Common Sense Real Estate

...Almost anything can be made to sound believable!

Recently while on Facebook, I saw something a friend had posted that caught my attention. The post was a chart that showed a breakdown of the budget and debt of the government. All of the figures in the chart were adjusted by removing several zeros from the end of each figure, transforming the chart to something that resembled a  household budget. The resemblance was limited to the fact that the numbers were in the thousands and not billions or trillions of dollars. That's where the similarities ended. The numbers, if they represented a real household budget,  it would be a household long overdue for a visit to the local bankruptcy attorney!

This chart is nothing new. I had seen it a few times in the past. It really does put things into perspective regarding the federal budget and deficit spending. The numbers in the chart were as follows:

Annual Income: $21,700.00

Annual Expenses: $38,200.00

New Credit Card Debt $16,500.00

Total Credit Card Debt: $142,710.00

Total Budget Cuts: $385.00

Pretty alarming when put into this perspective!

What was different this time was that someone had posted an interesting comment about the chart. He posted that this chart was something created to sensationalize the current state of the economy, that you can't compare the economy of the government with that of a household. Following his comment was a link to an article that I was sure would attempt to back up his opinion and may have even been the basis for that opinion. Being curious how anyone could put a positive spin on these numbers, I had to read it.

It was a well written article that brought up some valid points but, overall seemed to minimize the need for concern over the economy. It showed how, for the past couple hundred years, we have experienced many highs and lows in the economy and have usually had deficits. The thinking seemed to be that we've always gotten things back on track in the past and there's no reason to think that things would be any different this time around.  What a relief!

 Unfortunately, it's not quite that simple.  I then thought about some of the things that weren't part of the article- All of the jobs that are no longer in this country but have been shipped overseas. (Thanks NAFTA!) That we're a  shadow of what we used to be with regard to manufacturing. That after the great depression we were able to produce our way back to prosperity due to our strong industrial base. That the US dollar may not always continue to be as in demand as it was in the past. Somehow these important pieces of information were left out.

The problem with trying to put a positive spin on numbers is that numbers are not subjective. They're not a matter of popular opinion- Adding two plus two will always yield the same result. Always! While it may be possible to cite reasons to be optimistic, the numbers don't lie.  It would be nice to think that we'd get spending under control before things get worse. It seems doubtful that will happen until people are at least willing to acknowledge that there's a problem.  Just my two cents. ( $1.00 adjusted for inflation )

With the decline in home values in the past few years, some homeowners who need to sell in the current market find themselves trapped, as they owe more than their home is worth. In this situation, the short sale can become a viable option.

What is a short sale:

A short sale is simply a sale in which the proceeds are not enough to cover all of the outstanding obligations associated with the sale of the home including the mortgage or mortgages, unpaid property taxes, attorney's fees, title expenses, commissions, etc. This shortage would require the seller to bring money to the closing or to negotiate a "shorted" payoff with their lender. The lender has no obligation to agree to this, but many will. In most cases, a short sale is attempted by sellers who are facing foreclosure or have fallen behind and no longer have the ability to continue making their payments.  

The process:

There are a lot of misconceptions about the short sale process and the lender's role in it, even among some Realtors. The seller's lender's role is nothing more than that of a contingency.  This can vary by state depending on whether it's a title theory state or lien theory state. This information applies to Illinois, which is a lien theory state (the owner holds title and the lender holds a lien on the property)

The seller owns the home and ultimately is the one who, with the help of their agent, accepts, rejects or proposes a counter offer once an offer is received.   When the offer is accepted by the seller, it is done so contingent on their lender agreeing to accept the net proceeds of the sale as full settlement of the amounts owed.   I've had more than one occasion where an agent working for a buyer asks when their offer will be submitted to the bank, even before the seller has agreed to accept it. It can add to the confusion if multiple offers are received. Some think that all offers must be presented to the lender. This is not accurate. All offers must be presented to the seller, not to the lender. The goal of the listing agent should be to obtain the best offer possible, thereby giving the transaction the best possible chance of actually closing.

What are the odds of a successful closing?

They're actually better than they used to be. Nowadays it makes sense for banks to seriously consider accepting a short sale as, in many cases, they net more money overall versus going through the whole foreclosure process, taking the home back and marketing it as an REO (Real Estate Owned).  Illinois is a judicial foreclosure state. Some states are non-judicial. Judicial foreclosures take much more time to complete. In Illinois, the process can take a year or more. There are some states which take upwards of 3 years. When you consider that, in most cases, the bank is receiving nothing while the process drags along, you start to see their motivation to consider other options. Add to this the deterioration to the property during that time and the additional carrying costs, and the benefits to the bank become even more clear. The bank in this situation, much like the homeowner, is  looking for the best way to limit their losses.

The benefits of a short sale:

 Lenders generally don't allow the seller to receive any of the proceeds of the sale. This is fair when you consider that the whole basis of the short sale is negotiating with the lender to get them to take less than what they're owed. The only exception I've  seen to this was years ago when, due to an error, we were out of balance by $.06 The title company actually cut a check to the seller for six cents! As a seller in this situation, one needs to keep in mind that, if the lender agrees to the short sale, they are allowing the seller to avoid having a foreclosure on their record which follows them around for many years. Additionally, most short sales also let the seller out from under the debt without being chased for a deficiency. These two things should be all the motivation you need. there are no guarantees of being successful but it's certainly worth the effort.

Who should you call?

These transactions are not for beginners. There is no substitute for experience when it comes to navigating through this process. An experienced agent and attorney are crucial.  In this situation it makes sense to ask a lot of questions. There are specialized short sale/foreclosure courses available for agents. Some are very worthwhile but these courses alone don't necessarily make the agent an expert.  An agent  referred by a seller who's been through this process is definitely someone worth talking to.  

What will it cost?

In most cases, it will cost you nothing unless there's an upfront fee charged by the agent to list the home. All agents negotiate their own fees. It should cost you nothing to talk to an agent and get information.  All commissions and other closing costs a seller would normally pay will be factored in and, if the lender agrees to the short sale, they are agreeing to the net amount of the sale so essentially, it is the lender that is paying your closing costs. For someone facing foreclosure, a short sale can be an excellent solution.

This information is not to be considered legal advice.    An attorney should be consulted for all legal advice.

Recently, there seems to be more and more people saying "it's a great time to buy". To someone who makes their living helping people buy and sell homes, this is certainly more encouraging than the seemingly endless reports of gloom and doom we've been hearing for so long. If the last few years have taught me anything, it would be just how important perception is and how it can and does drive markets. While there are advantages to buying in the current market, the advantages may be things you haven't considered.

The most common thing I hear lately about the benefits of buying now is price and, more specifically,  the current prices in relation to prices a few years ago. On the surface this would seem like a very convincing argument. In my local market (northern Illinois) we've seen prices adjust  downward approximately 30%. Homes are much more affordable now than they were in 2007.

Where are prices headed? 

In late 2008 I ended up selling an investment property I had owned for several years. I did so not because it was a good time to sell but rather, to get out from under all the bills that had piled up that year as a result of the declining market and my declining sales. I had planned to hold this property long term and was very reluctant to part with it, as I felt a stronger market was just around the corner. How wrong I was! This turned out to be a blessing in disguise. I can see now that, had I not sold this property when I did, it would have cost me between $30,000- $40,000! Timing is everything. My point is that it can be very difficult to predict what will happen with home prices, even for someone who does it for a living. Will prices drop further? That's a question with no simple answer. Based strictly on what has occured in the market in the past few years, it would seem that prices have nowhere to go but up. If only things were that simple. A bit more research into the economy overall would suggest that it's  possible that prices could decline a bit further. Time will tell.

Why would anyone want to buy now if prices may see a further adjustment downward?

The answer to this question, financially speaking, is fairly simple. Interest rates.  Looking at home buying from an affordability standpoint, it's easy to see how one can benefit from buying now versus waiting to see where prices go. For example, a home purchased now for $100,000 with the current interest rates ( less than 4%)  will have a lower monthly payment than a home purchased for $90,000 or even $80,000 when rates return to what most would consider "normal".  One thing that no one will argue with is that rates will rise. Using this example, even if homes dropped another 20% in value, you'd still be ahead long term.

A long term plan: 

 Now more than ever, the decision to finally buy that home should be looked at as a long term investment. Years ago, it was pretty simple to buy a home and expect that it would rise in value quickly, allowing the owner to sell after just a couple of years without digging into their pocket to break even. In many cases, you could even make  money doing this. At some point, a strong market may again make this possible but, we're not there yet. For someone who doesn't have strong job security or who faces a possible transfer in the next couple years, not being financially tied to a home would be an advantage.

As a Realtor, I tend to focus on the numbers and whether things make sense financially. The fact is, that for most people, the decision to own their own home tends to also involve emotion. Having a place that is theirs, a place they can take pride in and make changes to that will bring them and their family years of enjoyment and memories  are the intangibles you can't simply affix a number to.

The bottom line is, if you've always wanted to own your own home and plan to be in one place for more than a couple of years, there are definitely  advantages to the current market. Long term, real estate has always performed well and I don't think that's likely to change.