Focus Professionals, Inc Real Estate Blog

What would you do if the house you wanted to buy was a bnak owned foreclosed property, and you had your offer accepted, and then received, after a 3 week delay, a counter P&S with clauses that are impossible to comply with?

It so happens that we have a buyer who has placed an offer on a bank owned property… The offer was accepted, and we drafted a standard Purchase and Sale Agreement, the same as used in all Rhode Island purchases. So far so good, and so far everything is going as usual, yes?

So after three weeks, the bank comes back to the sellers agent with an amendment to the P&S, which deletes more than two thirds of the language there and which then goes on to list a slew of other requirements… I have detailed some of the requirements below:

1) The seller reduced the time frame for the buyer to have an inspection performed, and to notify to the seller of any issues to 7 days from receipt of the modified P&S… that is, the buyer has to have the inspection done, receive the report from the inspector, and mull it over, and respond to the seller in a total of 7 days. If the buyer fails to respond within the time frame, the seller assumes that the buyer has waived the right to inspections, and to notify the seller of any issues, and is then obligated to buy.

2) The title work on the property must be performed by the bank’s own title company, and the buyer will receive a preliminary title report from the seller, which may be inaccurate, and which must be responded to within three days of receipt. Buyer must pay one half of escrow fee, which will be payable to the bank’s escrow company, within 5 days of receipt of the instructions from the Escrow Company. The bank goes on to say that if there are any faults in the title, the bank is not obligated to remedy or cure those faults, even if the buyer notifies them within the specified time frame of 5 days.

3) Title shall be conveyed to buyer from seller by quit claim deed in a form reasonably acceptable to SELLER…

4) Seller reserves all oil, gas, and mineral rights to property.

5) If seller shall not perform any obligation under the contract, the seller is not to be considered in default unless buyer shall have provided seller with written notice describing such failure to perform, and buyer hereby waives all rights to specific performance and waives the right to file a lis pendens on the property for any failure to perform on the part of the seller. Of course, the seller retains all such rights, and the buy is to be considered in default if any deadlines are missed.

6) Seller has unilateral right to terminate the agreement for any cause what so ever.

Besides the date and deadline issues, which are impossible to comply with (the seller wanted the signed P&S returned by 10AM the following morning, when it was only sent to the buyers agent at 5PM the day before, for example), there are just so many issues with this contract.

What do you think? We are thinking we will counter back to the bank, with the original P&S…

Something comes to mind… something about the old adage, having your cake and eating it too… what it gets down to is this: the seller wants to be able to continue to market the property even during the purchase process, and wants to be able to accept any offer that comes in after they accepted yours, with no recourse to you… in other words, if someone else comes later and makes a better offer, they can cancel your contract at will… sound good to you?

It has come up several times now, so we want to make a point here regarding the get rich quick schemes and courses we all have seen on TV… you know the ones: no cash out of pocket, no hassles with credit agencies or mortgage companies, buy cheap, sell high… and once you take the course, you are an expert.

Wrong!

It takes a bit more than a course to become rich in real estate… it takes market knowledge, money, patience, timing, and skill. It takes having a good team of professionals. And being an expert in anything requires more than one course.

Let me give you an example: I used to teach scuba diving. I am a PADI Course Director certified instructor. I don’t teach now, and have not for some years, but when I did, I taught beginners, advanced divers, and instructors. It never ceased to amaze me that folks just out of the open water tests for the basic certification now felt that they were experts. They literally had 4 or 6 dives under their belt, and all with the accompaniment of a qualified instructor and a qualified dive master. But they were expert, in their own minds. I found through hard experience that it isn’t until two more courses, and 25 more dives, that I would consider them to novices. NOVICES, not experts. After perhaps 30 or 40 more dives, in a wider variety of conditions, they might be considered advanced, even though they had the course they call “Advanced” many dives earlier. In point of fact, as a highly trained commercial diver and trainer, with more than 10,000 dives logged, I refused to dive with buddies that had less than the three courses: Open Water, Advanced Open Water, and Rescue Diver. It was the rescue course that made them comfortable in the water, built their confidence, and made them less likely to panic.

Statistically, more accidents happen with basic trained divers… they get cocky, and then panic, and suffer for it. After a few close ones, many give up, but other persist, and it is those that persist that become good quality divers, with buoyancy control, confidence, and surety… they are safe because they are not given to panic and have the experience needed to survive the tougher times.

What does this story have to do with Real Estate?

One course does not make you Donald Trump. Start smaller, learn the ropes, learn the market, get your balance, and move ahead slowly and surely. In the end, after 10 years and 100 house purchases, with 20 that went bad, you are an expert. Not before.

I recently posted the following on Active Rain and wanted to include it here, since this is a more localized forum, and since this sort of issue is coming up frequently these days. Caveat Emptor, as they say… buyers beware… well, sellers should beware too… misleading a seller about the value of a home just to get the listing, and sellers giving listings to agents that simply promise what ever the seller wants to hear, is bad business… especially for the seller.

We hope this sort of thing has costs to the agents that do it… we know there are costs to the sellers. See our site for discussions about valuing a property, and be realistic, whether that means don’t sell, sell, refinance, or how to finance when purchasing your next home.

You know, I realize that many of the recent first time home buyer sales have used 100% financing to acquire their new homes, and that without that sort of loan program, many of these buyers would not have been able to purchase their homes at all. Never the less, I am pleased that it is becoming harder, if not impossible, to obtain that sort of financing now. 

Why, you ask?

We have seen a tremendous increase in foreclosures in our market, and the vast majority of those are houses that were purchased with no money down in the last 3 years. Years ago, when I bought my first property, there was no such thing as 100% financing. Virtually all home buyers had to come up with at least 10% down on the purchase. Most came up with more than that. Whether by intention or by accident, this resulted in home owners starting out with at least that much equity in their homes. So whether the value of the home went up, down, or stayed the same, the home owner could sell the house without having to fork over cash at the closing. Not so any more.

In our area, we were competing for a listing with several other agencies, in an area called Island Park, in Portsmouth RI, and virtually all but one came in around the same value for the CMA… all but one. All were lower than the owner expected she could sell the property for. All but one. The one of course that won the listing is the one that came in high on the CMA, at exactly the price the owner wanted to sell at. This owner has no ability to afford the payments on the current mortgage, and with late payments, cannot refinance either. We know this because we were working with the owner on the mortgage side as well as on the real estate side. Of course, the now listing agency referred the client to another mortgage lender, as it turns out, at the same office as our agent.

The problem with this, in our opinion, is that the listing agency has basically misled the client on the value of the home, just to get the listing. The home owner will be unable to purchase another home, and most assuredly will not get the price they are asking.

But the agent will soon enough tell the seller that the house cant sell at the asking price, and will most likely tell them to reduce the price… a strategy used by some unethical agents in every market, I imagine, just to get the listing. Of course, if they do sell the house, the woman will have to rent.

How is this relevant to the “no money down” issue I started this post with? The listing agent has told the seller that they can get that sort of financing on the new purchase. Of course, they have no idea about her credit situation, her late payments, or the fact that if she sells the house for less than she wants, she will still need to come up with cash at closing. She cannot come up with that cash, and the sale will, in all probability, be for less than she owes on the house.

For every 5 houses we show buyers, 1 is bank owned. That is an enormous number of houses that have been foreclosed in recent times… 20% of houses we show… While this is not an Official Statistic, it is our own experience. The price range is insignificant, as we have the same number of foreclosed or bank owned properties at prices above $600K as we do for homes below $300K.

What we have seen is that a good number of these bank owned homes had previously had negative amortization loans for the primary mortgages… if you are unfamiliar with what that loan product entails, let me just say that it is marketed as a way of keeping payments low, and of getting extra equity out of the house. What it really is, is a way of having monthly mortgage payments that do not completely cover the interest. By extension, this means that the equity in the home is not increasing, but is in fact decreasing with every month that goes by… the difference between the amount of interest owed each month and the payment amount is added to the principle of the loan.

In short, a negative amortization loan leads to decreasing equity in the home, which means that over time, even in an appreciating market, your home becomes worth less than you owe.

The math is not too hard, but reads poorly on the web… example, if your interest payment should be $100 per month, and you only pay $80 per month, your payment amount is less, but the total amount owed on the house increases by $20 each month, so unless the house appreciates faster than that, you will be behind the eight ball soon enough.

An then the interest rate increases. Payments become too high to afford, and you cant sell the house because in order to do so you will have to actually fork out cash from your pocket.

This is what, in part, has led to the many bank owned properties for sale that we see now.

Please… be careful in selecting your mortgage program… do your due diligence, and work with a trustworthy loan officer, who understands your needs, and who has your interest at heart.