Karen Cavanaugh\’s Blog

When Your Home’s Value is Less Than the Mortgage

For a variety of reasons, it is possible that the total  debt on your home may be more than what the home is worth. Most of the time, this isn’t a problem because time is the solution. Depending on how much you owe, just wait it out and the value of your home goes up. Problem solved. Unfortunately, this could take years.This solution does not work for everyone though, because some folks are stuck in a situation where they absolutely have to sell their house.This can happen for many reasons, some good and some not so good: relocation, financial hardship, divorce, death, illness, or anything at all. The result is that you may have to move, but you can’t sell your house and make enough on the sale to pay the mortgage off. So what do you do?

One option is to do nothing and not make your mortgage payment. That’s a worst-case scenario because it impacts your  credit rating  more severely than anything else possibly can. Another option is something called a “short sale.” This is when you fess up to the lender, let them know about your hardship and ask them to accept less money than you owe. Of course, the lender doesn’t want to do that, but they also don’t want to pay all the costs of foreclosing on a home, repairing any defects, placing it on the market, and getting the best price they can in what may be a market already overstressed with excess inventory. Lenders absolutely hate to foreclose, so they may be willing to consider a short sale. Not always so don’t get your hopes up. A short sale involves a lot of paperwork, time and effort and it is best if you have a REALTOR or someone knowledgeable to help guide you through the process and give moral support. A lot of stress is involved.

The first step is to contact the Loan Service Department of your lender. That number will be in the documentation you receive about making your payment. Use the phone and the mail. Keep copies. The lender will ask you to submit a financial statement. They want to know that you really don’t have the financial assets to repay the  loan after you sell the home. That’s just the beginning, assuming they give a tentative agreement.

Your  REALTOR  still has to put the home on the market, find a buyer, and get a bona fide offer. Once that has been accomplished, you submit all contracts and paperwork to your lender for a decision. This takes a while because there are several decision makers involved. Your lender isn’t usually your lender. They just service the loan for your actual lender, called the investor. Your paperwork is submitted to the investor for a decision.   Assuming you have mortgage insurance on the loan, they are another decision maker in the process. Mortgage insurance covers lenders in the case of loan defaults. That way they can justify making high LTV (loan-to-value) loans. If the investor and the insurer both agree, your short sale is approved, and you can sell you home. A short sale is basically a “forgiveness of debt.” That counts as income and you have to declare it to the IRS.  

Confused about Real Estate commissions? You’re not alone. Here are some answers to a few of your most common questions.

There™s no question a good real estate agent can be a valuable resource when it comes to buying or selling a home. But how much is that help going to cost?

First of all, if you™re the one buying the home, it isn™t going to cost you anything. The agent™s commission comes out of the selling price. That means it™s deducted from the amount the seller receives, not added onto the amount the buyer pays. Of course, it can be argued that as a buyer you are indirectly paying the commission by virtue of the fact that it™s included in the price. But following that logic, all homes for sale by owner should cost less than those being sold through an agent, and that certainly isn™t always the case.

Second, if you™re the seller, you don™t have to pay an agent anything up-front to market your home. A real estate agent generally doesn™t receive any commission until closing, at which time they will receive the amount stipulated in their contract — typically somewhere between five and eight percent. But chances are (unless you™re in a particularly hot market) your agent is going to have to work hard to earn that commission by investing a lot of time and effort into marketing your home. And they™re going to have to give a cut of that commission to both their brokerage and the buyer™s agent (unless they represent both the buyer and the seller).

To help take the mystery out of real estate commissions, I™ve provided the following answers to a few of your most common questions.

Q. What is the average commission on a home purchase?
A. The average commission is about 5 percent, although 6 percent commissions are still common.

Q. Who pays the commission?
A. The seller. It is paid out of funds received from the sale of the home.

Q. Does the commission go entirely to the seller™s real estate agent?
A. No. The broker whose firm lists the house sets the commission. The listing broker then offers part of the commission — often 50 percent — to the broker whose firm represents the buyer. Both brokers then share their portion of commission with the agents who work with the seller and buyer. The agents™ share may be as little as 50 percent or as much as 100 percent, depending on their arrangement with the broker. If either brokerage is part of a franchise, it may also pay part of the commission as a franchise fee.

Q. Is it possible to negotiate the real estate commission?
A. Yes. An agent may be willing to negotiate his or her commission in order to get your business. This is especially true if the agent is independent and doesn™t have large operating costs. In some cases, both agents might agree to cut their commissions in order to bring down the price of the home if the buyer™s offer doesn™t quite meet the asking price. Sometimes a buyer™s agent may offer concessions such as paid closing costs, a repair allowance or a rebate in order to help close a deal. Buyer rebates are legal in most states.
 
Q. Is a real estate agent likely to push me to buy a more expensive home so he can make a higher commission?
A. There isn™t a big incentive for an agent to push you to buy a more expensive home because of the way commissions are divided. Your agent may be entitled to 65 percent of his broker™s share of the commission — perhaps 3 percent of the sale price. Under that scenario, if you were to buy a home for $260,000, rather than $250,000, your agent would earn only an additional $195. However, there could be an incentive for the agent to steer you toward a house on which his broker has been offered a larger share of the commission. This practice is not prevalent, but it does occur.

Q. Are there other commissions that buyers don™t see?
A. In some cases, a seller, listing agent or builder might offer the buyer™s agent a cash bonus or other incentive to help sell the house. The buyer™s agent should disclose these fees if you ask.

Q. Can I get a lower fee by using a discount broker?
A. A discount broker may offer you lower fees, or a deal in which you pay only for the services you receive. However, discount brokers may be more suitable for those with a good knowledge of real estate, since they may not offer a full range of services. As always, you get what you pay for so make sure you understand the market and it™s practices.  

You’ve heard news reports saying that the housing market is in turmoil.  Home prices are stalling, if not falling in many areas and it’s   tougher to get home financing.   So does this mean it’s Game Over ?

Well, before you write another rent check, or write off the opportunity to buy your first property, trade-up  or down to another  property, consider the following seven things you need to know when it comes to homeownership.

1. HOMEOWNERSHIP IS A SOLID LONG-TERM INVESTMENT. In fact, it’s probably the smartest investment you will ever make during your lifetime, let alone the largest for most.  That’s because homeownership has proven to be a critical contributor of financial well-being for American families for decades. While residential real estate did especially well between 1998 and 2005, I’m not thinking of just that period. Instead, housing has been making consistently solid gains since at least the 1950′s. It’s simple – homeownership generates wealth, renting you home does not.
2. THE IRS GIVES BIG ADVANTAGES TO HOMEOWNER. The federal government provides tax breaks for homeowners – from allowing you to deduct your mortgage interest, mortgage insurance and property taxes to exempting capital gains taxes on your primary residence, within limits (be sure to check with a tax professional to see how these may apply to you). In some cases, you may find that your after taxes your  mortgage payments  is comparable to and perhaps lower than your current rent payment!
3. GENERALLY SPEAKING HOME VALUES AREA STILL RISING. During the past year home prices across the country rose 3.2%, according to government statistics. While that’s the slowest rate of appreciation we’ve seen over the past ten years, the value of the typical home continues to increase.  And history is on your side, especially if you remain in your home for at least a few years. Since 1975, and through recessions and expansions, the average annual appreciation rate for the typical home is 6.0%. National home prices since 1975 have yet to record a decline for any one year period.
4. WHAT THE MARKET IS DOING NATIONALLY IS IRRELEVANT TO YOU. The media likes to refer to a “nationwide housing slump” BUT don’t be misled. Real estate isn’t national, its local! The only market you need to be concerned about is your local market. Some areas throughout the country are indeed struggling. On a state-by-state basis, five states recorded price declines of between 1.0% and 1.5% in the past year: Rhode Island, Massachusetts, California, Michigan and Nevada. But at the same time, four states posted increases in excess of 9%: Montana, Wyoming, Washington and Utah. When considering future home price appreciation in your area, ask yourself about prospects for local job growth. Is it anemic or healthy? And rely on your Realtor, who can tell you a lot more than just listing prices. Ask about days on the market, the local housing inventory and selling prices to get a clear picture of your current local market. Don’t let headlines in the media SCARE you AWAY!!
5. BUYING OPPORTUNITIES HAVE IMPROVED. In most of the country, the number of homes on the market has risen steadily, making this largely a buyer’s market. Sellers are more willing to make concessions on price or even paying part of the closing costs. Mortgage rates remain low by historic standards and while lending terms have become more stringent for those with less than perfect credit, borrowers with a good credit  history probably won’t notice much of a difference.
6. YOU DON’T HAVE TO WORRY ABOUT TIMING THE MARKET. Ideally, you’d snap up a new home when the price is at its lowest, and see it start to appreciate right away. It’s nice to dream, but don’t let that keep  you from getting into the market. If you’re making a long term purchase – a property you expect to own for at least four years or so – you’re usually better served just getting in.
7. SMART HOME FINANCING OPTIONS ARE STILL AVAILABLE. There’s a wide array of mortgage products out there, filling various needs for borrowers in certain situations. Be sure you understand what you’re getting. Will the rate change?   If so, How soon and  How high could it go? Can you handle bigger monthly mortgage payments? Are you paying down the loan’s outstanding balance? If you have the option of paying less than the monthly interest accrued, are you willing to add the unpaid interest to your loan’s outstanding balance (known as negative amortization)?

These are just some of the questions you need to consider. The mortgage that’s right for you depends on your situation and your preferences and some financing options available to you may harm, not help your financial security. That’s why it’s critical to work with a lender who takes the time to understand your financial circumstances and preferences and than ensures that you understand your choices.

Homeownership is the way American families move ahead financially and waiting for the current concerns to fade away can cost you. Don’t simply assume that this is a bad time to buy real estate. Go beyond the headlines and make  a well informed decision.

Why do we call agents who showed your home for feedback?

Mostly to answer any questions or concerns the potential buyer expressed or the agent may have had during their visit to your home. Also, to jog the agent’s memory about the house so we may be able to get a second showing.   The feedback from agents is welcomed and we can also get another opinion of price, condition so that we can assist if we need in repositioning in the market.

One thing not to expect is an agent to give us  a full critique of the house.   If  that agent has  showed 5-7 houses to a potential buyer,  they may honestly not remember it in detail. Also, if an agent who we have called has not returned our call, it means the buyer is not interested. Here are some ways to interpret feedback.

If an agents says:

 ” The buyer thought the house was too small”

That means: The buyer found larger homes for the same price.

“They didn’t like the carpet?”

The seller should strongly consider replacing the carpet due to age, color or condition

“They like the house but put an offer in on another one”

They found a house that was a better value

“They like the house but bought a NEW one”

That means the buyer was willing to pay  10 – 15% more to get a better value

“They thought the yard was too small, street to busy”

They found other homes in that price range with larger yards, quieter streets

“They didn’t like the layout/floorplan of the house”

Bottom line- They just didn’t like the house

Price objections are always “clothed” in different terms, remember as a seller your objection is to be the nicest house in the price range your in!

Three factors to consider in selling your home-

LOCATION, CONDITION AND PRICE…..

and they are all related!

Your home’s location and setting influence its value.   A home inside a quiet subdivision sells for more than  the identical home on a busy street.   Remote areas typically sell for less than areas that are close proximity to shopping, major highways, etc. Views, streams and trees can increase value, but ultimately you have no control over location.

Condition-New homes enjoy a marketing edge over resale homes because they are   shiny, clean and obviously NEW! REALTORS also can enhance that appeal by offering model homes which are just that -(clean, bright, decorated in current colors and amenities) for buyers to examine.   Realtors would love to have every listing look that good.   Our goal (as REALTORS)is to make your home as close to model home as possible, being sensitive to costs.   You (the seller) have complete control over the condition and you can increase the value and decrease marketing time by being in the best possible condition.  It’s usually the first impression on a buyer that will capture their emotions.

Price-You home must be priced within a appropriate range. What you paid for your property does not affect it’s value! The amount of cash you need from the sale of your property does not affect its value! What you want for your property does not affect its value! The value of your property is determined by what a BUYER is willing to pay in Today’s Market based on comparing your property to others currently on the market for sale, but even more importantly, what similar properties have SOLD for in the last 6 months. This is the only historical data a bank will use to lend a mortgage. Remember BUYERS always determine value!

It™s not like the last time- when you didn™t already own a home, this time you already own  one. Not only are there additional considerations for financing  your next home, there is the timing issue. Would you rather have the possibility of owning two homes or the dilemma of having to find temporary housing between homes?

Here are 5 strategies to avoid the most common mistakes  you can  make when Moving Up!

The Dream Home: Let™s face it, we all dream of improving our lifestyle and moving to a larger home. What prevents us from doing that is the discrepancy between our hearts and our bank accounts. It is easy to drive by a home and find out it is sold or more than you are willing to pay. Many home owners get caught up in this hit or miss strategy. Find out if your REALTOR offers a Buyer Profile System or House Hunting Service, which takes the guesswork out and helps put you in the home of your dreams. It takes into account your criteria and all the available homes to supply you with updated information on an on-going basis. This helps to remove those rose-colored glasses.

Making the Necessary Improvements: Are you interested in getting the best price for the home you are selling? Then there are certainly things that you can do to enhance it for the buyer. Fix-ups don™t need to be expensive to be effective. Making minor investments can come back to you ten-fold when you get ready to sell. If you don™t have the cash, investigate an equity loan that can be repaid when you close.

Sell First: If you don™t want to find yourself at a disadvantage at the closing table, sell before you buy. If you don™t, you may feel pressured to accept a below market offer to meet a purchase deadline. Selling first allows you to buy with no strings attached. This not only helps your bargaining position in selling your old home, but also in purchasing the new one. It may be possible to sell your current home and rent it back for a short time.
Get your mortgage Pre-Approved: Pre-Approval does not cost you anything or obligate you, but many homeowners fail to take advantage of. This step gives you a significant advantage when submitting an offer to purchase a home. It lets the seller know that you already have the green light from your lending institution. It helps you ascertain how much home you qualify for and your projected payment. Don™t fail to take this important step.

Coordinate Closings: When coordinating two major transactions together with all the people involved like lawyers, loan officers and / or title company representatives -the chance of a mix-up or misscommunication goes up dramatically. If you want to avoid a nightmare make sure you work closely with your agent.

Keep these strategies in mind and you should have a great experience and remember. A down market represents an excellent time to trade up. By understanding that more expensive homes typically get hit harder on prices you will get the concept.

Let™s say homes in a down market have depreciated 5% in value. That  $200,000 home you are selling has taken a $10,000 hit in value, but that $400,000 home you are purchasing has taken a $20,000 hit in value. It means your overall cost in moving up to your new home is reduced by $10,000.

That accounted  for the gap reduction between the prices of the two homes.   A down market represents the best financial time to trade up.

Welcome to Karen Cavanaugh’s Blog! This blog will provide you with valuable information, tips, and general insight into the real estate market in Wilmington.