Closing Chicago Real Estate

I wanted to put up a short post on this because I’ve heard of a person or two getting burned on this and the so-called “Good Funds Legislation” (codified at 215 ILCS 155/26) seems to have gotten surprisingly little attention for legislation that potentially impacts many, many residential real estate closings. I dealt with it just last week when we had a client who had to bring some $60,000 to closing.

My reading of the legislation and what the title companies seem to be adhering too is:

When a Buyer brings in MORE THAN $50,000 to close that those funds must be wired and not the typical certified/cashiers/official checks that we have advised for years. For amounts LESS THAN $50,000 the “old rules” still apply.

So there ya go, be the best lawyer in the room, save time, and maybe save a closing or two by knowing the law!

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Comments (0) Feb 26 2010

The typical and not uncommon repair or closing cost credits that I’ve negotiated in tens if not hundreds of residential real estate transactions over the last 8+ years have become far more challenging to squeeze onto the HUD-1 at closing over the last year or so as lenders become more restrictive & FHA loans have predominated. So you’ve really got to be asking yourself, will that $10,000 repair credit that sounds great during attorney review go “poof” when the Buyer’s lender sees a preliminary HUD-1??

Buyers love the closing credits because in theory they can still borrow say 96.5% of the contract price while using the credit to lower their bottom line owed (simply they can borrower more and owe less at closing). For example, on a $100,000 purchase Buyer can borrow $96,500 and then that $2,000 repair credit would leave a Buyer needing only $1,500 to close (leaving aside other closing costs for the sake of discussion). Of course you could simply drop the purchase price to $98,000 but then Buyer’s loan amount gets lowered to $94,570 and Buyer owes more at closing versus the $2,000 closing cost credit example above (of course long term Buyer’s paying less on his loan over 30-years but sadly the issue is usually the short term matter of $$$ to close).

So that’s why Buyer’s love credits, Mo’ Money; but the flip-side for lenders is that the “credit Buyer” example above has less skin/money in the transaction and thus is viewed as the riskier borrower. And that becomes the trick, if lenders won’t let a credit be listed on the HUD-1, how do you make sure a Buyer still actually gets credit for that agreed upon contract credit at closing. The greatest challenges lies in transactions, notably FHA loans, where a Buyer can’t put too much money down yet she MUST invest 3.5% of the purchase price into the transaction.

What to do? Here are 3-4 tools to keep in your real estate closing bag of “lawyer tricks”…

1.  Hide the Credit Somewhere Else on the HUD-1. This is the easiest and the most frequently used solution and typically done in one of two ways. First, Buyer’s “closing credit” gets added into Buyer’s real estate tax reproration credit. When there’s a smallish Buyer’s credit of say $2,000 or less this is almost always the preferred solution and I’ve never seen a lender bat-an- eye.  Second, if you need to find to find a few more bucks, then some of Buyer’s costs should get moved over to the Seller’s side…mortgage interest, lender fees, etc.

2. How About a 203k loan? I’m going to write an extensive post on 203k loans upcoming…this is a HOT area right now. I think I represented one 203k Buyer over the first seven years of my legal career and have represented five 203k Buyers in the last 6 months. What is it? Simply, a Buyer can borrower more than a property’s current value in order to fund remodeling/repairs. So if you really need a big repair credit at closing, why not dial 2-0-3-K?

3. Have Seller pay Buyer’s Contractor Directly. I wouldn’t recommend this option but I did see this happen recently. Parties got to closing and Buyer’s lender wouldn’t let a large repair credit show on the HUD and Buyers couldn’t close without those dollars. Long story short, item #1 (above) was used to the point that it could be used, but a good chunk of the agreed upon credit was still outstanding. Seller ended up agreeing to quietly pay credit to Buyer’s contractor to complete the repairs…not sure about legality here but I’m just sayin’ I’ve seen it done to close a deal.

Or just don’t buy a property that you can’t afford…sometimes that’s the critical issue. If you’re squeezing for $$ too much just to close you may be asking for a disaster like here. Remember, if Buyer’s lender ostensibly won’t cooperate on this issue at closing that’s not the Seller’s problem and between Buyer/Seller if Buyer can’t close w/o the credit the Buyer likely is in a breach of contract scenario.

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Comments (0) Feb 06 2010

I’m amazed at how frequently real estate attorneys horribly and wrongly estimate either a client’s bottom-line amount owed by a buyer (how much $$$ to bring to closing) or the Seller’s expected proceeds. Mainly because at a practical level a buyer without enough money is NOT a buyer, but (more important to your law practice) because if I was a client who thought I’d owe $1,500 at closing and end up owing $9,000 I wouldn’t be overflowing with confidence or raving reviews of my real estate lawyer.

Just last week I worked with some Sellers and there was a $12,000 Buyer’s closing credit in the deal. However, since Buyer’s were using an FHA loan they had to put at least 3.5% of the purchase price into the deal. So, Buyer’s couldn’t get full credit for the $12k at closing and more importantly their bottom-line thus needed to be about $9,000 cash to close versus $1,500 cash to close. Needless to say, Buyer’s attorney hadn’t prepared them for this eventuality. Miraculously this deal closed because the Buyer’s could bring in extra dollars.

But, if I’m those Buyers my summary recollection for my first home purchase is, “remember that sloppy attorney who was $8,000 off in his estimate of funds to bring to closing.” Nope, I’m not recommending him to anyone else.

In conclusion this is a thoroughness issue. The day before the closing you’ve got to review the file…contract, attorney review letters, title charges…simply know the numbers and advise your client accordingly.

YOU WANT YOUR CLIENTS TO REMEMBER YOU…BUT FOR THE RIGHT REASONS!

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Comments (0) Jan 26 2010

Well, hopefully as we enter year 3 of the real estate malaise no one is signing up for 1-3 year ARMS or some of the interest-only products that devastated many home-buyers. But I’m still seeing plenty of folks buying homes who shouldn’t be.

Here’s a sad example that I’ve been dealing with lately…

Clients purchase a modest home earlier this year…just barely. Meaning, they barely have adequate funds to bring to closing. Well, several months post-closing I get a call about some flooding that they’re experiencing in the home’s basement (they did do an inspection). Sadly upon review it seems like the property Sellers were fraudulent and that a claim under the Residential Real Property Disclosure Act seems likely. Yet enforcement of legal rights usually requires a little upfront investment….RETAINER!

Perhaps more importantly, if you don’t have $5,000-$10,000 in an emergency fund to deal with something like flooding/plumbing, etc. you likely can’t afford to own that home.

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Comments (1) Jan 14 2010

I have started to have more than a few clients who have worked with or are working with Redfin real estate agents. Redfin is the online real estate company that I think began in the Seattle market whose selling point is the refunding of 50% of a buyer’s agent’s commission back to the individual buyer. I’ve been reading about them in the general business media for some time now but I believe they’ve only been in the Chicago market for some 2ish years so I had not had direct dealings with them until this fall. Here’s what I’ve found both first-hand and sort of a report of what I’ve heard from my clientele:

Read the fine print on Redfin’s Agency Agreement. Although their marketing is that a buyer gets 50% of the agent’s typical 2.5% commission back the Agency Agreement’s that I’ve seen include a $5,500 minimum commission on Redfin’s part. So lets do the math…on a $250,000 purchase (isn’t the median Chicago sales price around $225,000 or so), 2.5% is $6,250. So Buyer’s “refund” on that purchase would be $750 and far from 50% of the buyer’s commission. Better than the $0 you’d get from most agents but just be aware that until you get a little over a $400,000 purchase price you aren’t getting a “50% refund.”

It’s a Team Approach. The feedback I’ve received on this part of the Redfin model has been overwhelmingly positive both for general customer service and by reducing overall sales pressure. On the customer service front simply more than one agent is involved so there are more people to help you look at properties so a buyer isn’t tied to just one persons schedule. Then once you’re ready to put in an offer you’re handed off to an individual who handles things more personally at the offer/negotiation/closing stage. On the lawyer side of things I thought the customer service was good. And the reviews I heard from clients was that with Redfin there was less “sales pressure” on the part of agents. I don’t know how their agents are compensated but since it is more of a team approach I’d guess it’s not purely on the sales commission like most agents.

Finally, I like the Forums feature that they have on their Website specific to the Chicago market. If nothing else, maybe you can use the threat of Redfin to negotiate your non-Redfin agent’s commission downward or get yourself a refund!

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Comments (3) Dec 30 2009

Ok, first the rant and then some instruction…

I’m bothered a tad when someone asks me to represent them at their real estate closing but particularly when I hear attorney colleagues use that as an expression of residential real estate representation. It diminishes the practice and if that’s all you are doing then you’re not representing your clients very well. I view my representation of people buying and selling residential real estate as a 4-part process:

1.  Initial contract review, attorney modification and inspection negotiation.
2.  Mortgage/title clearance monitoring.
3.  Closing.
4.  Deed recording & title insurance follow-up, post-closing escrow releases, and final client correspondence.

And I think I’m particularly annoyed by the expression because it de-emphasizes the importance of what an attorney is doing pre-closing and to ASSUME that a contract will close and everyone will live happily ever after is stupid! Here’s the recent war story, short and sweet…

A long-term client recently asked me to look at her son’s file regarding a problem getting his earnest money back after a failed real estate deal (he was the prospective buyer). And the lawyer he used seemed to have been writing the proper letters and the client appeared to not be at fault. He wanted to get out of the contract based on various legitimate inspection and mortgage contingency reasons.

Yet I saw 2 BIG things I didn’t like:

1.  Buyer’s attorney letters are never “accepted” by Seller’s attorney. Have an assistant follow-up on these after a day or two if you’re asking for a mortgage contingency extension or whatever. This file I was reviewing contained at least 5 extension requests but none are accepted by the Sellers attorney…that’s at a minimum a serious communication problem.

2.  You must keep proof of service/notice of your letters. This was the true shocker when reviewing this file. This law firm only kept its fax confirmation pages for two months. So now this client is considering options to get his earnest money back, including litigation, and yet he’s going to have a serious problem proving proof of proper notice. Send your letter, printout and staple your fax confirmation page to the letter, and file. Simple.

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Comments (0) Dec 24 2009

Just a quick follow-up on our recent post about the chances for the first time homebuyer tax credit extension. NYTimes reports that the extension was discussed in the President’s meeting with Senate Majority Leader Reid and Speaker Pelosi yesterday…

Extending and possibly expanding the popular home-buyers credit, which is due to expire after November, is high among options for further stimulating the economy and creating jobs, Congressional aides said, though a White House official said it was only briefly mentioned on Wednesday in an Oval Office meeting between President Obama, Speaker Nancy Pelosi of California and Senator Harry Reid of Nevada, the Senate majority leader.

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Comments (0) Oct 08 2009

And that’s just the average folks. Good overview piece on short sales recently from the Tribune describing the often frustrating process. Personally, the last few months I’ve been involved with 5 short sales, 1 of which has actually closed. I’d like to think my clients know what they’re getting into since I’ve told them what they’re getting into, but even for the well-informed person the waiting and unknowing and lack of communication becomes problematic after a while. Ideally a potential short sale buyer will have no time crunch to move and up front the buyer should be prepared to wait 12-16 weeks to hear something. If you’re not prepared to wait stay away from the short sale properties.

And look at that an informative quote from one of our favorite real estate bloggers, Eric Rojas, in the article:

“Most people really aren’t in a situation where they can deal with the uncertainty,” said Zhao’s real estate agent, Eric Rojas at Prudential Rubloff. “Even when you explain that it’s not accepted until the bank accepts it and you build these safeguards into the contract, people are dropping out, left and right. These sales would get done, but people just can’t wait.”

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Comments (2) Oct 01 2009

Communication likely is job one for the different players in any real estate transation from lender to lawyer to agent. But it’s particularly important with short sales as they drag on and on and on and on…

Case-in-point, we’ve been working with some buyers over the last several months who had entered into a contract regarding a transaction that they knew up front was a short sale and I surely counseled them up front that this deal may take several months to close or it may not close. Fast forward 2-3 months and clients are getting a bit nervous that the deal may not close prior to Uncle Sam’s November 30, 2009 bewitching hour and they start considering other properties.

Well, Buyer’s find another property, want to kill the ’short sale’ deal, and put in an offer on the “new” property. We send letter over to Seller’s lawyer on the short sale to null/void the contract and suddenly are told that first mortgage has approved the short sale and are given written proof of said approval and they’re just waiting for approval by the second mortgage-holder (what was worse was that my office had followed-up within the last couple weeks and we were told specifically Seller was still negotiating). So we may have just been getting the run around.

But the moral of the story is that particularly on the Seller’s side, you need to communicate the status of the lender negotiations to the Buyer or the Buyer’s eyes may start to wander. A quick e-mail or fax every 3ish weeks doesn’t take too much time. And it might keep that Buyer interested and save a Seller the ramifications of foreclosure.

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Comments (1) Sep 24 2009

I was recently part of an interesting negotiation during the attorney review period of a residential real estate contract regarding a buyer’s potential repairs that came up on an inspection report and other possible buyer credits. As the attorney for the buyer primarily it was eye-opening that the Seller is this particular transaction was taking such a hardline amidst the worst real estate market in recent memory. The Seller was adament about the fact that the Buyer’s prorated real estate tax credit should be 100% of the previous year’s tax bill and Seller would do no repairs nor provide any credit despite probably $2,000-$3,000 of substantial repairs that were raised in the inspection report.

What’s the sweet spot in terms of $$ when negotiating fairly straight forward deals like the above?

Generally I think Seller should be willing to compromise up to the amount of his total monthly expenses that she pays each month for the property that she’s selling. In other words, add up mortgage liability, condo assessment, property taxes, utilities, insurance, ect. Say that total is $2,000. I’d suggest that Seller should be willing to deal up to that amount in order to get a deal closed with the current buyer. Probably even more in a soft market, but I think that’s a good, easy guide for finding the “sweet spot” needed to get a deal closed.

My reasoning is that even if there is a backup buyer ready to step in, by the time you play with the first buyer’s attorney review period for 10-14 days, kill the deal, then second buyer has 10-14 days in attorney review…a month is eaten up and closing is delayed approximately a month. Thus the one month’s expenses as a simple barometer. And this likely even leans optimistic for Seller.

Are you really ever certain that there’s another offer out there?

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Comments (1) Sep 23 2009