the bank declined the offer.  The department that we were dealing with tossed the file to another department and is letting them handle the next steps.  They made it sound like they didn't want to have the loss on their books, so they are pushing it off to another department.  It appears that the bank is going to list the property with another realtor (not from the area) though I have not been able to confirm.  This is not over!  In the end, I am certain that the bank will have lost much more on this home than they would have if they had taken the original short sale that was offered or the more recent offer immediately after the foreclosure.  Meanwhile they have had to pay property taxes and if the property is listed they'll have to pay commission to two Realtors instead of one, not to mention closing costs.

Tomorrow, another tale of bankers' misguided actions...

Thank you for reading!

To see any home for sale in the Chicago area click here.

To get information on foreclosures anywhere in the USA click here.

Bankers/Lenders Holding up Real Estate Market Recovery

You've heard that the inventory of bank-owned home is at an all-time high, and that it is going to grow even more in the coming months.  And, you've heard that this is going to cause prices for all homes to remain low and possibly decline further.  But what you haven't heard is that the action (or inaction) of many banks is preventing the timely sale of these properties and making the problem much worse than it needs to be.

Over the next couple of days I will be sharing some examples of the irrational and inept behavior of some banks that I have encountered. Here is the first one:

The Short Sale Shuffle

My buyers put in an offer on a home that is a known short sale (owner owes more to the bank than the property is worth).  The homeowner accepts the offer and then submits the offer and a short sale package to their bank that holds the mortgage.  The short sale package is documentation from the homeowner to show that they cannot make up the difference between the contract price and the amount owed to their bank.  The next step is to wait for the bank to approve or disapprove of the short sale.

Typically the banks are taking as long as 3 months to make this decision.  So what happens during this waiting time?  The buyers find something else to buy.  This has happened to me several times - I end up "selling" the buyers two or even three houses before they actually make it to the closing table. 

And what happens to the short sale homes? After a while, if the owners are having financial difficulties and they cannot get a short sale to stick (in part because the banks take so long to make a decision), then the home ends up in a foreclosure.  I've seen several foreclosed properties that have been vacant for an extended period of time before the banks put them on the market.  By then the homes have fallen into disrepair (most typical issues around here are mold and/or water damage) and the value plummets.  Eventually the bank sells it for even less than they would've gotten at the short sale, and they've also had to pay additional holding costs including property taxes and utilities.

In my opinion the banks are shooting themselves in the foot by not getting on the ball and making these short sale deals a priority.  Also they need to be more realistic in determining what price they will accept for these sales.  They can hire and train temporary staff to get the work done in a timely fashion - I am sure that there are plenty of unemployed people that could be trained to do this AND I am sure this would have a better impact on their bottom line than the status quo.  While it is true that they are losing money in the short sale scenarios, by the time a property goes through foreclosure the losses are even greater.  The goal should be to minimize their losses.

Thanks for reading! Your comments are welcome.

By the way, if you are interested in foreclosed properties, go to my new site:  North Shore Foreclosures to get info on foreclosures anywhere in the country. 

Deed in Lieu of Foreclosure - defined

I've said this before, but it should be repeated.   I'm not a lawyer, and I've never even played one on TV.  But in this unusual real estate market, I am learning very quickly about all the different ways that lenders and sellers can reconcile a mortgage agreement gone sour. 

Deed in Lieu of Foreclosure is when the homeowner basically throws up their hands before the foreclosure process even begins, or maybe during the early stages when they've missed some payments, and just hands over their home to the bank.  This skips the foreclosure process and allows the homeowner to just move out and get on with their life.  In some situations homeowner can negotiate the timing of when they will actually move out.  The one catch is that you've got to try selling the home before the bank is allowed to go forward with Deed in Lieu of Foreclosure.  I'm not sure why this is the case, but apparently that is the law.

I learned about this because I have two properties that I am trying to sell that may end up back in the bank's hands (via Deed in Lieu of Foreclosure) if I don't sell them within 6 months.  Both owners owe more to the bank than the properties are currently worth, so they are both short sales.  You can check out my archives for previous posts on short sales if you want more information on that.

Short Sale in Highland Park - 2206 Kipling 

Short Sale - Vacant Land on Westview in Des Plaines   

Contact your lawyer if you need more information about your particular situation.  Or, I know two lawyers with expertise in this area - give me a call for a referral: 847-226-5594

As always, if you know someone that is thinking about buying or selling a home, please have them give me a call.  To search for any property for sale in the Chicago area, go to my website.

Thank you for reading!

nsk

Short Sale Advice for Buyers

Most home buyers right now are looking for bargains.  And, there are plenty of them in the Chicago area - the North Shore is no exception.  The best bargains are "distressed" properties, here are the most common situations: 

• Bank-owned properties - These are homes that the banks had to foreclose,  and yes the North Shore is not exempt from foreclosures.
• Short sales -When the owner owes more to the bank than the property is worth on the current market it is a short sale.  The owner must either come to the closing with money to make up the difference, or they must prove to the bank that they have a hardship and cannot make up the difference.  If the seller cannot make up the difference, then the sales contract and all terms of the sale must be approved by the bank.  Since the banks really aren't in the real estate business, depending on the bank, the purchase process can be lengthy.
• Bankruptcy - The homeowner has declared bankruptcy and the sale of the home is being directed by the court system.

In general any distressed property will sell at a price below the market value.  This is particularly true in those cases where the property is not in good condition.  For short sales, the lower market value reflects the added inconvenience of purchasing a home that is a short sale, even if the home is in relatively good condition. 

If you are interested in purchasing a home that is going to be a short sale, here is what you need to know:

• The short sale process takes longer than a normal sale.  It  also takes longer than purchasing a bank-owned property or a home being sold for bankruptcy.  If you want to purchase a short sale, be prepared to WAIT between 30 - 120 days for the bank to approve the purchase.
• Do not wait until the bank approves the deal to do your own due diligence. You should have  home inspection immediately so that you can decide whether or not you want to go through with the purchase (usually these sales are for the property in "as is" condition).
• Ask if the homeowner's bank is offering special financing.  One bank that I am dealing with offers 4% mortgage rates to buyers that are purchasing their short sales.  Buyers still need to qualify with strong credit score and a downpayment.
• Hire a lawyer that has a successful track record with short sales.  You need a pro-active attorney that will work hard for you to make sure that the sale makes it to the closing table.  Some real estate lawyers just sit back to wait and see what happens with the bank - if your lawyer does this, the sale will most likely fall through.  Your lawyer needs to be in touch with the seller's lawyer and the bank to make sure that the process is moving forward.  The banks are inundated with short sales and foreclosures and it is very easy for these deals to fall through the cracks if at least one of the lawyers doesn't know how to work with the banks.
• Once the sale is approved, you will need to be ready to move quickly.  Typically, after the sale is approved, the bank will want the transaction to close within 30 days. This is another reason that you need a pro-active lawyer that can move quickly to make sure that nothing falls through the cracks.

I have a property for sale in Highland Park right now that is a short sale. This particular home is in great condition, and has had many updates.  Click here for more information on this home.

Thank you for reading.

nsk

Short Sale Basics for Sellers

The first thing you need to do if you want or need to sell your home is to determine the likelihood that it will be a short sale.  The formula for this rather straightforward – the difficulty lies in determining how much your home will sell for in this situation. 

Let’s start with the “easy” side of the equation.  Add up all of the expenses related to selling your home, including the following:

• First mortgage
• Home equity line, if any
• Real estate taxes due for prior calendar year(s)
• Estimated real estate taxes for the current time period, up to the date of closing
• Any other liens on the property.  (If you had some work done on your home and you didn’t pay the contractor or other service provider, they may have put a lien on your property.)
• Lawyers fees, real estate sales commission
• Miscellaneous closing costs including survey, title fees, etc. (contact me for a detailed list)

Then you need to consider what your home will sell for in the current market.  Bear in mind that if you are in a short sale situation, the home will sell for less than a comparable home that is not a distressed property.  For buyers, purchasing a home through a short sale has a lot of uncertainty and risk.  So, they expect to save some money on the purchase.  In general, banks appear to be approving short sales at prices that are around 90% of the current market value.  Use this as a rule of thumb, not as fact.

The best way to determine what the home will sell for is to work with a Realtor who is familiar with your neighborhood.  There are some on-line resources that you can use as a starting point, such as www.zillow.com, to roughly determine market value.  However, the computer-generated models used by Zillow and other value-estimation web sites cannot replace the insight and expertise of a Realtor.  These programs utilize publicly available information on homes that sold, but they cannot take into account the condition of the homes, recent updates, and location factors such as busy streets, train tracks, walk-to-town, etc.  Your local real estate agent will have a lot of information on all of the variables that will affect your sale price.

As a seller of a short sale property, you should try not to be personally sensitive about the price.  At the end of the day, you will not see any proceeds from the sale.  Your objective is to sell the house for a price that the bank is willing to accept to pay off your debt to them, and to any other lien holders.  In fact, if you are in default on your mortgage, or at risk of being in default, then you will need to price it low enough to ensure a quick sale and avoid foreclosure.

When the expected sale price is less than all of your anticipated closing costs, then you will be in a short sale situation.

The next step is to assess your financial situation.  If you have the financial means to make up all or some of the difference between the short sale price and the closing costs, the bank(s) will insist that you do just that.  On the other hand, if you cannot make up the difference, then you have to go to great lengths to prove that to the bank(s).  Once you have a buyer the bank(s) will require that you complete a short sale package.  This may include any or all of the following:

• Tax returns
• Pay stubs
• Letter describing your hardship, explaining why you can’t bring any cash to the closing
• Authorization for you lawyer and/or Realtor to speak with your mortgage holder
• Bank statements (NOTE: Banks cannot require you to use your 401K funds to make us short fall on a short sale)
• Complete investment information
• If you have your own business, you will need detailed documentation of assets and liabilities.

If you have two liens...  If you have both a mortgage AND a home equity line with different lenders, the short sale process becomes a bit more complicated.  After you find a buyer, then the short sale needs to be approved by TWO lenders.  The first lender's goal is to minimize their loss on the loan, and will not be willing to allow a large amount of the purchase price to go to the second lender (the home equity line).  However, the property cannot be sold if there is a lien on it.  So the second lender does have the right to demand some payment at closing.  Here is an example of a typical deal that the second lenders have been getting:

• Cash at closing for small percentage of what is owed.  For this payment, the second lender will release their lien on the property so that the closing can actually take place.
• The seller signs a promissory note for 10 - 25% what is still owed to be paid out over a fixed time period (maybe 10 years) at no interest. (Use these numbers as guide, these will vary depending on how much is owed.)

Forgiveness of debt can be a huge benefit of a short sale.  Be very careful and ask a lot of questions about this.  Right now if the bank(s) forgive your deficient balance you will receive a tax form from them reporting this amount of money to the Federal Government as income.  However, for 2009 tax year in many situations you will not have to pay taxes on this amount.  I am not sure what will happen next year. Consult your tax adviser for more information on how this works.  

The most important piece of advice I can give you is to work with a lawyer that has plenty of experience with short sales.  You need a lawyer that is going to go to bat for you and work out a deal with the bank(s).  This isn't easy and not all lawyers, and not even all real estate lawyers, are willing to put forth the extra effort required to make this happen.  You also need someone that is going to take the time to make sure that everyone involved is kept informed on the status of the deal.  Many short sales fall apart because the buyers get tired of waiting and waiting to find out whether or not the banks are going to approve the deal.  They want to know what is going on, and they are starving for information.  If they don't get any information or updates, then they cancel their offer and find another house.  Call or send an email to me - I have found a couple of terrific attorneys that can help you out.

Thanks for reading.  To see all homes available for sale in the Chicago area click here.  You can also find info on homes that already sold, open houses, and much more at the same site.

nsk

Short Sales 101

Over the past several months I have had a lot of first-hand experience with short sales.  So now I am ready to share what I've learned with my readers.  I am not a lawyer, so don't take any of this as legal advice (I can refer you to a couple of terrific lawyers who can help you with your specific situation).  I have consulted with several lawyers that are experts in this area - so I will share with you what I have learned from them and from the school of hard knocks.

First some definitions and explanations:

Short sale- In real estate, a short sale is when a piece of property is sold and the amount of the sale does not cover the outstanding mortgages AND all of the closing costs, including things like real estate taxes, state and local transfer taxes, condo association dues owed, commission to Realtor, lawyers fees, etc.  In today's market some of the properties that are being sold short are at risk of foreclosure.  It is important to understand, however, that NOT ALL SHORT SALES are at risk of foreclosure.  If the home owner has been paying their mortgage and home equity loan in a timely manner and their real estate taxes are current, then they are just "victim" to the market which is experiencing declining real estate prices.

Foreclosure - Basically foreclosure is the process whereby a bank or lender can repossess your home due to non-payment. Foreclosure laws vary from one state to the next.  Anything I am writing about is with regard to Illinois.  In Illinois the foreclosure process can take about 9 months, start to finish.  In some cases it can go much faster, or slower, depends on the situation.   The homeowner has several opportunities during the process to turn thing around - but don't wait until the last minute to try to do that - contact a lawyer as soon as possible if you have been notified by your lender that you are in default.  I will write more about foreclosures and the process in another post. 

Deficiency Balance - This term describes the difference between the amount of money that the home owner owes to the bank and the amount of money that the bank will receive at the short sale.

Short sales and forgiveness of debt

Just because someone's home is worth less now than when they purchased it, doesn't mean that they can just sell it with a short sell and walk away with no obligations.  The bank(s) won't let people off quite that easily.  Home sellers have to PROVE that they do not have the means to make up the deficiency balance.  The banks can and do expect sellers to come to the closing table with a check to make up the short fall.   If the seller does not have the funds to do that, then they have to prepare a short sale package for the lender. Usually there is a form to fill out, and plenty of supporting documentation, including pay stubs, financial statements, credit reports, etc.  And the seller usually has to write a "hardship" letter - this is a letter that describes why you can't come to closing with a check for the deficiency balance.

Typically if there is one bank involved (no home equity line, or the home equity line is same bank as primary mortgage) and they approve the short sale, then they will also forgive the deficient balance.  However, this deficient balance is reported to the government as income.  In the past people had to pay income taxes on this income - right now there is law in place that waives the requirement to pay income taxes on forgiven balances...but I believe this is a temporary situation through the end of 2009.

If there is a separate bank involved with a home equity line on the property, things get a little more complicated. I will write about that in my next post.  Also, coming in a future posts - what you should know about buying a property with a short sale.

Thanks for reading!!  If you have questions, feel free to post a comment or contact me directly.

nsk

To view all homes for sale in the Chicago area click here.

I am listening to you!

To my subscribers:

Yesterday after posting my "Death of a Shortsale" article, one of you commented that the series of articles I worte on short sales were confusing. They suggested instead that I focus on the key things I've learned first hand about the short sale process and share that with you, my loyal readers, instead of the blow-by-blow details of how I learned it.

I deleted the article posted yesterday as soon as I received that feedback. (Although I really liked the title of the post - made me think about poor Willy Loman, the main character in Death of a Salesman, waiting for his next sale.)

And now, immediately after I post this message, I will delete those prior posts from my blog and then begin to provide lessons learned and insights for you.

Thank you for reading!

nsk

Foreclosures and Real Estate Taxes

At our weekly office meeting this week we had a few guest speakers talking to us about the process of assessing residential real estate for tax purposes.  During this session I realized that many people are confused about foreclosures as they relate to real estate taxes.   There were some folks in the room that believe that the higher than normal foreclosure rates are going to cause an increase in real estate taxes for everyone else.  They seem to think that homes that go through foreclosure don't have to pay their real estate taxes...and so everyone else has to make up the difference.

So, I decided to clarify this issue for my readers.  There is one eternal truth with regard to residential real estate.  Uncle Sam always, always, always gets paid first.   When there is a foreclosure, the home usually goes up for sale at auction.  If someone buys the home at auction, then they are then liable for all real estate taxes due.  If no one buys the home, and the bank/lender takes possession of the home, then the bank has to pay the real estate taxes.  The same is true of a short sale; any real estate taxes due are paid out before the lender gets any of the proceeds from the sale.

This isn't my area of expertise, but I can tell you that foreclosure isn't the only way you can lose your home.  If you don't pay your real estate taxes for several years, you can bet that the government will put a tax lien on your property, and maybe even force you out of your home so that they can collect their money (the specifics can vary by county and/or state - there is plenty of info on-line for specific jurisdictions).  In fact, if you don't pay your federal income taxes, the federal government can put a lien on your property for that too. 

This just came to me - this is ironic - some of the TARP dollars that go to the banks could be used to pay taxes that distressed home owners couldn't pay!

Thanks for reading!

nsk