Friday, October 24, 2008

Loan Funding- Show Us The Money!

During the process of buying or selling a piece of real estate, most buyers require a loan in order to purchase the property. There comes a time in the transaction when the money is ready to be exchanged for ownership of the property. Funding of the loan is essentially the transfer of money from the lender to the seller of the property. Actually it is transferred to our third party escrow but for simplicity purposes we can think of it as being transferred to the seller.

After you review and sign your loan documents, the escrow company will send them back to the lender. A final review by the lender’s underwriter takes place and if everything looks good according to the underwriter, the lender will notify the escrow company that they are ready for funding. In other words, the lender is ready to send over the money to complete the purchase of the real estate.

At this time or preferably before, the escrow company will instruct the buyer to bring all necessary closing money (i.e. closing costs and down payment) into escrow to be held until funding. Most of the time when the loan is funded the actual money for the loan is wired over in just a few minutes but in order to fund the loan all conditions and instructions set up in escrow must have been met. This dotting of the i’s and crossing of the t’s is usually what delays the actual funding from happening. Many times underwriters will take a hard second look at the borrower’s financials that may delay the funding a few days. For this reason, we encourage buyers to get their entire loan application and supplementary materials to the lender as quickly in the escrow process as possible.

As you can see, in most real estate transactions funding is a very significant event in the process and a critical component to purchasing your home. Now that you know what the funding process is all about, the only thing left is the closing and recording. You’ll learn about this final step in our next tutorial.

Monday, October 20, 2008

Purchase Agreement Contingencies - A Buyers Emergency Escape

When you wrote an offer to purchase your prospective home, you more than likely had a few safety nets put into action should the deal go sour. These safety nets are known as contingencies and are considered normal buyer protection in our purchase agreements.

The most common contingencies are to:

  • See all disclosures from the seller

  • Inspect the property

  • Obtain acceptable financing for the property

  • Have the property appraise at a value equal to or greater than the purchase price
If for any reason you are unable to obtain any of the above, or have an issue with them, no matter how small (ie unacceptable interest rate on loan, too many repairs, or low appraisal) within the first 17 days of the transaction, then you most likely will be able to cancel the entire agreement with zero penalty.

There does come a time in the transaction, usually after the 17th day, that the buyer will need to be ready to remove all of these contingencies of sale. We call this the "release of contingencies" and usually send the buyer a form to be signed stating that they are satisfied with respect to all of the above conditions, are electing to proceed with the transaction, and realize that backing out or failing to close escrow from this point forward could lead to the forfeiture of their deposit.

After the contingency release is complete, a buyer is starting to turn the home stretch toward owning this new piece of real estate. And while the remaining length of track may be short, it is the stretch where most deals are either made or broken. We'll do everything we can to make sure you are able to make it across the finish line with your new home.

Look for our next article on insurance for the first thing we can do to get you there.

Monday, October 13, 2008

Appraisals - How Much Is This Home Worth?

Appraisals are very easy and simple to understand so we are going to keep this one short. Within the first 17 days of escrow buyers will need to have their lender order an appraisal to prove to the bank's investors that the property is worth at least as much as the loan they will be writing on it. Appraisers work for the lender but are often paid by the buyer via closing costs. The cost for an appraisal can range from $300-$600 depending on size, type, and location of property.

Appraisers are licensed and will visit the house, look at recently sold homes in the area, and combine this information with general market trends to determine a fair market value for the home. There is no need for a buyer to meet an appraiser at the property.

Many buyers confuse appraisal with inspection. Think of it like this:
Inspectors check for physical defect in the property, work solely for the buyer, and do not discuss value of the property.

Appraisers work solely for the lender and speak mainly about the value of the home based on recent sales.

In order for you to get a loan to purchase your home, it will need to appraise at least at the value of the loan you are proposing taking out. If it doesn't, you will either have to make a larger down payment or need to renegotiate the purchase price. If none of the above are possible, you will need to cancel escrow.

Very rarely do appraisals come in way above the purchase price as this can create major problems if the seller then has second thoughts. Since they work for the lender, their main job is to ensure that the lender is secured by property value not to give the seller an accurate estimate of his properties value.

Now that appraisals are out of the way, we are excited to bring you our next article on real estate contingencies.

Repairs - What Can You Ask For? What Can Happen?

So you've been through the comprehensive inspection report detailing all of the shortcomings of your soon to be new home. At this point, it is natural to feel a little apprehensive about proceeding with the transaction as there is undoubtedly more wrong with the home then you initially thought. This is a normal feeling and in most cases a night or two of sleep will help to put it all in perspective. Remember, most all of the homes on the market are used and do have some defects so it will be an impossibility to even find a home with zero areas of concern. The same also goes for new construction and probably even the property you are currently living within.

The real purpose for a home inspection is awareness. That means you, the buyer, now have the knowledge about the various shortcomings with your property and can make the best decision possible.

What Options Are There After A Home Inspection

Ask For Repairs - Most standard sellers will be open to making a few repairs to the property in order to ease buyer concern. Of course, the property is privately owned so the owner does not necessarily have to do any repairs and some will not. All of this depends on the motivation and general disposition of the properties current owner. It is common practice for buyers to ask for items listed as health and safety issues to be remedied before proceeding. Items such as exposed wiring, broken glass, unstrapped water heaters, and other potential hazards are the most commonly asked for repairs.

How much can you ask for? You can ask for as much as you like, and your certainly not limited to health and safety items, but generally 5-10 items is what we would consider average. Again, the chance of you getting these items fixed will depend on many factors including: the negotiations leading up to the escrow, the sellers feelings toward the buyer, market conditions, and the overall condition of the property. For example, a seller who has endured endless price negotiations leading up to escrow may have such ill feelings towards the buyers that he will not do any repairs to the property. This is also known as selling "as-is."

Ask For Credit - Sometimes in addition to or in lieu of asking for repairs, the buyer will ask for a cash credit to fix the problems on their own. Again, good judgement should be exercised here as it is not likely for a buyer to recieve a credit for a broken pool heater when the seller had been crediting the buyer for it in the negotiations leading up to escrow. Cash credits, on the other hand, can be advantageous as the buyer will be able to fix the problems in any manner they like without worrying about the seller picking an unqualified "low ball" contractor for quick fix. The buyer is not bound to use the money for repairs, in fact, they are free to spend it any way they see fit.

Proceed With The Sale - The above solutions can lead to the continutation of sale when both parties can arrive at a mutually beneficial arrangement. Sometimes, there are so few problems with the home that the buyer is just ready to proceed without any repairs. Other times the buyer will know going into escrow that asking for repairs will be pointless and if don't see any major issues, they also elect to continue on with the transaction. After a home inspection it is perfectly acceptable to continue on with the sale of the home with zero talk of repairs.

Cancel Escrow - Every once in a while the inspection will reveal more problems than the buyer can handle and the buyer will simply cancel escrow without penalty and continue on looking for another property.

Bank Owned And Short Sale Property - With bank owned property, the simple fact is that it is often sold "as-is" from outset so any hopes a buyer may have for repairs will be fruitless. Banks very rarely will acknowledge any information about the property given the unique way in which they acquired title to the property. Since it was acquired through foreclosure, they may have never been given any disclosures about the condition of the property and therefore are not willing to vouch for its shape.

Occasionally, banks will offer cash credit for repairs but they certainly are not under any obligation to do so. In fact, many banks price their properties so well that they recieve multiple offers and may be completely unwilling to accomodate a buyer asking for credit because they have so many backup buyers.

Short sale sellers may be more willing to do repairs and credits but this is often overshadowed by the slow process it may become to ask for considerations. Often times, asking for repairs can kill any time sensitive approval the bank has given so it may not be wise to demand them. More often than not, the price on short sales and bank repo homes is so competitive that it just may not matter to a buyer. This is obviously a good time to consult with your real estate agent about the overall value of the deal.

Some Other Ideas

When you do decide to continue on with a transaction, it would be an excellent idea to keep a copy of the inspection report so that you have some idea of problems you may want to look at remedying in the coming years. This advice alone will pay dividends when it comes time to sell your home.

Look for our next article on understanding your homes appraisal.

Thursday, October 9, 2008

Understanding Disclosure Paperwork From The Seller Of Your New Home

The beginning of the escrow process is an exciting and very busy time for most home buyers and real estate agents. One of the first issues to attend to is the gathering of all disclosures made by the seller about the condition and overall situation of the property in question. And you thought there was a lot of paper work to sign during the offer process? Just wait till you see how much more is coming down the pipe!

As a home seller, they do have an obligation to provide the buyer with signed copies of these disclosure forms detailing all material defect known about the property within the first seven days of the transaction. As a home buyer, you have an obligation to read, understand, and sign off on any information provided within these disclosures or cancel the agreement if something strikes you as a deal killer.

We will attempt to guide you through these documents so that you have a basic understanding of the information they are trying to convey. The forms making up the disclousure packet include but are not limited to:

Agency Disclosure For Seller and Sellers Agent - Shows that the sellers agent has a fiduciary duty to act in the best interest of the seller.

Transfer Disclosure Statement (TDS) - Filled out by the seller showing A) the current equipment in the systems of the home B) the awareness by the owner of any material defect with any of these systems C) the awareness of any problems in the area or surrounding community/neighborhood and D) the awareness by the agents of any known defects.

Preliminary Title Report - Shows all matters affecting title to the property including but not limited to back taxes, mechanic leins, and past due homeowners association dues.

Supplementary Statutory Disclosures (SSD) - More representations made by the seller as to whether people have died on the property in the past three years, whether the property is located near ammunitions or industrial areas, and a few other items.

Earthquake and other Hazards Booklet -
A booklet usually paid for by the seller detailing the extent of risk associated with earthquakes, radon gas, and other hazards, with regards to California real estate. Booklet also provide some advice for things you can do to help mitigate damage from earthquakes and other disasters. The last two pages have a section to be filled out by the seller and signed off on by the buyer. Pay attention to any of the boxes marked that may pose potential hazard risks in the future. You may not be able to renegotiate the deal but at least you will know for the the future.

Sellers Affidavit of Nonforeign Status and Withholding Exemption (FIRPTA) - Sellers disclosure of their citizenship and details of ownership to prevent foreign investors skipping out on paying capital gains taxes after the sale.

Natural Hazard Disclosures (NHD) - A packet usually purchased by the seller stating the presence of various natural hazard risks to the property. Typically, these hazards include flooding, fire, and liquifaction (land movement during earthquake). Most of our coastal real estate will have some flood risk, most hillside real estate will have some fire risk, and nearly all the properties in our area will have some degree of liquifaction risk.

Lead Based Paint Hazards Disclosure - Only used with property built prior to 1978. Disclosure discusses the risks associated with lead based paint, the hazards it can present, and whether the owner knows of the the presence of any lead based paint within the property.

Water Heater and Smoke Detector Statement of Compliance - Discloses State law with regards to the bracing and strapping of water heaters as well as the presence of smoke detectors.

Seller Property Questionaire - More disclosures from the seller with regard to whether they have repaired, replaced, or rebuilt the home or any of its systems plus more disclosure about known defects affecting the property.

Statewide Buyer and Seller Advisory - The catch all form outlining all things real estate brokers are not qualified to advise clients about.

Normally, these disclosures can be returned to the seller within the first seventeen days of the agreement but it is often better to get them to us well in advance of this date. We would personally recommend signing these documents with some other preliminary paperwork such as the inspection authorization, escrow insructions, and loan application to save you some time. We know your hand is probably already beginning to cramp just looking at all of this but we've found it less painful to do as much paperwork as possible at one time while your in "the zone" as opposed to the tedious drip of never ending forms. As always, if you have any questions about these disclosures, please do not hesitate to ask.

We think you will enjoy our next article on home inspections.