The San Francisco Peninsula Real Estate Blog

There has been so much written and speculated about the Obama Administration’s Foreclosure Prevention Plan, that it’s hard to understand what it really means for homeowners.   This morning I found a really nice, concise summary in the lastest edition of Realtor Magazine which briefly touches on the key points.   This is such a good summary, that I have reproduced the article below in its entirety, or you can click the photo above for the online article:

What’s In the Foreclosure Prevention Plan

The Obama administration yesterday released its long-awaited plan to stem foreclosures. It’s organized into three categories:

1.) Help for home owners making their payments but at risk of default and foreclosure.

Home owners with a Fannie Mae or Freddie Mac loan would be eligible to refinance as long as their mortgage doesn’t exceed 105 percent of the home’s current market value. Currently owners need to have at least 20 percent equity. Potential impact: 4-5 million households.

2.) Help for home owners already in default and in need of loan modification.

For lenders that voluntarily agree to lower a borrower’s payment so that it makes up no more than 38 percent of the borrower’s income, the government would share the cost of lowering the mortgage burden to 31 percent of income. Incentives to lenders to participate include a $1,000 payment.

Borrowers can receive up to $1,000 as an incentive to stay current on their new mortgage. Still in the works is a proposed provision that would allow bankruptcy judges to require loan modification (known as a cramdown) as part of a household’s restructuring. That provision requires legislation by Congress. Estimated potential impact: 3-4 million households.

3.) Doubled resources to Fannie Mae and Freddie Mac.

To encourage investors to buy the secondary market companies’ mortgage-backed securities, the government explicitly backstops them to up to $400 billion, twice the current amount.

The plan does not provide help to investors or to home owners who are in trouble with a second home, nor does it apply to homeowners whose mortgage is part of a private-label mortgage security that is not backed by Fannie Mae or Freddie Mac.

“The administration’s proposed plan, combined with provisions like the $8,000 first-time home buyer tax credit in the just-enacted American Recovery and Reinvestment Act, will help minimize foreclosures, shrink housing inventory, stabilize home values, and move the country closer to an economic recovery,” says NAR President Charles McMillan.

Source: REALTOR® Magazine Online

The Message:

The message here is simple: Help is available to you in a variety of ways. If you’re a homeowner in one of the situations outlined  above, the worst thing you can do is to DO NOTHING.  The Administration is trying to keep as many people in their homes as possible, so take advantage of this and get the assistance you need.

“Don’t pay  for something that you can get for free…”

That’s essentially the message that’s conveyed in this press release from County Assessor Warren Slocum’s Office.  San Mateo County homeowners have been receiving official looking letters from private companies that are soliciting fees to file a Request for Property Tax Reduction on your behalf.    The details of the scam along with examples of the solicitation letters, are nicely outlined on the San Mateo County Assessor’s website.  I highly recommend that you take a minute to read this link.

No scam would be complete without an ominous “call to action,”  and this one has that as well in the form of an artificial deadline — you must act by a certain date or you will lose the opportunity…..  you get the idea.

The Truth

As I outlined in this blog post about applying for a property tax reduction, there are 3 truths to applying for a reduction in your property taxes.

1. It’s FREE.
2. You deal directly with the County Assessor’s office (no intermediary required.)
3. You can apply for the reduction online or via mail.   It’s really very easy.

Now, this doesn‘t mean that you’re automatically going to get a reduction in your property taxes.   What it does mean is that the process to apply for this reduction is free.

In other words, don’t pay someone to do something that you can yourself for free!

The trying economic times we’re experiencing has made an impact on the real estate market that we haven’t seen in decades:  The Real Estate Owned (REO) property.   An REO property is simply a home that is now owned by the bank after a foreclosure proceeding, and is being sold on the market.    Sometimes, REO’s can represent a good opportunity for buyers.   Banks are in business to loan money, NOT to own houses — so they are motivated to get a stagnant asset like a vacant home off of their books as soon as possible…the more motivated they are, the lower the list price.

With all of this opportunity for buyers, are there downsides to consider?  You bet.   Here are the three biggest things to consider when considering the purchase of an REO:

1.  Disclosures (or lack thereof.)

California Real Estate Law requires the owner of a property to disclose any material facts about a home that may have an impact on its value — if you’ve shopped for a home, you’ve definitely seen a thick disclosure packet or two.    But there are provisions that allow exemptions for owners who haven’t lived in the home, or who simply inherited the property through a trust proceeding — REO’s usually fall under this provision, so there will likely be NO disclosures about this property.  Consequently, you don’t get the benefit of the previous owner’s knowledge about the house or the neighborhood.  The banks make this very clear when you’re writing an offer.

Solution:

Be sure to hire a very competent property and pest inspector.   Do your own thorough inspection of the property as well.  And don’t be afraid to knock on some neighbor’s doors to get their opinion on the home, neighborhood, street, etc…

2.  Deferred Maintenance.

When homeowners stop making payments on their home, it’s safe to assume they won’t be putting any money or effort into maintaining the home either.  In some extreme cases, homes have actually been vandalized by the departing owner.   Since the foreclosure process itself takes a number of months to complete, you may be looking at a home with several years of neglect.

Solution:

In addition to the aforementioned property/pest inspection, be sure to get estimates from reputable contractors on what it will cost to remedy any deferred maintenance.   A house that looks like a screaming deal on the surface may not be such a great deal when you factor in the cost of fixing everything.

3.  Transaction Timeframe.

As I mentioned at the top of the post, banks are NOT in the business of selling homes.   Most banks have very little infrastructure manage the exponential growth of their REO inventory.  Consequently, you can expect that EVERYTHING in the contract process is going to take longer.   Getting a response back on your offer is usually quite a bit longer than if you were buying from the owner — and this problem simply  multiplies with every counter offer.    A healthy dose of patience is required when buying an REO.

Solution:

Be sure to include an “out” clause in your contract  — This will enable you to move quickly if you’re waiting for the bank to reply to your offer and you suddenly find something you like better.

Summary:

REO’s can be a good deal for buyers, but it’s important to go into the transaction with your eyes wide open and be aware of the possible pitfalls of purchasing a bank owned property.

When the forward pass was first introduced in football, the naysayers predicted failure, claiming “there are 3 possible outcomes of the forward pass, and two of them are bad.” Well, we all know how that turned out. The forward pass completely revolutionized the game.

How does this apply to real estate? I apply the same logic to the question:

Why are buyers reluctant to write offers below the asking price?

Using my handy football analogy, what are the possible outcomes when you write an offer below the asking price? There are also three — your offer will be either,

1. Accepted
2. Counter-offered, or
3. Rejected

From the buyer’s standpoint, two out of the three outcomes are good, and the likelihood that a seller will flat-out reject an offer is low, especially if the home has been on the market for a long time. (Obviously, common sense dictates here — I’m assuming for this argument that the “below list” offer is not something totally absurd like 50% of the asking price.) So you’re already WAY ahead of the forward pass — so, why don’t more folks do it?

There are also three possible reasons that I can think of:

• They don’t like the property at any cost.
• They are afraid of insulting the seller or the seller’s agent.
• Their own agent refuses to write what they consider to be “low-ball” offer.

Let’s discuss these. The first one is easy — if the property is of no interest to you, you’re not going to want it at any price. #2 is easily solved. For homes that have been on the market for an extended period, the sellers will likely be thrilled to see ANY offer, even if it is substantially less than list. If they do get upset that the offer is low, tough…they can just say no.#3 is the one that amazes me. I have heard from numerous people that their agent refused to write up a low offer (or tried very hard to talk the buyer out of it.) If that’s the case, find a new agent. If your agent isn’t willing to put in the extra work (a whole hour or so) to fill out the paperwork for an offer, find an agent who is.

There’s rain in the forecast for this weekend — hooray!  We probably could use the precipitation.   But should it put a damper on your home shopping?  No way.  Quite the contrary…  If you have your eye on a particular home that’s for sale or have you narrowed the candidates down to a short list of a final few,   here’s a really good tip:  Go out and see them again this weekend…while it’s raining.   No, I haven’t lost my mind.   But you’ve already seen them when they’re dolled up at their “best”;  now, go see them at their worst.

Why?  Because a good rainstorm will expose weaknesses in a home that you might never see on a dry, sunny day. Important weaknesses….expensive weaknesses to fix.

Here are a few key things to look for when it’s pouring out:

• Drainage:   This is a big one, and the most obvious.  Is the water draining away from the property as it should, or is it pooling in low spots?  Are the drainspouts clearing water away from the foundation?  Are you getting unwanted drainage from your neighbor’s yard?   Does the water flow down the driveway, or is it sneaking back into the garage?  Does the house get standing water under the foundation?
• Integrity:   Simply put, is the house water-tight?   Are there any leaks in the roof or from the vents?  Are the windows holding out the rain?  Very important–>  check the ground-level rooms to see if any moisture is finding its way in through sliding-glass doors, or up through the foundation.  Many homes with high water tables will have problems with this.
• Odor:   Even if nothing jumps out at you visually, trust your other senses.   Nothing brings out the smell of mold and mildew quicker than exposing it to more moisture.  If the house has that telltale smell, pay attention and find out where it’s coming from.

Homeowners are required to disclose problems like this when they’re selling their house, but don’t assume it always happens.  Find this stuff out for yourself.  A competent property inspector can see signs of water-related problems even when it’s not raining, but there’s nothing like seeing it for yourself.   Fixing drainage problems and water damage can be very expensive, and it’s an issue you need to be fully aware of before you plunk down all that money.

You’ve seen your favorite home at it’s best..now go throw on your boots and raincoat and see how it holds up to a good whipping from Mother Nature.

In San Mateo County, it is “customary” for the buyers in a real estate transaction to pay for closing costs. (Note the word customary – like anything else in a transaction, this is indeed negotiable.)  But with a normal transaction, the majority of the fees that you’ll see when you close escrow are:

1. Escrow fees
2. Title insurance, and
3. Loan origination fees.

Assuming that you’re not pre-paying points on your loan, you can count on closing costs to amount to about 0.8% of the purchase price.  So if you’re buying a $1M home, you should have an additional ~$8,000 set aside to close escrow.  Again, this is a rough approximation, but it gives you an idea on the costs involved — first-time buyers are sometimes caught be surprised by this and have to scramble to close escrow.

Well, if you’re buying a home in the City of San Mateo, you need to be aware of an additional transfer tax that increases the 0.8% significantly.  The City of San Mateo levies a “City Transfer Tax” of $5.00 per every $1,000 of the sales price.  So the same $1M home would be levied an additional $5,000 of taxes at closing.  The good news?  Unless it’s agreed to otherwise, the buyer and the seller split the City Transfer Tax 50/50.  Regardless, $2,500 represents an increase of about 31% above our example $8,000 closing cost.

So while you’re scraping up enough change to buy that first home, be sure to keep an extra stash on the side to cover your closing costs.