Foreclosures

31August

How To Determine The Market Value of a Home, Part 2

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In Part I of this article we said the market value of a home, like anything in the market, is determined by what a buyer is willing to pay.  Fortunately, in the real estate world there is a standard and proven method for determining “approximately” what that amount might be.  This method is called a “Comparative Market Analysis”, also known as a CMA. Understanding the CMA is essential for sellers as they decide what price to list their home and for buyers, as they decide what price to offer. 

            So,what is a comparative market analysis?  Let’s begin with the first word, “comparative”.  As you have probably noticed, most neighborhoods or subdivisions are made of a group of homes that are similar in age, construction, style and size.  You probably also noticed that each neighborhood is different and unique from another neighborhood and some are more desirable than others.  The first step in determining market value is finding and comparing homes that are “similar” to your home if you are a seller, or similar to the home you are considering purchasing, if you are a buyer.  From this point forward we will refer to your property as the subject property. 

            For example, if your subject property is a single story brick home with 1800 square feet, carpet in the living areas and bedrooms and tile floors in the kitchen, Formica counter tops in the kitchen, light fixtures and plumbing fixtures from the original construction in 1995 and the original standard builder fence that is now 14 years old, then you will need to find 3 or 4 homes that have recently sold in that same neighborhood that have those same amenities.  You will not want to compare it to a home that has been updated with granite counter tops, all new fixtures, wood floors and a new board-on-board fence.  If you do, you will find that the updated home sold for significantly more than the homes that are similar to your subject described above. This is a common mistake many sellers make.  They see an updated home in their neighborhood sell for $200,000 and think they can sell their home for the same price when their home is not really “comparable”. In reality, if they looked at homes that have recently sold that are similar to their home with no updates or improvements; they would discover those homes “sold” in the $175,000-$180,000 range instead of the $200,000 range.  So, it is very important to compare apples to apples when determining the market value of a property.

            Now that you know how to properly compare similar properties, you are ready to look at the actual “market data”, the next word in comparative market analysis.  You will need a real estate agent to assist you with this part, as well as, for preparing a Comparative Market Analysis, because they have access to the market data in the area of your subject property.  Most communities have a multiple listing service (mls).  This is the database system that contains all the properties currently listed for sale with a broker in an area.  Many online sites, which post for sale properties, sometimes pull their data from the local mls.  Once a property is sold and closed, the listing agent changes the status to sold and enters the sold price in the mls for that particular property.  Only real estate agents have access to the mls, therefore, only they have access to the sold data.  When a real estate agent prepares a CMA for you, it will usually be divided into four categories: 

1.    Similar properties that are currently listed for sale.  Actives.

2.    Similar properties that have recently sold.  Solds.

3.    Similar properties that have sales pending.  Pending or Option Contract

4.    Similar properties that have failed to sell.  Expired/Withdrawn/Cancelled. 

             All four categories are important, but the most important category of all is the “Sold” properties.  Comparing similar homes that have “sold” will give you an “average price per square foot” of what homes like your subject are selling for.  The price per sq. ft. is determined by dividing the sales price by the square footage.  For example, if a home was 2500 square feet and it sold for $200,000, then the price per square foot would be $200,000/2500 = $80 per sq.ft.  If another similar home sold for $195,000 and was 2400 sq ft, the price per sq ft would be $81. You then take the price per square foot of 3 or 4 similar homes that sold and average them, to get an “average price per square foot.”  Once you know the “average price sq/ft”, then multiply that number by the square footage of your subject.  This is the approximate market value.  One final note, you should only compare properties that are within 300 to 400 square feet of your subject, plus or minus.   

            Finally, the third word, “analysis.”  A real estate agent analyzes the CMA and all the variables to determine what they think is a good estimate of value for the subject property.  In their analysis, they consider many things like the number of days on the market, how many properties are currently listed, how many listings have expired and most of all, they make adjustments to the 3 or 4 sold properties chosen to make them like the subject.  The analysis part requires the skill of an agent because they know how to make those standard adjustments for amenities, and in addition, they know the local real estate market.  This is another good reason to always use a real estate agent when buying or selling a home. 

            This basic method of valuation is also used by appraisers as they determine the appraised value of a home.  If a home does not appraise for the loan amount, then a lender will not lend you the money to purchase a home for more than its “market value”.  One final important fact about a comparative market analysis is, it is an opinion of value; it is not an exact science.  If you ask three different real estate agents to do a CMA on a subject property, you will get three different opinions.  If they are good agents however, the opinions will usually be close in value.  

I hope this explanation of market value has been helpful.  The CMA gives you an idea of what buyers have been paying in the market, but as I said in Part I of this post, market value is always determined by what a buyer is willing to pay and what a seller is willing to sell for.  If you can understand this key element in the valuation process, you will be a much more educated and savvy seller or buyer. 

 

14July

Facing Foreclosure? 5 Things You “CAN” Do

Many Americans are either facing foreclosure, behind on their mortgage or upside down … owe more than they can sell their home for.  If you are one of those people, here are 5 simple things you “can” do to deal with the issue and find a solution or resolution. 

1.    Don’t Put off Dealing with the Issue.  Or as some would say, “don’t be in denial about it.”  The worst thing you can do if you are behind on your mortgage or facing foreclosure is to avoid the issue and do nothing.  We are going through one of the most challenging financial times in years and becoming paralyzed by fear is not the answer.  In addition, you should be careful to avoid falling into the trap of believing “you’re the only one” or “you’re a failure” because you’re in this situation.  Financial challenges happen to the best of us. The good news is, you can recover and rebuild later.  For now, take responsibility, own up to the situation you’re in and don’t let fear and avoidance control you.  It never accomplishes anything constructive. 

2.    Consult a Real Estate Agent.  If you need to get out from under your mortgage, talk to a real estate agent you know and trust.  Real estate agents are professionals and they can give you an idea of the market value of your home and the actual costs involved in selling it.  Even if your home is not market ready and needs a lot of work, they may know someone willing to buy it as-is … even if it is not in perfect shape.  Real estate agents can also help you be realistic about the value of your home.  If you are truly upside down and can’t sell your home for what you owe on it, they will tell you.  This can be the first and easiest step to taking responsibility and finding out what your options are. 

3.    Seek Advice.  Once you know the market value of your home, the costs involved and whether you can sell it or not, seek advice from trusted friends or professionals like an accountant, attorney or financial planner. Renting your home instead of selling it might be an option, so get some good advice before making a life-changing decision like selling your home.  The hardest thing for many people to do is to ask for help but it’s the BEST thing you can do.  It is much easier to face a challenge of this magnitude with someone else than by yourself.  Think of your favorite stories or movies.  There is always a “fellowship” of some kind.  Frodo and Sam, Dorothy, the Tin Man, Scarecrow and Lion, the four siblings in Narnia.  Don’t try to go it alone.  No one ever succeeds alone.  Get some good advice and support from others. 

4.    Call Your Lender.  If you find yourself upside down and can’t sell your home for what you owe, call your lender and ask them what are your options.  Many lenders are willing to work with homeowners on the terms of repayment.  Some are not, so a phone call to them is essential.  If you have fallen behind on your payments and they are calling you, talk to them … and most of all, don’t avoid them.  If they are uncooperative or have turned your account over to a collection agency, know your rights under the Fair Debt Collection Practices Act (FDCPA).   

5.    Call HomeTelos.  If you truly need to get out from under your mortgage and owe more than you can sell it for, you may qualify for the HomeTelos Loan Exit Option (LEO) program.  The goal of the Loan Exit Option program is to exit your mortgage loan by completing a pre-approved “short sale” at a pre-determined price.  A short sale results when a homeowner sells the home for an amount that is not adequate to repay the mortgage loan, but the mortgage lender agrees to accept the sales proceeds and release its lien. The lender typically accepts the sales proceeds in full satisfaction of the borrower’s loan, thus helping you to avoid a foreclosure on your credit record. HomeTelos LEO Program short sales are pre-approved by the mortgage lender so they are very different from a traditional short sale. Homeowners participating in the LEO program BEGIN with a letter that defines the lender’s loan settlement terms. This letter includes a minimum sales price for the home based on its current market value, thereby avoiding all the delays and headaches of most short sales. For more information on the LEO program and to find out if you qualify, you can call HomeTelos at 1-866-99Telos between 8:00 and 5:00 central standard time. 

Facing foreclosure can be one of the most challenging and stressful events you ever face, so seek good professional advice, take responsibility and don’t try to go it alone.  You need help navigating this situation and there are many options to consider. 

27January

Short Sales – Good Decision? (Part 3 of 3)

In parts 1 and 2 of our short sale blog, we discussed the initials steps in preparing your file for a short sale. Because of the state of the mortgage industry today, many individuals have opted for this route in trying to alleviate themselves of the financial responsibility of a home mortgage. As was noted, this route is usually a great scenario for the homeowner, but the lender is usually less responsive to your requests for a short sale. This is primarily due to several factors: (1) There is an abundance of short sale requests because of the state of the economy, the crater of the subprime market, and the rate adjustment of Adjustable Rate Mortgages; (2) Many loss mitigation specialists are not bonused on short sales rather on loan modifications. Many times these individuals will not assist you from start to finish on a short sale. Rather, your file is held in “suspension” until a foreclosure takes place; (3) The ease of a foreclosure is the path of least resistance many lenders prefer to take rather than allow you to sell your home through a short sale.

When we finished the last blog, we had presented your full file to the lender and they had in turn packaged your offer and HUD-1, your current financial package, and the BPO from a third party. As we discussed, the presentation of a FULL FILE to a lender is imperative. Because of the influx of so many short sales in the market, lenders will often put aside partial files and present full files to the investor. The presentation of a full package to the investor is critical because many times you are racing against the foreclosure clock. In many states it take 6 to 8 months for a home to fall into foreclosure. However, I have seen lenders foreclose on properties in as little as 4 months from the first missed payment. Each state has its own laws governing the steps of a home foreclosure, so it would be in your best interest to research the timeline to eleviate a certain missed opportunity for a short sale.

Once the investor has researched your file, he will more than likely accept the offer. Many times lenders don’t present offers that are off the mark of the third party BPO. This saves everyone time and allows all parties to follow through with the sale of the home. Once the investor has accepted the offer, the lender will then prepare an acceptance letter of the offer. The acceptance letter will be based on the offer that was outlined on the HUD-1 that was submitted with the offer. It is imperative to note that the investor approves the offer based on the information in the HUD-1. Always double check the title officer’s work on the HUD-1. You want to make sure of this because contracts vary from state to state, but the HUD-1 is the universal tool all of them use to approve, deny, or counter a contract.

Generally, the buyer has 30 days from the acceptance of the offer to close the transaction. The items that will need to be collected during the review of the contract are: (1) A current title run by the title office. Because there can be multiple liens (mechanics liens, federal tax liens, HOA liens, etc) placed on a property, it is imperative to have a run sheet detailing a clean chain of title; (2) HOA resale certificate (if applicable). If the HOA has had to mow your lawn or fax a fallen fence, etc., they will many times not issue a resale certificate because of these infractions. These items will of course need to be paid and brought current to sell the home; (3) Communcation of the buyers lender. Because of the current mortgage market, you do not want to jump through so many hoops in the preparation of sale only to find out that the buyer can no longer qualify for the home because he/she has had credit problems in the interim or did not sell their previous home. Remember, the squeaky wheel will always transition yourself into a smooth sale of your home.

I will finish this final blog with a question that I always receive from short sale selling participants: am I going to be responsible for the deficiency between what is owed and what I sell my home for? The answer is: maybe. The reason for this is that it all depends on what your home is classified as: a homestead or investment property or second home. If your home is homesteaded, under the Debt Forgiveness Act of 2007, “…..the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.” (You can read more on this at www.irs.gov). If your home is an investment property or a second home, you will be responsible for the deficiency in the loan. Many times the lender will issue you a 1099-A and will write off their loss. You will then be responsible for the taxes as a result of the sale. Please remember, you will receive a deficiency whether you sell your home in a short sale or you allow it to go to foreclosure. Its much easier to erase late payments from your credit than to erase a foreclosure. Some lenders will place a judgement on your credit. The problem with this is that the judgement goes away in 10 years unless it is renewed. This is usually too much for a lender to keep up with.

I hope that this three part series has been a good tool to prepare yourself for a short sale. If you have any questions regarding the contents of this blog or would like to discuss other options for your home, feel free to contact me at tteichelman@firstpreston.com. Thank you.

29December

Short Sales – Good Decision? (Part 2 of 3)

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In part one of this discussion, I talked about the initial steps that are involved in starting a short sale process. As with all short sales, this option is not necessarily the first line of defense a lender wants to take in releasing the lien and ultimately your financial responsibility in a property. The path of least resistance for any and all lenders is a loan restruction (some use the name loan modification). Although a loan modification sounds like a great idea, most individuals who have either lost their job or the ARM that the lender has placed them in is not the best route to take in relieving your financial responsibility to the lender of your property. A short sale is usually a great option for a home owner who just needs to get out of the loan they are in. With a sagging housing market and lenders going out of business daily, reselling this asset can be tough.

Another item of importance that was discussed in the last blog was preparing the paperwork that is necessary for a bank to approve a short sale. This paperwork includes: the last two years of tax returns, current pay stubs, bank statements, 1099 forms, and utility bill information. This collection of data is critical in that it demonstrates to the lender that you can no longer keep up with the current note on the property. This data is also important in that it shows that you are willing and able to disclose your financial history to the bank to show them that you want to work with them to sell your home so that they don’t necessarily need to take the home to foreclosure.

Once your financial history is gathered and you have put together a detailed financial spreadsheet for the lender, your next order of business is to get the home up on the market. If you have not already done so, contact your listing agent and begin pulling comparables of surrounding home sales in your neighborhood from the past six months. This, just behind the collection of your financial data, is another critical step in selling your home. Many agents who list homes concentrate on listing your home for as much as they possibly can to not only pay off your lien, but to put extra dollars in your pocket. In the short sale scenario, all liens on the property are taken out of the equation. What the bank wants to know is the current market condition of your home. The seasoned listing agent who pulls comps should concentrate on the lower end of the market. This will solve two problems in this tight market: (1) it will bring you a ton of showings and potential offers; and (2) it will show the lender that you have a viable property that can be sold without sending the home to foreclosure.

Of course with a home priced at the bottom end of the market, you will get a lot of investors and individuals who want to place low bids on the property. This is okay. Take ALL offers and submit them to the bank. Before the offer is submitted to the bank, you must accompany it with a HUD-1 settlement statement. This is a universal tool all title companies around the nation use to disclose to both parties, the buyer and seller (and in this case your lender), as to who will pay for what and what the net profits will be at the end of transaction. Contact your local title office and have a title officer prepare this settlement statement. Instruct them to treat the sale of the home as if there are no liens on the property. Once the settlement statement is prepared, submit the signed offer from both the buyer and seller, accompanied with a prequalification letter or proof of funds AND your full financial package to the lender.

An important item to relay to the buyer is that they need to understand that the short sale process is not a fast transaction, it is usually a marathon. If you haven’t already been getting the phone calls from the lenders collection department, you soon will. Keep in mind that the loss mitigation department whom you are dealing with is completely separate from the collection department. The right hand doesn’t necessarily know what the left hand is doing. When you do get a collection call, indicate to them that you are requesting a short sale from the lender and that you have been working with loss mitigation. This may slow the calls, but it certainly won’t stop them.

The next step to the process is another very important step. Now that the lender has received your full file, they will order a Brokers Price Opinion (BPO) on your property. This is done by an independent third party, usually a local agent, who will drive by the property and pull various comps in the neighborhood as a way of indicating to the bank if the offer you are getting on your property falls within what they call “fair market value”. The reason why this step of the process is so critical is that that particular agent or appraiser can float or sink your transaction. If he decides to pull from the top of the market and you have pulled from the bottom of the market, there may be too much variance in the asking price to make the deal go through. This is why I like to meet them at the property to discuss the comps that they are using. This is also why you want to hire the “squeaky wheel” agent because they are the individuals who will meet the appraiser or agent at the property to push for a price reduction based solely off of the comps they pull in the neighborhood.

After the bank has received the BPO from the agent or appraiser, the lender will now put your entire portfolio, along with the third party appraisal into a package, and submit it to the investor for review, and hopefully approval. The investor is the individual who has actually loaned the bank the money for their loan to you. They are the only individual in this case who can approve, deny, or counter the offer on your property.

In my third and final discussion in this series, I will discuss the final phase to the short sale: the closing of the transaction and the long term ramifications of the shot sale process.

10December

Short Sales – Good Decision? (Part 1 of 3)

I have often been asked how I was able to get into the market of short sales. Years ago, when lenders began offering 100% financing on investment and owner occupied properties, I knew (from historical data) there was going to come a time when the market was going to take a shot in the arm. Because of this, any lender who was loaning at 100% or, in some cases, 105% of CLTV, was risking the market position of their investment. Many home owners today are falling victim to this devastating problem in our mortgage market. The lenders answer to this is a multifaceted approach. The following are options each homeowner has when trying to sell a property that has lost value due to tumbling market conditions:

  • Foreclosure. Many costs are involved when a lender forecloses on a property. Not only are there attorney’s fees, eviction fees and the possible cost of repairs to the home, but there is also the possibility of a greater loss when a home sells at auction for well below its market value.
  • Loan Restructure. This may be a great option if the lender is willing to add missed payments to the end of the loan or if the interest rate can be reduced, but if the homeowner is in dire straights, this may not be enough to help.
  • Deed-in-Lieu-of-Foreclosure. This involves signing the house over to the bank. Now the bank has become a real estate broker, with the burden of marketing and selling the home. Most lenders do not want this responsibility.
  • Short Sale. The lender recoups most of the loan for a much smaller loss than other options. It is difficult going this route because account specialists (at the bank) who put your short sale package together may not receive any bonus on a short sale, as they would with a restructured loan.

Our discussion today, and in the next two articles, will focus on the Short Sale.

A short sale, for all intents and purposes, allows a homeowner to place the house on the market for the current market price, which is usually less than the principal of all mortgage loans on the property. This seems to be a good idea, since it allows the homeowner to get out of the mortgage without letting the property fall into the quagmire of “foreclosure” that we hear so much about today. However, banks are surprisingly reluctant to participate in this scenario. Many individuals and real estate agents who have tried short sales in the past have become very frustrated at the banks’ lack of response to requests for this mutually beneficial solution. Most banks would much rather coax a homeowner into modifying the loan than allow sale of the note on a property for what the bank perceives as “pennies on the dollar”. I will be discussing the most proven method of executing a short sale, as judged by my personal success with them — 40% as compared to the 20% industry standard.

Preparing Your Home for a Short Sale

In selling any home, preparation is key – of your representative, your home and your financial statements.

The first step is finding an agent with a proven track-record in closing short sales. Search the internet, interview local agents, ask friends and family, and perhaps even put an ad in the paper (or your favorite online classifieds) to find this special representative. Unfortunately, as you may soon find, very few real estate agents have actually closed a short sale. Any realtor can place a home on the market and submit an offer to the bank, but finding a team to be the metaphorical “squeaky wheel” in the bank’s ear long enough to garner success is quite a challenge. Even still, once you’ve found your winning team, there are still several tasks to do before you can actually list your home for sale.

If you watch HGTV or have browsed the internet, you’ll probably have found the overwhelming storehouses of information that guide you on preparing your home for sale. Many of these sources offer accurate and worthwhile advice — from mowing the yard and tidying the flower gardens, adding fresh mulch and pruning trees, to cleaning out closets and painting. The adage of “less is better” certainly applies to the furnishings inside your home. However, since staging and landscaping ideas are worthy of a separate discussion, we’ll save those details for another time.

Preparation isn’t limited to your real estate team and your house; you should also attend to your financial position. Remember, you are asking the bank to take a loss on their investment, so you must prove that you can no longer keep up with the payments. In fact, most lenders won’t even consider a short sale until you are at least two payments behind. It is imperative to paint a clear and truthful picture when presenting your situation to the bank, since the details will be thoroughly checked. The necessary documents may include (but are certainly not limited to):

  1. current pay stubs
  2. bank statements
  3. income tax statements from the past two years
  4. a balance sheet for your current list of bills
  5. utility bills and credit card statements that show your payment history (and possible delinquency)

You should begin gathering this information as early as possible, perhaps even before finding a real estate agent. I always have my clients collect a full file of financial information because all lenders prefer to have a full package upon submission for a short sale. This package includes the homeowner’s current financial position demonstrated by the items listed above, an offer on the home with the buyer’s prequalification letter or proof of funds, and a HUD-1 statement.

Preparation is a lot of hard work, but it may open doors that might otherwise remain closed and locked. In my next article, I will discuss the next steps in a successful short sale — the offer — as well as taking a closer look at what needs to be delivered to the lender to expedite the successful and positive handling of your file.