More Homeowners Have Little or No Equity Left

One of the results of the easy credit and looser financing terms that have been prevalent over the past several years has been Fort Collins Real Estate homeowners that have little or no equity in their homes.Some people bought homes with little or nothing down over the past several years.Perhaps a homeowner has refinanced several times over the past ten years, pulling equity out each time paying off cars, paying for a college education or other debts resulting in little or no equity left in the home even though they have lived there for many years and the home has appreciated greatly over that time.Some people may have taken out a loan that negatively amortizes. This means that they are not paying the full interest owed each month. This unpaid interest is added to the existing loan balance so that it is going up every month! Some people have had high appraisals done on the homes in order to allow them to borrow the money they needed to pay off other debt or perhaps to reach a certain loan to value ratio so that they would not have to pay mortgage insurance. While these scenarios helped them at the moment, it can spell trouble if they need to sell now when our local home prices have been relatively flat. It will really hurt if they have not kept up with the maintenance and update of the home and now also need to put in new carpet and paint to sell. In any of these scenarios if the homeowner finds they need to sell, they may need to bring money to closing in order to pay off the loan(s), brokerage fees, release/title fees, interest owed, prorated property tax, HOA fees and closing fees. By signing the standard Colorado Contract the seller is agreeing to pay of any loans and expenses of sale through the equity available in the property or from any other source. This means they would need to take it from savings or take out a personal loan for the amount owing, if need be. The title company will want that amount in the form of a wire transfer into their trust account or they might take a cashier’s check at closing. What does this mean to the buyer who is out looking at these homes? Unfortunately, unless your agent does a bit of detective work, you may not know that the seller must bring money to closing. If the seller refuses to bring the money to closing, the buyer may be in the position of having spent a tremendous amount of time, emotional energy and money for inspections and the appraisal on a home they cannot buy. The buyer may have made moving plans, had their van packed and given their notice on a rental. They will likely lose the interest rate lock that they have with the loan as it is generally tied to the property, closing by a specific date. Per the contract, the buyer would potentially have the right to “specific performance,” but this entails a lawsuit and some time. Even if you do not sue for specific performance, you can go after the seller for the damages that you have incurred (listed above). If the seller is in very serious financial trouble, he or she might claim bankruptcy and you would be hard-pressed to get your expenses reimbursed. Some sellers want to negotiate a short sale with their lender. In other words they want to see if the lender will take less than the balance owing on the loan. As you look at the listings in the MLS you will see listings that say, “this sale is subject to a short sale”. Even if the seller is able to negotiate a short sale, the lender is likely to go after the seller for the deficit after the closing. Generally, before a lender will even consider accepting a short sale, the borrower must be behind in their payments. Legal counsel should be sought by the seller to determine how this will impact their credit and what other options they may have. The seller and his or her agent are obligated to disclose a short sale, and will likely have an addendum to the contract that cancels the sale if an acceptable agreement with the lender cannot be made. A short sale is likely to take several weeks to negotiate with the lender. If the seller is unable to negotiate their short pay, the buyer once again may be in the position of having lost time and money trying to buy the home. If a buyer is negotiating to purchase a home where the seller will need to bring money to closing, I would suggest that the seller be required to put the funds that they will need to bring to closing in escrow with the title company so that the buyers are assured that they will not waste their time and effort. The buyer’s lender verifies the buyer’s down payment funds prior to closing but there is no mechanism to assure the buyer that the seller can perform. It is incumbent of listing agents to do a net sheet for the seller at the time of listing at a reasonable sales price. If you can see that the seller has little or no equity and will need to bring money to closing, this discussion can occur before a buyer is involved. Once an offer comes in, another net sheet should be done so the seller clearly understands what his or her position is.