Joe Baker - REALTOR

I've had many calls lately about finding a buyer a home on either a contract for deed or a rent to own. These calls are coming from people that just can't get a mortgage right now, or don't have the required funds for down payment per their credit. I have been having the conversation about the positives and or negatives for each one so I figured I would write about it.

So let's first talk about a Rent To Own Situation. Here are a couple of Positives a Rent To Own Home:

• You can work toward home ownership with this type of contract.
• You will typically get a credit each month for on time payments that you can use towards the purchase price.
• You will typically have less money out of pocket to sign the contract.
• If you make UNDER a certain amount for your income, you will get a renter's credit to be used on your taxes.
• You have a set purchase price that you know about from day 1.

Here are a couple of negatives for a Rent To Own Home:

• You don't actually own the home. The rent to own contract is a glorified rental contract.
• If you default on any portion of the contract, you may lose the chance to buy the home for the agreed upon price.
• When you apply for a new mortgage, the lender will NOT recognize the Rent To Own Contract.
• You have a set purchase price that you know from day 1.

Now wait, I listed one items as both a positive and a negative above (see the comment in bold). Well, it all depends on what the price is from day 1. If the market appreciates more than anticipated, you might end up getting a better deal on the home. However, if the market goes down, you may end up having to buy the home for an inflated price. Not many normal buyers are willing to do this so you may just end up walking away with nothing to show for your efforts.

Here are some positives for Buying a home on a Contract for Deed:

• You actually own the home from Day 1.
• You get to write off your mortgage interest and closing costs, just as you would if you obtained a standard mortgage.
• You know what the purchase price is from day 1.
• When you come to your balloon (if you have a balloon payment set) the mortgage company will actually recognize the contract and acknowledge your amortization schedule.
• Depending how far out your balloon payment is (again, if you have one), the mortgage company will consider it a refinance. This makes it much easier to obtain the mortgage.

Here are some negatives for Buying a home on a Contract for Deed:

• If you default on any portion of the contract, the Contract for Deed could be canceled in as little as 30 days. You could potentially lose your down payment.
• The down payment that may be required could be a lot higher.

So, as you can see, there are positives and negatives to each method. In my opinion, if you can get into a contract for deed as opposed to a rent to own (or even a rental) you will be much better in the end. To answer a question that I'm sure is lingering - In my experience, I have worked with Buyers that had to put as little as 1.5% down to get into the contract. On the flip side, there are some sellers who will not even consider selling on a contract for deed unless there is 20% down. It all depends on how motivated the seller is, and how credit worthy they think you are! Please contact me if you have any questions that I did not answer.

With 95% of my listings being short sales, I have come to learn a lot when it comes to this subject. In this blog, I'll attempt to cover two important items. The first, why even bother selling your home as opposed to letting it go through the short sale process. The second, and certainly the most frustrating, why it takes so long to complete a short sale.

First, why could a short sale benefit you as opposed to allowing your home to complete the foreclosure process? There are a couple answers to this. If you have two mortgages, MN state law will allow a lender to do one of two things, foreclose on your home (thus, taking it away) or suing you for the deficiency in court. They can ONLY do one or the other. Next, there can only be one "foreclosure" process on any home/mortgage. So, if you can see where I'm going with this, you could have one lender that forecloses on your home, and the other lender suing you for a deficiency judgment. One of the main goals of agents is to get the lender to release you from any further liability after you sell your home. I negotiate hard on a client's behalf to reach that goal. Lender's are about as sneaky as one could imagine. If they don't specifically state that they are considering your loan satisfied, they have the right to come after you. Of course, this only applies to home owner's with more than one mortgage. This is common in our market. Now, there are conflicting articles for my next point. Does the short sale increase your chances of obtaining future credit? Most of the time, if you are behind in your mortgage by 4 or more payments, regardless of whether the home is actually foreclosed upon, new credit assumes that it is a foreclosure. With that being said, it's important to get it off your books sooner rather than later. The conflicting article states that any short fall on the payoff on your credit report is the same as a full foreclosure. Only time will tell what the actual truth is. Of course, one or two 30 day lates are far better than the foreclosure being listed. It's all in how your lender reports to the credit bureaus. "Paid as agreed" is the best possible report.

Now to my second question: Why does it take so long to complete a short sale? This is true most of the time unless your lender is a small local bank. The reason for this is because there are thousands of home owners that are selling their homes on short sale. At countrywide for example, each individual negotiator has between 100 and 150 files on their desk at any one time. This is down from a staggering 300+ files just a few months ago. Countrywide has been adding negotiators to their department! As for a general explanation: The banks are corporate. They are losing money. There are a lot of approval steps that each file needs to go through. And trust me, they do their due diligence to make sure that the loss of selling the home now is less than the loss of foreclosing. I am not 100% sure, but I have heard that it costs up to 25% of the home's value for the lender to foreclose. Understandably, the originally vision of lenders to make money off of home mortgage interest was a much better idea than making money by owning Real Estate!

Welcome to my new Blog and thanks for being a part of it! I plan on updating this Blog on at least a weekly basis. I will discuss of course the Real Estate Market. I'll mix in some lending comments and also what the economy may be up to at that particular moment.

Well, as some of you might be curious about, we're going to talk about the new lending guidelines and why these guidelines have recently changed. As I am sure that everyone has heard, 100% financing is now a thing of the past. Well, almost. It's a thing of the past unless you have DVA eligibility. If you don't know what DVA is, please ask - but my hunch is that if you don't know what it is, you don't have it. Some of you may be thinking that you could care less about 100% financing because you have enough money to put down on a home of your choice. As you will no doubtedly see, even if you have 100% cash to purchase your home, YOU CARE THAT IT'S GONE!!!

Up until recently, there were a plethora of 100% financing options. These ranged from 80/20 loans to loans with mortgage insurance to loans with down payment assistance. The 80/20's went away when the housing market took a turn for the worst. The lender in the second lien position (the 20% lender) was taking a hit because the homes were not selling enough to cover that amount. Well, we don't care that they went away because there was still 100% financing through FHA using one of the down payment assistance programs such as Nehemiah. This is a government backed loan that limits the lender's risk for defaults. As consumers, we cared that 100% was there. As a lender, they care about insured mortgages. Hence, everyone was still happy.

Now, about 2 months ago, legislation was passed and signed into law that made 100% FHA loans (the only available at the time) that were using down payment assistance illegal. The legislation contended that people that use down payment assistance were more likely to default, even though there is no concrete evidence for it. Now the down payment that you need to come up with is 3%, soon to change to 3.5%.

I'm starting to get to the point why everyone cares that down payment assistance is gone. People need a place to live. Nobody can argue with that. Life changes drive Real Estate. Whether it be a college grad that needs his or her first home, a growing family that needs a bigger home, or even a separation of a family into two different home. Whatever the case may be, most people move up OR down in their home value 125-150% As an example, the owner of the $200,000 home that wants to upgrade is probably going to spend between $250,000 and $300,000 on the new home.

Here's a stat for you that I've kept to myself up until now. 40% of buyers in our local market use down payment assistance for homes valued (and purchased) under $300,000. 40%!!! Now, let's say you have the $800,000 home for sale that you would like to sell before you upgrade or downgrade. I'd venture to say that you don't want to payments, even if you can afford it. Let's also assume for arguments sake that everyone in my example here is going to upgrade.

1. Your $800,000 home is for sale. You want something new, regardless of what it is.
2. The buyer for your home is selling $600,000.
3. The buyer for #2's home is selling $450,000.
4. The buyer for #3's home is selling $350,000.
5. The buyer for #4's home is selling $250,000.

THERE ARE NOW 40% LESS BUYERS FOR #5 BECAUSE DPA IS GONE!! As you can see, everyone is affected up the line for home selling.

What can we do now? Well, the short answer is we can sit and wait. The Economy has tightened it's grasp on the credit market which may have some negative effects on the housing market. As if the housing market needs anything more negative to happen to it, right? Housing has consistently been a positive factor for the economy in the past many years. Even though it is easy to see that people have over-mortgaged, most of them used that money to buy things - to consume things. Restaurants flourished, home stores had profits soar, even down to the little mom and pop stores in the malls. All had great years because of the consumption. It's obvious that I am no expert on the economy. However, I am an expert in the Real Estate Market. No credit (lack of demand), depressed prices, and increasing inventory spell one thing. Trouble! I believe Macroeconomics 101 taught me this valuable lesson.

Check out my website for more:

www.JoeBakerHomes.com