Real Estate News

It’s been nearly 30 years since the last significant real estate downturn in Michigan. That occurred in 1981 and was primarily driven by double digit interest rates. Mortgage rates peaked at about 18% then and real estate sales would have come to a screeching halt, but for many sellers having the ability to convey property via land contract.

Real estate sales are now being impacted by factors that are much different. While interest rates are at all time lows, sales are being hampered by the HVCC, buyers with wounded credit scores, sellers with little or negative equity and buyers wishing to buy with small down payments. In short, market dynamics today are completely different than in the early 1980’s.

Lately, there has been much discussion among real estate practitioners about returning to the use of land contracts or purchasing money mortgages to help create more sales by avoiding some of the issues mentioned above. We have already seen the proliferation of longer term leases and lease/option transactions over the past few years.

There certainly are instances where creativity in structuring a real estate transaction can benefit both the buyer and seller. There are many more instances, however, where such transactions are neither appropriate nor in the best interest of one or both parties to the transaction. Consideration should be given to the following in determining whether such a transaction makes sense.

• Underlying financing – Sellers typically require significant equity to facilitate a land contract sale. There are “due on sale” issues with respect to their underlying mortgage. Even if those are resolved by acquiring permission from the underlying lender, the monthly payments due under the land contract normally need to match or exceed the payments due on the underlying mortgage plus property tax and insurance payments.

• Creditworthiness of buyer – The seller assumes the risk as the lender in a land contract sale. The buyer’s ability to make the monthly payments becomes a critical issue to the seller, unlike a conventional sale.

• Down payment –Land contract sales normally require significantly higher down payments than under other types of financing. When land contract sales proliferated in the 80’s, down payments on all types of financed transactions of 20-40% were typical. That is not the case today.

When contemplating a land contract sale or lease/option of any kind, additional expertise must be brought to the transaction. Advice from outside counsel and/or a CBWM manager with this specific knowledge should be sought.

Over half of all transactions closed today fall into the bank‐owned or bank‐approved short sale category. In these cases, many offers to purchase are either written on contract forms provided by a lender or modified by an addendum provided by a lender.

In virtually all these cases, the provisions of these contracts transfer much of the transaction risk from the seller to the buyer. It is imperative that practitioners and buyers read and understand every word in these documents as their provisions are typically quite different from normal accepted practices in our market.

Here are some key things to watch for:

Transaction expenses normally paid by the seller are often transferred to the buyer. This can include almost anything, such as title insurance premiums, transfer taxes, tax and other pro‐rations, de‐winterizing, repairs, credits, etc.

When title insurance is provided by the seller, the policies specified frequently include so many exceptions that they provide little or no protection to the buyer. In these cases or when no title insurance of any kind is provided by the seller, we highly recommend that buyers acquire their own title policy from a reputable local agency.

Sometimes there are additional fees charged to the buyer.

The risk of loss is frequently placed on the buyer. This means that if the house is vandalized
or otherwise damaged prior to closing, the buyer has no right to rescind and must close anyway or lose his deposit. Small earnest money deposits are recommended in these cases.

Some agreements do not create a tangible interest in the property for the buyer. Some allow the seller or lender to continue to solicit additional offers from other buyers and replace an existing offer with another that is deemed more desirable for the seller.

Buyers should be counseled to weigh the benefit of “getting a good deal” on a distressed property against the additional cost and risk associated with the acquisition of a bank owned or short sale property. These types of properties can represent great opportunities for some buyers, but only if they understand the risks and additional costs in advance.

Over half of all transactions closed today fall into the bank-owned or bank-approved short sale category. In these cases, many offers to purchase are either written on contract forms provided by a lender or modified by an addendum provided by a lender.

In virtually all these cases, the provisions of these contracts transfer much of the transaction risk from the seller to the buyer. It is imperative that practitioners and buyers read and understand every word in these documents as their provisions are typically quite different from normal accepted practices in our market.

Here are some key things to watch for:

• Transaction expenses normally paid by the seller are often transferred to the buyer. This can include almost anything, such as title insurance premiums, transfer taxes, tax and other pro-rations, de-winterizing, repairs, credits, etc.

• When title insurance is provided by the seller, the policies specified frequently include so many exceptions that they provide little or no protection to the buyer. In these cases or when no title insurance of any kind is provided by the seller, we highly recommend that buyers acquire their own title policy from a reputable local agency.

• Sometimes there are additional fees charged to the buyer.

• The risk of loss is frequently placed on the buyer. This means that if the house is vandalized or otherwise damaged prior to closing, the buyer has no right to rescind and must close anyway or lose his deposit. Small earnest money deposits are recommended in these cases.

• Some agreements do not create a tangible interest in the property for the buyer. Some allow the seller or lender to continue to solicit additional offers from other buyers and replace an existing offer with another that is deemed more desirable for the seller.

Buyers should be counseled to weigh the benefit of “getting a good deal” on a distressed property against the additional cost and risk associated with the acquisition of a bank owned or short sale property. These types of properties can represent great opportunities for some buyers, but only if they understand the risks and additional costs in advance.

Because of the crunch to get all the first time buyer closings scheduled before the November 30 tax credit deadline, we are advising that scheduling closings on the last few days of November be avoided if possible.

The November closing calendar is complicated by the fact that the 30th is a Monday and the Thanksgiving Holiday falls at the end of the prior week, eliminating three critical business days from the last five days of the month.

We have also learned that some lenders are establishing early cut-off dates after which they will not accept loan applications from first time buyers. Some lenders are setting these dates as early as mid-October to avoid any potential liability for not being able to close their loans prior to the tax credit deadline. In some cases this may cause real estate practitioners to seek mortgage loans for first time buyers from sources other than their normal lenders.

It cannot be overemphasized how important it is to counsel buyers seeking to use the First Time Home Buyer Credit to do the following:

• Get pre-approved with your lender and provide all documentation to them in advance. Understand their deadlines for submission of the complete package, including a binding purchase agreement, to their underwriters.
• Identify your target property ASAP.
• Enter into a binding purchase agreement with a traditional seller who has the ability to close by the third week in November.
• Perform all inspections and related repair work as soon as possible to avoid any closing delays.

While November 30 may sound like a long way off, time is truly running out for first time buyers to meet the tax credit deadline.

The opportunity to take advantage of the First Time Home Buyer Credit may soon be gone. The current $8,000 tax credit is available for homes or condos purchased and closed on by December 1, 2009.

Given the popularity of the current program, Realtors, lenders and appraisers are very busy processing transactions for first time buyers – which, by the way, also include former homeowners who have not owned a home during the past three years, according to program guidelines. In order to ensure a qualified closing before the deadline, buyers are encouraged to begin the process right away, if they have not done so already.

The process begins by working with a Realtor to identify the right property for you and becoming pre-approved for a mortgage with a performance-based lender. We recommend entering into a binding purchase agreement by November 1, 2009 to best avoid the risk of missing the December 1 deadline.

There are four great reasons to buy now. Inventory, incentives, interest rates and prices.

While inventories are coming down, they are still at historical times and there are great selections available for all buyers.

Incentives such as the First Time Home Buyers Tax Credit will not be available forever. Complete program details about the credit can be found at CBWeirManuel.com.

Interest rates are also at all time lows as noted in the market statistics in the box above.

And prices. Coldwell Banker Weir Manuel believes that we are now at the bottom of the market and prices will never be better.

While there is some talk in Congress about extending the tax credit program, nothing is certain at this time. Our recommendation for anyone contemplating the purchase of a new home is to act now.