Repair credit best for fixing home defects

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REThink Real Estate

August 25, 2008 05:08 PM

By Tara-Nicholle Nelson 
  Inman News

Q: I decided that this was a good time to buy, and found this really great house at a great price. It's an older home, and very charming, but there is about $10,000 worth of various electrical and termite repairs that the inspectors have found that need to be done. I know that's not that much compared to the $300,000 I'm paying for the place, but I'm going to be pretty house-poor after escrow closes. I'm afraid I'm going to lose my dream house over these issues. What should I do?

A: As always, the lawyer in me has to say, "It depends." Did the original contract have an as-is clause? If so, it may be unethical to demand that the seller pitch in to fix these defects, though he might offer to if the other alternative is for you to back out of the deal. Are the repairs required by your lender or your city/state to be completed by the seller? Is the seller an individual or a bank? A bank is highly unlikely to contribute to these sorts of repairs, unless required to do so by law. How badly do you want the place? All of these things impact how you should proceed.

Mindset Management

If you love the house, feel that you're getting a good value, and the proposed financing will work for you on a long-term basis, look at ways to resolve or work around the problems, rather than instantly fearing that you're going to lose the house around this. In life, generally, what we fear we often create. If you approach this problem from the perspective of losing the place, you will. If you approach it committed to working this out, you almost certainly will.

If you are attracted to the charm of older homes, understand that this level of repair (or more) is liable to be required on any older home you consider buying (and in many of the newer ones, which have often been less well-cared-for). In fact, I know home inspectors who feel that older homes are often a better bet, conditionwise: The quality of materials and craftsmanship when they were built was often superior to those of newer homes, and any major functional or structural issues will have usually emerged by now, so the chances of a major surprise occurring are much smaller.

Home inspection reports can be worded very strongly, in the interest of protecting the inspector from liability. Don't let the verbiage freak you out -- there are lots of answers and clarifications you need to get before you can determine whether the repairs needed are potential deal-breakers.

Need-to-Knows

In the world of home improvement and repairs, things are not always black and white. For example, opinions will vary on what specific repairs are necessary -- some electricians prefer to actually ground two-pronged outlets, while others prefer to install ground-fault circuit-interrupting outlets. I know that's gibberish, but these are basically two solutions to the same issue of ungrounded outlets -- the first solution costs thousands, while the other costs $50 per outlet.

Also, every item that the home inspector points out may not, strictly speaking, need to be done (or may not need to be done with any urgency). Inspectors' professional standards require them to call your attention to recommended upgrades and other items that, when you ask them, they would either never complete if they were buying the house themselves or they would complete over a number of years, rather than trying to get them all done up front. Pest reports, for instance, are actually inspections for all sorts of wood-destroying organisms and conditions, not just pests. So, if your pest report comes back indicating actual termite infestation, that is an item you need to ensure gets handled urgently. However, if it comes back indicating a fence with dry rot, that may be a much less urgent repair -- and may even be duplicative of a fence rebuild that you were wanting to do irrespective of the pest report.

As a homeowner-to-be, it's time for you to learn the art and science of obtaining multiple repair bids. If you have one bid for $10,000 and you go out and get two more, you're very likely to end up with three totally different amounts and even three totally different recommended courses of action. Whether you buy this particular house or not, take this lesson with you throughout your career as a homeowner: Always get multiple bids for repairs or home improvements. You may not always want to take the lowest bid, because professionalism and quality of work vary along with pricing, but that's another story. Until you have multiple bids, you don't truly know how much the repairs will cost.

Finally, your Realtor will help you obtain a home warranty policy before close of escrow; in many markets, the seller will even pay for this item. While home warranty plans don't cover everything that could ever go wrong with your home, they do dramatically limit your potential exposure for when things break. Ask your Realtor to help you review your home warranty policy coverage and exclusions right now. Generally speaking, if any of the items you're concerned about are, for example, systems or mechanisms that are currently working but may need repair or replacement soon, those items may be covered by your home warranty -- but only after escrow closes and only when they actually stop functioning.

Action Plan

If you are committed to trying to resolve these repair issues so that you can move forward with the purchase of your dream home, here's the plan of action I suggest:

1. Get multiple bids and opinions on the necessity, cost and urgency of the recommended repairs. Get contractor referrals from your Realtor and friends, and also ask them if they would recommend an alternative course of action.

2. Ask the seller for a closing-cost credit or repair-credit holdback. Most lenders won't let you get cash from a seller credit without the repairs being done before closing, so you have two options. You can either (a) ask the seller to pay for some of your closing costs, so you can reserve your closing-cost funds and use them to have repairs done after closing, or (b) you can ask the seller to give you a repair credit, and leave that money in escrow after closing until your licensed contractor submits an invoice to escrow. I prefer either of these to having the seller complete the repairs, as I think few sellers will have the work done the way that you, the new homeowner, would. Consult with your Realtor and mortgage broker about which of these options your lender will allow, and stay flexible -- if the seller agrees to pay for only half of the repairs, then you can evaluate whether that's enough to allow you to move forward.

3. Ask seller for repairs. If you can't get credits for whatever reason, like the seller already giving you the maximum credits your lender will allow, ask the seller to complete the repairs. Ask for an invoice from a licensed contractor, and ask if you can select any cosmetic or finish materials.

4. Ask seller for price reduction. If the seller can't do the repairs or offer you a credit, ask them to reduce the price for some or all of the costs you'll be incurring for repairs. A price reduction is not ideal, as it doesn't result in you having the cash to get the work done, and will often not reduce your down payment or monthly payment amounts enough to allow for the repairs, but it's certainly better than nothing!

Once you have completed this action plan and have the results of your negotiation with the seller, only then do you have the full information you need to make a decision about whether to move forward with this purchase. While it is true that sellers are more motivated now than in the last generation to help with repairs, if they have already given you a great price, they may or may not be able to afford to add credits on top of that. Look at the help the seller can (or cannot) offer in the holistic context of the price, property, etc., rather than as an isolated potential deal-breaker.

The Kauai County Council's comittee has deferred making a decision on the proposed tax bill to reform the real property tax system but will resume deliberation on Sept. 3.  As I mentioned in my last blog, amoung other things, the proposed legislation would change the current real property tax system based on zoning to a system based on use for the purpose of shifting some of the burden on homeowners to the resorts. The deadline for the council to pass the bill has been extended but may go beyond September 10th. 

County administrators and stakeholder groups who have been working on the property tax reform bill for over a year, gave their recommendations to the Kaua‘i County Council for approval.  Some of the proposals on the table are: raising the Homeowner Exemption amounts, basing the tax rate on use rather than zoing and cutting the number of tax classifications from 8 to 4. The new clasess would be Residential, Resouce Lands, General and Resort.  Stay tuned for further updates. 

It's okay to ask.  I didn't know either until Rick Shaw posted one of his listings under that heading. Here's how it works... the seller reduces the price of his property by $1,000 per day until it sells.  Simple, but what an agressive marketing move on the part of the seller, and it's good fortune for the astute buyer.  Today, the home in popular Kakela Makai Oceanview Subdivision is listed at $871,900 - intrigued?  Call Rick's cell number get the full scoop at 808-639-0774.

Best options for borrowers facing payment problems

August 13, 2008 02:05 PM

By Jack Guttentag
Inman News

An uncomfortably large proportion of my mail these days is from borrowers with serious payment problems. In most cases, I can't help them for reasons discussed below. In a few common cases, I try.

In one common case, the borrower has two mortgages, which add to an amount well in excess of the value of the property, and can no longer afford both payments. If the same lender holds both mortgages, and if the borrower can afford a reduced payment, his objective should be to persuade the mortgage lender to modify the notes to lower the payments.

The burden of proof is on the borrower. He has to document that he will be forced to default on the existing mortgages but could afford the payment on a new mortgage that would cost the lender less than foreclosure.

If the second mortgage is held by a different lender, the challenge is greater.

The first-mortgage lender is unlikely to modify the note so long as the second-mortgage lender remains in a position to foreclose.

I suggest that borrowers in this situation approach the second-mortgage lender first, with the objective of inducing that lender to get out of the way. The borrower can offer the second-mortgage lender an unsecured promissory note for a portion of what is owed on the second mortgage. Since the second-mortgage loan has little or no value except as a nuisance, any reasonable offer is likely to be accepted.

The situation described above is only one of many in which troubled borrowers may find themselves. Rarely do they communicate all the information I would need to find the best possible outcome. Not all have second mortgages, but some have large amounts of nonmortgage debt to complicate the process; while many have negative equity in their properties, some have positive equity; in some cases a loss of income appears temporary, in other cases permanent; in some cases borrowers plan to dispose of the property, while in other cases they want to hang on if possible.

In principle, there is a "best possible outcome" for every individual situation, but only rarely do borrowers give me all the information I would need to find it, even if I had the time. Few borrowers know what their options might be, and fewer still understand the information they must provide before a best option can be identified. But some useful resources are available.

The Makai Properties Caravan which was held on Wednesday August 6, 2008 was a great success.  Thank you to JJ Leininger who arranged the Caravan and pulled everyone together.  Thank you Drew for all your help with firing up all the agents! To everyone who showed up and helped make the caravan a success a big Mahalo to you! And one last thank you to Bill Facker, Makai Properties newest addition who has brought positve and contagious energy to the office! Welcome aboard Bill, you are a fabulous addition to the Makai Ohana!

National Association of REALTORS®
Summary of Key Provisions of H.R. 3221 - The Housing Stimulus Bill (as of 7/30/08)

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H.R. 3221, the “Housing and Economic Recovery Act of 2008,” passed the House on July 23, 2008, by a vote of 272-152. On Saturday, July 26, 2008, the Senate passed the bill by a vote of 72-13. The President signed the bill on July 30, 2008. The bill includes the following provisions:

• GSE Reform – including a strong independent regulator, and permanent conforming loan limits up to the greater of $417,000 or 115% local area median home price, capped at $625,500. The effective date for reforms is immediate upon enactment, but the loan limits will not go into effect until the expiration of the Economic Stimulus limits (December 31, 2008).

• FHA Reform – including permanent FHA loan limits at the greater of $271,050 or 115% of local area median home price, capped at $625,500; streamlined processing for FHA condos; reforms to the HECM program, and reforms to the FHA manufactured housing program. The downpayment requirement on FHA loans will go up to 3.5% (from 3%). The effective date for reforms is immediate upon enactment, but the loan limits will not go into effect until the expiration of the Economic Stimulus limits (December 31, 2008).

• Homebuyer Tax Credit - a $7500 tax credit that would be would be available for any qualified purchase between April 8, 2008 and June 30, 2009. The credit is repayable over 15 years (making it, in effect, an interest free loan).

• FHA foreclosure rescue – development of a refinance program for homebuyers with problematic subprime loans. Lenders would write down qualified mortgages to 85% of the current appraised value and qualified borrowers would get a new FHA 30-year fixed mortgage at 90% of appraised value. Borrowers would have to share 50% of all future appreciation with FHA. The loan limit for this program is $550,440 nationwide. Program is effective on October 1, 2008.

• Seller-funded downpayment assistance programs – codifies existing FHA proposal to prohibit the use of downpayment assistance programs funded by those who have a financial interest in the sale; does not prohibit other assistance programs provided by nonprofits funded by other sources, churches, employers, or family members. This prohibition does not go into effect until October 1, 2008.

• VA loan limits – temporarily increases the VA home loan guarantee loan limits to the same level as the Economic Stimulus limits through December 31, 2008.

• Risk-based pricing – puts a moratorium on FHA using risk-based pricing for one year. This provision is effective from October 1, 2008 through September 30, 2009.

• GSE Stabilization – includes language proposed by the Treasury Department to authorize Treasury to make loans to and buy stock from the GSEs to make sure that Freddie Mac and Fannie Mae could not fail.

• Mortgage Revenue Bond Authority – authorizes $10 billion in mortgage revenue bonds for refinancing subprime mortgages.

• National Affordable Housing Trust Fund – Develops a Trust Fund funded by a percentage of profits from the GSEs. In its first years, the Trust Fund would cover costs of any defaulted loans in FHA foreclosure program. In out years, the Trust Fund would be used for the development of affordable housing.

• CDBG Funding – Provides $4 billion in neighborhood revitalization funds for communities to purchase foreclosed homes.

• LIHTC – Modernizes the Low Income Housing Tax Credit program to make it more efficient.

• Loan Originator Requirements – Strengthens the existing state-run nationwide mortgage originator licensing and registration system (and requires a parallel HUD system for states that fail to participate). Federal bank regulators will establish a parallel registration system for FDIC-insured banks. The purpose is to prevent fraud and require minimum licensing and education requirements. The bill exempts those who only perform real estate brokerage activities and are licensed or registered by a state, unless they are compensated by a lender, mortgage broker, or other loan originator.

National Association of REALTORS®
Summary of Key Provisions of H.R. 3221 - The Housing Stimulus Bill (as of 7/30/08)

---

H.R. 3221, the “Housing and Economic Recovery Act of 2008,” passed the House on July 23, 2008, by a vote of 272-152. On Saturday, July 26, 2008, the Senate passed the bill by a vote of 72-13. The President signed the bill on July 30, 2008. The bill includes the following provisions:

• GSE Reform – including a strong independent regulator, and permanent conforming loan limits up to the greater of $417,000 or 115% local area median home price, capped at $625,500. The effective date for reforms is immediate upon enactment, but the loan limits will not go into effect until the expiration of the Economic Stimulus limits (December 31, 2008).

• FHA Reform – including permanent FHA loan limits at the greater of $271,050 or 115% of local area median home price, capped at $625,500; streamlined processing for FHA condos; reforms to the HECM program, and reforms to the FHA manufactured housing program. The downpayment requirement on FHA loans will go up to 3.5% (from 3%). The effective date for reforms is immediate upon enactment, but the loan limits will not go into effect until the expiration of the Economic Stimulus limits (December 31, 2008).

• Homebuyer Tax Credit - a $7500 tax credit that would be would be available for any qualified purchase between April 8, 2008 and June 30, 2009. The credit is repayable over 15 years (making it, in effect, an interest free loan).

• FHA foreclosure rescue – development of a refinance program for homebuyers with problematic subprime loans. Lenders would write down qualified mortgages to 85% of the current appraised value and qualified borrowers would get a new FHA 30-year fixed mortgage at 90% of appraised value. Borrowers would have to share 50% of all future appreciation with FHA. The loan limit for this program is $550,440 nationwide. Program is effective on October 1, 2008.

• Seller-funded downpayment assistance programs – codifies existing FHA proposal to prohibit the use of downpayment assistance programs funded by those who have a financial interest in the sale; does not prohibit other assistance programs provided by nonprofits funded by other sources, churches, employers, or family members. This prohibition does not go into effect until October 1, 2008.

• VA loan limits – temporarily increases the VA home loan guarantee loan limits to the same level as the Economic Stimulus limits through December 31, 2008.

• Risk-based pricing – puts a moratorium on FHA using risk-based pricing for one year. This provision is effective from October 1, 2008 through September 30, 2009.

• GSE Stabilization – includes language proposed by the Treasury Department to authorize Treasury to make loans to and buy stock from the GSEs to make sure that Freddie Mac and Fannie Mae could not fail.

• Mortgage Revenue Bond Authority – authorizes $10 billion in mortgage revenue bonds for refinancing subprime mortgages.

• National Affordable Housing Trust Fund – Develops a Trust Fund funded by a percentage of profits from the GSEs. In its first years, the Trust Fund would cover costs of any defaulted loans in FHA foreclosure program. In out years, the Trust Fund would be used for the development of affordable housing.

• CDBG Funding – Provides $4 billion in neighborhood revitalization funds for communities to purchase foreclosed homes.

• LIHTC – Modernizes the Low Income Housing Tax Credit program to make it more efficient.

• Loan Originator Requirements – Strengthens the existing state-run nationwide mortgage originator licensing and registration system (and requires a parallel HUD system for states that fail to participate). Federal bank regulators will establish a parallel registration system for FDIC-insured banks. The purpose is to prevent fraud and require minimum licensing and education requirements. The bill exempts those who only perform real estate brokerage activities and are licensed or registered by a state, unless they are compensated by a lender, mortgage broker, or other loan originator.