How can lender back out of deal, and where did deposit go?

Friday, January 11, 2008

Q: I put a bid on a home that was subject to a short sale early last month. I was told by my Realtor that it could take a little while before any decision would be made.

After calling my agent once a week for three weeks, he now tells me that the home went into foreclosure even though the seller wanted to sell the house, and I was told that my offer was gone.

The agent I was working with has now changed to a different real estate company. Somehow I feel that either my Realtor or the selling agent just wasn't aggressive enough in pursuing this deal. How can my offer just "be gone"? How can I still purchase the home? Do I ask for my earnest money back? Do I follow my original real estate agent to his new company? I am so very frustrated by this whole deal. I just don't think that it was handled well.

A: You certainly do have lots of issues with your attempted purchase of a home. But let's start with a little bit of understanding about the tempestuous real estate market that exists in most of the country today.

In some parts of the country, real estate values have come down significantly; homes are sitting on the market for months; mortgage lenders and home builders have gone out of business; and some homeowners are having problems keeping up with their mortgage payments.

The homeowner you were trying to buy a home from had probably not made a payment to his lender in many months. The owner was trying to get himself out of the mess and hired a real estate agent to sell the home. You found the home and you were willing to buy it. However, what you offered for the home was probably less than what the owner owed to the lender. The owner was short funds to sell the home. These circumstances gave rise to the "short sale."

But just because there is a deal on the table doesn't mean the lender is required to accept the short sale. The lender can take its chances, foreclose on the home and sue the owner for any deficiency in funds that the lender gets from the foreclosure.

There are newspaper reports of homeowners and other real estate practitioners attempting to get lenders on the phone for days at a time without success. Even if someone picks up the phone, it may take several tries to get through to the right person.

You deal may have fallen into this hole. Although we're not suggesting your agent did everything right, even the best agent might not have been able to do anything if he or she couldn't get through to the right person.

Unless you have other information about your agent and the seller's agent, you might want to cut them some slack. In this marketplace, they would have been delighted to have gotten everything together to make the sale.

Unfortunately, it didn't work out. Most likely, it wasn't that you weren't serviced properly but rather that market conditions didn't work out in your favor. Your offer wasn't really gone -- it just didn't go anywhere. The owner might have been willing to accept it but without the lender's agreement to the short sale, you would never have been able to buy the home.

The only apparent customer service flaw is that no one stayed in touch with you to let you know what was going on. That's a big problem, especially in today's market. Agents have to stay in touch with their clients during the offer and negotiation phase, so that everyone knows what's going on.  Numerous times this year, I have had to give my short sale clients an daily update report that told them I made no real progress that day.  I called for four weeks before we discussed moving on to another property or keep trying for another 4 weeks.

If you liked your agent, you can follow him to the new company he moved to. If you didn't like him or you don't feel he really gave you the proper level of customer service, you should find a new agent.

In any event, you should make a request for the return of your earnest money check. The agent you worked with should be willing to help you out with the return of the money. If he won't, then speak to the managing broker of the firm he worked for.

Property should be in same condition as day you signed contract

Wednesday, October 24, 2007

Most home buyers will have at least two opportunities to inspect their property before closing on the purchase.

First, most buyers will include a contingency in the contract that allows them to do a professional home inspection by the home inspector of their choice. This inspection typically happens right after the sales price has been agreed to, usually within a week or 10 days.

If the home inspector finds anything wrong in the property or decides further inspections (perhaps for radon, heating and air conditioning systems, or mold) are called for, the home buyer will be able to hire specialists to figure out if there is an insurmountable physical problem with the property.

Assuming those inspections go well, the second opportunity to inspect the property is just before the property closes. The preclosing inspection, or final walk-through, as it is often referred to, is a home buyer's last opportunity to walk through the property before closing.

What you're looking for here is not at the same level as the initial professional home inspection. In a preclosing inspection, you simply want to make sure that the property is in the same condition as it was on the day you agreed to buy it.

To avoid getting burned, you schedule the walk-through as close to the actual closing as possible, certainly within the 24 to 48 hours prior to closing. If possible, the sellers should have already moved out.

The whole point of the walk-through is to protect yourself and your future property from sellers who aren't as nice as they seem to be or who are actually as nasty as they appear. By inspecting the premises, you're making sure the seller has lived up to his or her agreements in the sales contract. And if he or she hasn't, you want to know about it in advance of the closing so remedies (both monetary and otherwise) can be agreed upon before money changes hands.

What should you look for in a preclosing inspection? To start with, you want to make sure that the condition of the home hasn't changed since you signed the contract several months earlier.

Believe it or not, a lot can change in the ensuing weeks. To make sure the home is in the same condition, you'll want to turn on every appliance, open every door, make sure nothing's broken (lights, fixtures, windows, etc.), be certain everything the seller agreed to leave is actually there and in good shape, and be certain that when the sellers moved out, they did no damage to the home.

Sometimes movers can accidentally scrape a wall or pull up carpet in the process of packing up the contents of a house. If you do your preclosing inspection while the movers are there, you'll have a harder time getting around them to make sure that the property is in good shape.

If you get there before the sellers have packed anything up, you might wind up with some nasty surprises on the day you move into the property.

I learned the hard way that sometimes sellers just don't want you to find out certain things until you've closed on the property.

Nearly 30 years ago, I bought our first place. It was a vintage co-op built in the 1920s. The sellers were seniors, and they were a bit quirky. The property hadn't been touched in years.

When I did our final walk-through, I noticed that the water was turned off in the kitchen sink. I wanted to run the dishwasher, which was really old, but didn't want to turn on the water if it was off.

Looking back, it's hard to imagine why this wasn't a red flag for me. But I was really happy to be buying my first place, which was taking just about all the money I had in the world. I didn't question it. I just bought it and moved in.

The first night I unpacked the dishes and decided to run a load in the dishwasher. At well past midnight, I turned on the water and I put in the dish soap and turned on the machine. I went to bed.

I was awakened early the next morning with pounding on our front door. My downstairs neighbors came into their kitchen and noticed that the liquid contents of my dishwasher had dripped down through the ceiling into their kitchen, ruining their window shade.

Iistantly knew why the water had been turned off. Too bad I didn't find that out ahead of time. Still, the damage could have been worse.

As I recall, it cost me $600 to fix the damage in our neighbor's apartment.

Is your loan going to reset?

Part 1 of 2: Preparing for an adjustable-rate reset

Monday, October 22, 2007

by Patti Lyles

(This is Part 1 of a two-part series.)

A loan modification is a change in the loan contract agreed to by the lender and the borrower. The modifications of major concern today are those designed to reduce the payment burden on borrowers faced with impending rate increases that will make the mortgage payment unaffordable to them. Many are subprime borrowers.

Homeowners faced with this prospect, whether they are already delinquent or not, should request a modification. They are very unlikely to get one if they don't ask, and they should make the investment required to make their case. The stakes are very high: They can save their house and their credit.

The Decision Process: In most cases, the decision on a modification is not made by the firm that owns the loan. It is made by a firm servicing the loan under contract to the owner. The owner could be a single lender, or it could be a group of investors who own pieces of a mortgage-backed security collateralized by a pool of loans.

Whoever the owner, the servicing firm is contractually obligated to find the solution to payment problems that will minimize loss to the owner. If the lowest-cost solution is a contract modification, great -- everyone involved prefers a modification to a foreclosure. But if a foreclosure would generate lower costs for the owner, the decision will be to foreclose. The cost of foreclosure to the borrower does not enter the decision.

Yet the decision is far from cut and dried, and it can be materially affected by whether and how the borrower presents his case. On this issue, I have benefited from an exchange with Warren Brasch, an attorney who represents borrowers seeking loan modifications.

Equity: Perhaps the most important factor affecting the modification decision is the amount of equity the borrower has in his property. If the borrower has enough equity in the property to pay any deferred interest plus foreclosure expenses, foreclosure is almost bound to be the lower-cost solution.

Equity depends on property value, which the borrower is much better positioned to know than the servicer. The borrower knows or can easily find out how many houses in the neighborhood are for sale and what the trend has been in recent sale prices. In a weakening market, it is easy for the lender to overestimate value, and the borrower must prevent that.

Moral Hazard: Servicers fear that if they are liberal in granting modifications, borrowers who don't need a modification will seek one anyway. They protect themselves against this by entertaining modification proposals on a case-by-case basis, while placing the burden of proof on the borrower.

Borrowers must accept the burden of proof. In addition to the data on property value, they need to document that they cannot afford the payment increase that is pending, and they must document exactly what they can afford.

For this purpose, borrowers should calculate their total debt ratio: the sum of mortgage payment, other debt payments, property taxes and homeowners insurance as a percent of their gross (before-tax) income. This number should be calculated now, what it will be after the rate adjustment, and what they will be able to afford. On the last, Brasch suggests that a servicer may be willing to accept 45 percent as a reasonable maximum.

Servicing Cost: Servicers have a self-interest in minimizing modifications because they add to costs. They try to minimize costs by computerizing the servicing process to the maximum degree possible, and standardizing customer support procedures so that low-paid and easily trained employees can perform them.

Modifications must be handled by a special group who are more highly trained and better-paid, and the increased costs from expanding their number cuts into the bottom line. Hence, there is a tendency to be nonresponsive in the hope that the borrower will go away.

Borrowers have to be persistent. According to Brasch: "If a servicer says they will call you back … forget about it. You need to call them and call them constantly. They will lose your paperwork, fail to return calls, put you on hold, and then hang up. It's what they do. Keep fighting, calling, faxing. This does work!"

In making their decisions about whether a modification would be less costly than a foreclosure, servicers usually ignore an asset possessed by the borrower that could tilt the balance toward modification. This is the right to future appreciation in the value of the borrower's house. In exchange for a modification that might otherwise be more costly to the owner than a foreclosure, the borrower could pledge a percent of the future appreciation, which could shift the balance to modification. This will be discussed in the second article in this series.

Buyer's you can't focus on falling prices, focus on long-term goals

Monday, September 10, 2007

By Dian Hymer

Last year, the home sale market began to slow, causing many buyers to postpone buying hoping that prices would drop. In fact, in some areas and in some segments of the market, prices have declined. However, in high-demand markets like San Francisco, Austin and Seattle, prices increased compared to a year ago, particularly for upper-end properties.

When interest rates fell below 6.5 percent at the beginning of 2007, San Francisco Bay Area buyers were back competing against one another in a low-inventory market. Was it wise for these buyers to postpone buying until 2007? Waiting resulted in lower interest rates, but in many cases, a higher purchase price.

Mass psychology influences home-buying patterns. For example, when buyers decide that it is not a good time to buy due to fear of falling prices or rising interest rates, this notion tends to become a self-fulfilling prophesy. When the volumes of home sales drop, buyers tend to hold back. When sales heat up, buyers perceive this as a good sign. They feel they must buy immediately before home prices rise and they are priced out of the market.

Buyers tend to follow the herd, which is counterintuitive. It would seem that the best time to buy would be when there isn't competition from other buyers -- that it, in a slow market. However, most buyers feel more comfortable buying when all their friends are buying. The comfort of the crowd validates that their decision is a good one.

Home sale markets are cyclical. There are up markets, down markets, and stable or balanced markets. In an ideal world, you would buy at the end of a down cycle, just before the housing market picks up again. But, it's impossible to time the real estate market. You know that the bottom of a cycle has passed only when the market is moving upwards again.

HOUSE HUNTING TIP: Given the cyclical nature of housing markets, home buying is risky unless you have a long-term perspective in mind. If you buy at the peak of a cycle and are forced to sell soon after in a softer market, you could end up selling for less than the price you paid. Buyers who can stay put and ride out a down cycle are in a better position to recoup their investment when they sell, and possibly make a profit.

In an uncertain market, buyers who are not sure about how long they will be living in an area may be better off renting than buying. It's often difficult to find a rental that feels like home. However, from a purely financial point of view, buying for the short term could end up costing more than you anticipated if you need to sell in a down market.

A common complaint about renting is that it's a waste of money. There are no tax benefits and you don't build equity. However, it can cost less to rent than to buy. To get the tax write-off, you often need to pay more than you'd have to pay renting. Renting usually requires no home maintenance and there's no risk of losing equity.

Good candidates for buying in a slower market are buyers who are ready to put down roots and stay put for awhile. This not only means that you aren't planning on moving out of the area soon, but it also means that you can afford to buy a home that will suit your long-term needs.

THE CLOSING: A purchase decision should involve a consideration of the dynamics at play in your local market. Prices might or might not drop in your area. In many places like Capitola & Santa Cruz, CA, sales volume is off, but not prices. When inventories are reduced and buyers are back in droves, prices could