January 8, 2009

Today’s Real Estate

Clarity for today’s sellers

By Donna Nardi
Special to the Times

Today’s housing market reflects the result of choices made by many home buyers several years ago. This has resulted in a variety of listings on the market – many of which can be confusing. In this article, we will examine the various types of listings and sales, and how to navigate through each unique transaction to a successful close of escrow.

The early 2000s saw falling interest rates, which netted an historic amount of homebuyers, too often offering a higher price than they could realistically afford long term.

In 2005, approximately 40 percent of all home sales closed with no down payment. Prices increased at such a high rate, many homebuyers falsely believed the market would continue at that rate, but the market couldn’t sustain itself long term. In 2007 more than nine million loans readjusted to a higher rate. With so many homes without home equity to support the falling home prices, choices were too often made for the homeowner. Instead of being a homeowner, the homes owned the families in them.

The choices
It’s not unusual for a seller who is “upside down” to try to sell the home themselves with a “For Sale by Owner” (FSBO) effort. In today’s depressed market with an excess of inventory, the chance of success is slight and every day wasted is money spent. A better choice is to hire a professional realtor to market the home properly. This affords maximum exposure, using a host of Internet databases, as opposed to hanging one sign in front of the home, with only drive-by exposure.

Banks want homeowners to keep their homes. By showing the bank you’re a good long-term loan risk, a loan modification can often be the simplest, yet best solution to a homeowner’s dilemma. Begin with calling your lender, as each lender will have its own criteria.

A short sale is when the value of the home is less than what the homeowner owes to the lender, and the loan servicing company allows the home to be sold at a lower price than what’s owed. While this can be very complex and trying for homeowners, the advantages can be worth the extra effort. A short sale will impact your credit score much less than a foreclosure, and allow you to purchase another home sooner. Several tips for a short sale include:

* Hire a Realtor who understands the process – preferably with short sale experience.

* Be patient – short sales generally take longer to close than conventional sales.

* Be sure you don’t have a pre-payment penalty attached to your loan.

* Be aware - if you have more than one loan, you will need to deal with each one.

* The first lender (first position) is usually more negotiable than the second lender.

* Stay in constant contact with your Realtor, and be the sure buyers’ loan is pre-approved.

To get started, you will need to contact the bank’s loss mitigation department. This group decides whether to accept a short sale. Generally, you will need to provide the lender with W-2 forms, bank statements, two years of tax returns, and other financial documents pertaining to income and debt. The bank will also need a broker’s price opinion (BPO) or a price comparable to show the estimated value of your home. The seller should also provide a letter to the bank, giving permission to speak with the realtor or anyone necessary involved in the short sale transaction.

The ideal short sale candidate will still be making loan payments, and have credit worth preserving. However, often, the homeowner has stopped making payments, and the lender will begin calling, offering to assist them with a loan modification, or forbearance agreement. It’s a big mistake to ignore these calls, as this will leave the lender little choice, but to begin foreclosure proceedings.

In California, we have non-recourse loans, meaning the lender cannot obtain a deficiency judgment against a seller for the loss incurred after the property is foreclosed or sold as a short sale. This applies only to owner-occupied homes, not investment properties.

Until the Mortgage Forgiveness Debt Relief Act of 2007 (HR3648), sellers were often obligated to pay taxes on the amount of the mortgage forgiven by the lender. This act is available through 2012. Consult your CPA, or go to www.IRS.gov for more information

The reason a lender will accept a short sale is that it makes financial and business sense. They would rather lose some money now, instead of losing more money later on by going through a foreclosure. The realtor will need to show the bank hard numbers to support a price reduction as often as necessary when the existing price is too high to attract buyers. Today’s buyers are savvy, and won’t purchase a home priced too high by today’s market standards.

Some Realtors will tell sellers they can short sell their home, and walk away owing nothing. This is just not true. If the home’s value is especially low, compared to the current mortgage debt, your lender may not agree to a short sale at all. Or you may need to sign a promissory note, agreeing to pay a specific amount to the lender within a specified time.

Again, each transaction and lender is unique in their requirements. Once a buyer makes an offer, and the seller has accepted, the lender will have the last word, and accept, refuse or negotiate a higher price. Although the lenders are improving with experience, this can be a long and frustrating wait. Have patience.

Increased short sales will reduce or eliminate the need for taxpayer bailouts.

While many lenders refuse to, another option if you’re in default is to consider giving back your property “voluntarily” to your lender. Yes, you’re losing your home, and your credit will suffer, but it’s less negative than a foreclosure.

Foreclosure
This is the least desirable option, but sometimes unavoidable. The damage to your credit can be as long as 10-12 years, and can be a number of years before you’re able to purchase a new home.

Once a homeowner is unable to pay their mortgage, the first step of foreclosure is for the lender to record a Notice of Default, and make a public notice. This allows 90 days for the homeowner to find a buyer for their home. If no buyer is found, the lender will issue a Notice of Trustee Sale, which will last another 20 days. Normally, the seller can bring a buyer to the table up to five days before the Trustee Sale to circumvent the sale.

The Trustee Sale in Santa Clara County is an auction on the courthouse steps. Today’s problem: the bidding starts at the current mortgage arrearage amount, plus fees. Since home values have dropped so drastically, it’s nearly impossible to find a buyer for the required higher amount. In that case, the home will foreclose, and become a bank-owned (REO) property. These properties will eventually be offered for sale on the local Multiple Listing service. And so, the cycle continues.

Due to increased loan modification activity, foreclosures have dropped significantly, 39.1 percent as of November 2008.

But It’s Not Selling!
Certainly, with the higher inventory of homes, there are no guarantees your home will sell at a higher price in a short amount of time. But, there are a number of practical ways that will help to get your home more attention, and more offers faster.

—Get the home “squeaky” clean.

—Be sure the home is in good repair.

—Curb appeal – walk around the house and across the street to see what buyers are seeing as they drive by. The goal is to “invite” buyers in.

—De-clutter. We don’t live in the home the way we sell a home. The home needs to be showcased to its best possible advantage. You may not be able to hire a “stager,” but you can certainly work with someone who has flair, or a good eye. Often your realtor is a good resource.

—Pricing. It may be necessary to drop the price to entice more buyers. It’s best to price at or near fair market value, and go from there.

As a rule of thumb, put more effort and less money into the home, especially if your reason for selling is a financial one. Sometimes, painting just one wall in a room a warm color will jazz it up perfectly. And remember, less is more.

Whatever the reason for selling, buyers are out there – there are often multiple offers on homes in good condition in good areas. Investors are getting in on the “bargains,” and first-time buyers are finally able to afford their very own homes. Listen to good, sound, professional advice, and keep an open mind. Handled correctly, there’s a buyer for every home.

Note: Not intended as legal or tax advice. Seek counsel from an attorney or CPA for your particular circumstances.

Donna Nardi is a Realtor, Accredited Staging Professional, and Senior Real Estate Specialist with Prudential California Realty in Willow Glen. You may reach her at (408) 918-4410, or donna.nardi@prurealty.com, or www.HappyWayHome.com.