If you want to start an argument, announce to a crowd that the economy is recovering: half will agree with you, half won’t. Certainly the recent downturn has impacted many, leading to short sales, foreclosures, and bankruptcies. And plenty of people are asking about buying a property that was involved in a bankruptcy. To answer that, the key issue is what type of bankruptcy was filed, and how long will it take to close?
Since most such sales come with no representations, warranties or indemnifications, attorneys representing buyers should make due diligence their number one priority. Section 363 of the U.S. Bankruptcy Code allows parties involved in a Chapter 11 or Chapter 7 (most common for consumers) proceeding to dispose of real property in order to help pay off their debts through a highly structured process aimed at getting the most out of each asset while retaining the least liability.
As such, properties are sold "free and clear" from all liens and encumbrances, but it's not uncommon to later discover hidden issues, experts say, and the buying process itself can present various other hurdles. The buyer should conduct exhaustive due diligence. The trustee or debtor-in-possession rarely has access to all of the materials a buyer would typically need to see before making a decision to purchase property; sometimes a debtor has destroyed the documentation prior to the bankruptcy, or not kept it in good enough shape.
A buyer should take advantage of the property being “Free and Clear”. Although the transfer of the property comes with no representations or warranties, it also comes with no liens or encumbrances. A buyer should enlist a knowledgeable lender and real estate professional, and be prepared to move quickly in what could be a competitive bidding environment.
The main goal under any filing in bankruptcy is to give one, who is burdened with debt, a fresh start. A debtor files a petition with the court, along with a schedule of assets and creditors; a trustee is appointed to administer the sale of nonexempt property. The primary role of the trustee is to pay the secured and sometimes unsecured creditors, from the proceeds of the sale of property, and this may take up to 45-60 days to wind its way through courts – but could very well be worth it to the buyer!
For home sellers, two basic options exist. They can sell their home on their own as a for sale by owner (FSBO) property, or they can sell with the assistance of an agent. Many sellers think that working with an agent is the more costly option, and thus try to sell their home on their own without assistance. Here are 5 reasons why this may not be the best idea.
1. Lower Sale Price
Most sellers choose to go the FSBO route because want to save money. They think, "If I'm not paying a real estate agent, then I get more profit from the sale of my home." Unfortunately, any additional profits they're hoping for end up counteracted by an often lower selling price.
According to the National Association of REALTORS, FSBO homes have a median sales price of $185,000 in. This is compared to a median price of $245,000for agent-assisted homes. A typical agent's fee of 6% on a home price of $245,000 is just $14,700, compared to the $60,000 difference in the prices. So, even with paying an agent, the seller using an agent still makes more money on the sale of the home.
2. Slower Sale
Sellers who tackle the prospect on their own often don't have the marketing expertise to do it right. This means that the home may sit on the market longer, because fewer buyers see it. Since almost 90% of buyers search online for a home, an online presence is critical, and many FSBO sellers don't know how to generate a good one or don't have the tools to keep it up to date and in the sight of potential buyers.
3. More Difficult Transaction
The amount of paperwork necessary to legally sell a home has increased dramatically. All of the inspections, disclosures and other regulations which are mandatory are quite overwhelming, and once the property's ready to sell the process of the contract adds another layer of complexity. When someone tries to sell a home as a FSBO property, they aren't exempt from these regulations, so they must tackle the learning curve on their own. That's one of the reasons the number of FSBO properties has dramatically dropped in recent years.
When selling with a Realtor, sellers get the benefit of working with someone who has extensive experience in this. Agents have to study the regulations and paperwork before getting their licenses, and experienced agents have closed multiple sales to experience the process again and again. This prevents delays and frustration for the seller.
4. Too Many Negotiations
The home selling process can involve a number of negotiations, and most homeowners are not skilled negotiators. Not only are they going to need to negotiate with the buyer, who of course is looking for a deal, but they'll also need to negotiate with the buyer's agent. Some buyers have attorneys as well, and that represents another negotiation. The home inspector, who always finds something wrong with the house, is another place where negotiation has to happen. Without experience in negotiation, this can be incredibly stressful for the seller. An agent comes alongside and guides these negotiations, knowing what is worth fighting for and what is worth conceding.
5. Insufficient Exposure to Buyers
One of the reasons successful real estate agents are successful is because they have a large reach to find prospective buyers for their homes. This starts on the internet, where the majority of buyers start their search. An agent is able to post in all online venues, including those linked to the MLS. In addition, agents know the most effective offline advertisement venues, so sellers don't waste their time posting in newspapers that no one reads. Finally, agents have buyers they're working with as well, and they're motivated to sell to their own buyers to increase their income, so they're going to show buyers the seller's property. When selling on their own, sellers must figure out all of the different venues, post the listing themselves and then hope for the best.
Sellers considering selling on their own have an uphill battle to face. It's always better to partner with an experienced Realtor, as doing so makes the process ahead much smoother and less stressful.
Underwriting guidelines change all the time. But interestingly, one thing that is somewhat constant is the amount of down payment due at the closing table. Many borrowers find, however, that coming up with the cash for the down payment has perhaps been the biggest obstacle to homeownership.
Seventy-five years ago, banks would only loan money to buy a house if the homebuyer had 30 percent or more of the sales price for the down payment. Even in 1935 when the average price of a home in the United States was $3,400, coming up with $1,000 for a down payment was a challenge. After all, the average income of a worker was just $1,500 per year. But in the 1930s the government decided to step in and help Americans buy their homes, and the Federal Housing Administration (FHA) was created to offer prospective homeowners the opportunity to buy a home with a small down payment and a stable 30 year fixed rate loan.
Today, our government, through the FHA, insures lenders who offer FHA loans. These loans have many benefits but probably the most noteworthy is that FHA insured loans allow a homebuyer to buy a home with as little as 3.5 percent down and to borrow as much as $729,750 (in a high-priced housing market) at a competitive 30-year fixed rate. FHA loans are typically more lenient on credit and allow a borrower to spend more of their monthly income on their house payment than conventional loans. They also allow a borrower to receive all of the down payment as a gift.
But FHA-insured loans also have their downsides. For example, FHA loans require mortgage insurance on every loan, despite the size of the down payment, and that mortgage insurance effectively adds up to 1.35 percent to the note rate. In other words, if the 30-year fixed rate today were 3.25 percent, the effective rate for an FHA loan would be over 4.5 percent.
Alternatively, the conventional financing offered by Freddie Mac and Fannie Mae requires the borrower to pay for mortgage insurance only if there is less than 20 percent for the down payment. Mortgage insurance may be paid either on a monthly basis or as a lump sum at the close of escrow. The precise payment options are dependent on the loan to value ratio, the loan amount and the credit score. Unlike with the current FHA loans, mortgage insurance on conventional loans does not continue throughout the life of the loan.
As we get move into the spring home buying season, most locations throughout the country have turned into a seller’s market. Although loan officers typically deal with buyers, or people refinancing, LO’s also come in contact with sellers who are buying in the same community. There are several buyer “turn-offs” that sellers should avoid at all costs.
First and foremost is a dirty house. Whether it be replacing carpets for stains and particulates or steam-cleaning tile and grout, the home should be as debris free as possible. The next area for an impression to go awry is smell. The old saying is buyers buy with their noses. Sellers should make sure their home smells fresh and inviting. From kitchen to pet odors as well as anything else, what a seller may perceive to be homey could quickly turn off a buyer.
Sellers should know that old fixtures are another way to scare off buyers, and for new cabinet hardware and doorknobs, the cost is all of $400 or $500, but it makes a huge difference. The same holds true for dated ceiling fans, light fixtures and kitchen appliances. Buyers can take care of these things after closing escrow, but it's going to impede the seller from getting the highest price possible for their home. Also avoid clutter, which can be a distraction.
It appears that today's buyer wants no part of wallpaper. Wallpaper is a pain to remove and simply adds another chore to a buyer's to-do list. Another pain-in-the-rear are popcorn acoustic ceilings; once the must-have for fashionable homes in the '60s and '70s, but now an accessory that badly dates the space.
Also, if your house is cluttered with too many personal items, it's like the buyer is trying on those clothes with you still in them: a fit is unlikely. Decorating to live and decorating to sell are different, and sellers should try to eliminate personal items, including family photos, personal effects and even unique colors.
Loan officers often tell sellers that another bothersome item is owners who want to walk around with the potential buyer and provide advice. On the other hand, curb appeal is critical – it is your house’s first impression. Experienced lenders know that buying, selling, or refinancing a home is very important, and are more than happy to assist and provide recommendations based on their experience.
It is important for anyone buying a home or refinancing to understand a couple basic concepts. For example, the two most important considerations for homebuyers are debt to income ratio and the price vs. rent calculation. Homebuyers first must understand their affordability using a debt-to-income ratio, and then they can evaluate their housing options in their local market by comparing cost to rent vs. buy.
Debt-to-income analysis tells you what percentage of your income you’re going to spend on housing and all other monthly obligations. This is how all U.S. mortgage lenders make loan approval decisions, and although there are other quantitative measures lenders use for loan decisions (such as credit scores or the percentage of the home’s value that will be financed - LTV), the debt-to-income ratio is by far the most important because it looks at the most data.
For housing, monthly debt payments mean highest-case principal and interest on a mortgage payment and property taxes (before tax deductions), homeowners insurance, and mortgage insurance if applicable. For non-housing it means payments on present and future student loans, credit cards, car loans/leases (the present versions of these items come from credit reports) plus child support, alimony, and countless other types of non-housing debt people have hidden in their credit reports, tax returns, and asset account statements. Lenders allow you to spend 40-50% of your income on your debt obligations depending on the loan size and type.
The next step is to understand whether it’s cheaper to rent or buy. Like debt-to-income, it’s all about the numbers at which you are looking. The reason is because people use national figures for home prices and rents, but monthly mortgage payment assumes a 20% down payment at prevailing 30-year-fixed-rate mortgage rates. Their analysis is based on median national asking prices for rents and median mortgage payments based on national listing prices, so when taking this into consideration, know exactly what the numbers mean!
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