Closing Chicago Real Estate

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Alright, so the real estate market is closed until fall so catch-up on some summer reading…

Biggest Defaulters on Mortgages Are the Rich. The article reports that 1 in 7 million dollar plus loans are now seriously delinquent compared to 1 in 12 in the below million dollar loan market. Surely these folks are seeing job losses like the rest of the economy but they’re also likely more quick to walk away from an investment property or simply being savvy about dropping a bad investment.

Fannie Mae gets tough on homeowners who walk away. Interesting “get tough” talk from Fannie Mae first about seeking delinquency judgments against borrowers who walk away from a home but can afford to pay the mortgage. Also, Fannie Mae also said it would make new mortgages harder to obtain for borrowers if it can be proved that they engaged in a “strategic default” — abandoning a home to foreclosure not because the required payments are unaffordable but because the mortgage is larger than the value of the residence. For such a borrower, Fannie said it would not buy or guarantee another home loan for seven years. Borrowers who worked in good faith with their loan servicers to try to stay in their homes would be barred from Fannie loans for only two or three years, even if they eventually lost their homes after attempts at loan modifications failed. How will Fannie determine when there has/hasn’t been a “strategic default”??

V.A. Loans Harder to Get. No surprise as the VA loan market has tightened with the general mortgage market. VA loans have typically been rather friendly because the federal government’s Veteran’s Affairs Department insures a quarter of these loans to lenders.  Major lenders like Bank of America, Citigroup and JPMorgan Chase, typically will not offer V.A. loans to borrowers with credit scores below 610. Debora Blume, a spokeswoman for Wells Fargo, said the cutoff score for her bank’s V.A.-insured loans was 600.

How to Start (And Survive) As a Mortgage Broker. Well, for starters there’s a lot less competition than a few years back…there are 2/3rds fewer mortgage brokers today than 2007.

He launched his business in 2007 with a relatively small capital investment, spending about $4,000 for equipment, services and other basic necessities. To this day, he has no employees and works primarily with lenders with whom he already has relationships, from large players such as Wells Fargo & Co. to smaller, established lenders like Flagstar Bank in Troy, Mich. Mr. Huettner makes money in three ways: by charging borrowers a fee, charging bankers a fee or a combination of the two.

He stands apart from competitors, Mr. Huettner says, by specializing in mortgages for customers with complex financial situations, such as self-employed individuals, second-home buyers and anyone dealing with tricky life matters.

Find a NICHE, great business advice always!

FHA Health Better than Expected. Here, here and 3 cheers for the Federal Housing Administration and the stronger-than-expected performance of FHA-backed loans.

Delinquencies on FHA-backed loans rose slightly to 12.4 percent in May from 11.7 percent in April, but were down from 13.6 percent a year earlier after stronger-than-expected performance in the first half of 2010.

Personally I think the performance of FHA is rather impressive considering the dramatic increase in their usage from the height of the boom years up to now.

FHA and Fannie Mae Getting Tougher on Reverse Mortgage Borrowers. Not a surprise, the reverse mortgage market has been greatly hurt due to home value depreciation. A rare time of government actually squeezing seniors.

Here’s a sobering message for anyone who has a federally insured reverse mortgage or plans to apply for one: If you don’t pay your local property taxes or hazard insurance premiums, you should know that the risk of losing your house to foreclosure is about to increase.

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Comments (0) Jul 14 2010

In transactional real estate land, title insurance is one of the most misunderstood products by lawyers and non-lawyers alike. Yet it needn’t be…if you understand what car/homeowners insurance does there’s no reason you shouldn’t have a basic understanding of what title insurance does. And this recently reported First District (Rhone v. First American, No. 1-09-1216) case provides a nice back-drop for a rich and thorough title insurance discussion.

You really just need to understand a couple things and you’ll “get” title insurance just like you “get” car insurance. Every insurance policy will have some “effective date.” The confusing issue with title insurance is that whereas a car insurance policy would cover damage the day AFTER the policy’s “effective date” with title insurance, the policy would cover damage the day BEFORE the “effective date.” Title insurance looks backward whereas the car insurance looks forward. Okay?

The case above includes an interesting mix of property tax law and title insurance law. The Plaintiff’s close/buy (on) a Chicago townhome 8/31/06 that had been taxed as vacant land for 2004-2006 so it was undertaxed quite a bit for those 3 years. Interestingly, the parties to the real estate transaction DID have a tax reproration agreement but only for 2006 taxes (not ’04-’05).  In February 2008 the Plaintiff’s get a Cook County tax bill entitled, “2007 Omitted Assessment Property Tax Bill” from the county treasurer that charged them for the 2004 and 2005 taxes (no longer classified as vacant land). Plaintiff’s then make a claim against their title policy from First American which was denied.

In June 2008 they bring suit regarding First American’s failure to pay their claim for the 2004-2005 taxes. The appellate court sided with First American citing a mix of property tax and contact law. Obviously, the big question was how should the 2004-2005 taxes be viewed…are those obligations that arise in 2004-2005 whereby First American would be on the hook OR do they not actually arise until 2008 when the tax bill is issued. I won’t delve into the tax code too much here, but the court held that the property tax lien doesn’t arise until 2008 (for the 2004, 2005 taxes) therefore these bills weren’t covered on the title policy.

Putting on my real estate transaction lawyer hat for a second, this is a bit of a scary scenario and primarily because it’s not that easy to find-out previous year tax information for a property. For example, look at the Cook County Treasurer’s site, it’s one click to look back one year but there’s not an obvious way to go back any further. And I do typically take a very close look at property taxes during a transaction. I suppose if you get something fishy like this case above where it’s a Chicago townhome that’s classified as vacant property you’ve got to really look under all the rocks to see what’s what.

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Comments (1) Jul 01 2010

As this WSJ story opens, it’s the temporary tax credit that just won’t end. I haven’t heard anything from the White House but I’d be shocked if the President wouldn’t be signing this into law.

However, a careful read of this article (awaiting some of the final legislative language) suggests that this won’t help that many people. Note this excerpt:

Congress first created a tax credit for homeowners in 2008. It was extended and expanded twice during 2009. The last extension, approved last fall, said that house purchase contracts would have to be signed by April 30, and home buyers would have until June 30 to close on those sales. The extension is only good for those buyers who were under contract by April 30. Someone who signed a contract after April 30 and buys a home by Sept. 30 isn’t eligible for the tax credit.

It’s fairly rare for it to take more than 60 days from contract acceptance to closing so I’m guessing there’s only a fairly small group of folks likely buying short sales or the like where close dates really dragged on.

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Comments (0) Jul 01 2010

Yep, we’re tweaking what we do here towards a dating model. Real estate is one of the last dating niches for a Website no? Could be big money! Well, perhaps I’ll let that idea get snapped-up by someone else and I’m happily married so…

But relationships are VERY IMPORTANT to real estate transactions and I’m constantly amazed that they’re not cultivated better. Why? Because it’s flat-out in everyone’s best interest that the different players in a real estate transaction get along and work well together. Because with minimal exceptions, everyone has the same end goal so why not just make it easier to reach the finish line?

I suppose the explanation for friction within a real estate transaction is in parts related to the sinful nature of man and also the egotistical (yet wrong-headed) need of attorneys or agents to appear “aggressive” but generally it’s unnecessary and foolish. Creating a great working relationship with opposing counsel or the agents/mortgage professional can be the difference between closing and not closing and may literally mean hundreds of thousands of dollars. Here are some recent examples I’ve experienced where a good real estate relationship was critical:

Earnest Money Return. Within every transaction exists the fairly good possibility that it won’t close and that a Buyer will be asking for his earnest money back. And if you’ve been in the business long enough you’ve had a deal or two where the earnest money release wasn’t easy and perhaps never happened. And the issues are rarely substantive, they usually boil down to one party thinking the other is a jerk. I can think of 2 deals in the last 6 months or so that didn’t close and fortunately in both cases where my client was the Buyer, the earnest money did get returned EVENTUALLY. But there was quite a bit of time differential…like 1 day vs. 1-2 months. In the “1 day” deal, there weren’t agents on both sides so it was me and the Seller’s attorney. I didn’t love the guy but we communicated well and when the deal died the money was returned promptly. In the “1-2 month” deal, the two agents were absolutely dysfunctional. I don’t know who was the problem but lets just say that the listing agent would call my office because he and the Buyer’s agent could not work together whatsoever. I felt fortunate the earnest money was ever released.

The Unexpected Post-Closing Holdover. Meaning, the unexpected need for a Seller rent-back a unit/home post-closing or to simply delay the closing due to unforeseen circumstances. Again, this possibility exists in every transaction, and it’s no big deal, UNLESS, the parties simply are unreasonable and can’t work together. I just represented a Seller who had to holdover where actually his purchase contract fell apart pretty much simultaneously with when the sale offer came in. But on the sale everyone liked each other and was extremely professional, my Seller client stayed-over nearly 1 month, he left the unit in good shape, everyone’s friends and he got his full $5,000 security deposit escrow returned.

A Deal That Doesn’t Close PERIOD without Mutual Trust, Goodwill. These don’t come along all that often but maybe once a year and you as a good lawyer or real estate agent really earn your fees because in these deals you can save your client hundreds of thousands of dollars…i.e., the relationship between the parties is excellent or the deal doesn’t close! Earlier this year I had a transaction without any real estate agents on either side so it was pretty imperative that clients/attorneys worked well together even if it were a vanilla transaction. So for starters the clients put together the contract between the two of them and worked out a repair credit. Then the appraisal came in a bit low so the price and credit adjustments had to occur. There was excellent communication between the clients. My clients were actually the heirs of an estate selling this home and weren’t local so even for the walk-thru I met the Buyer at a CTA “L” stop on my way downtown the morning of the closing and gave him the keys to the place to do a walk-thru (glad the home didn’t get burned down before the afternoon closing). But what options did we have? And finally, the big kahuna, at the closing the Buyer’s lender wouldn’t let a fairly sizable closing cost credit show on the HUD-1 and a little side deal had to occur or the closing would not. The kind of side deal that’s not in writing and likely not enforceable at all but there was trust between the parties and the side deal occurred and the deal closed.

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Comments (0) Jun 16 2010

We all know that the real estate market remains soft with Sellers outnumbering Buyers and although buying activity is improving, prices have yet to stabilize. That remains the “macro” economic picture but within the 45-60 days in a specific real estate transaction the leverage between a Buyer and Seller evolves over the course of the transaction.

I closed a transaction today on behalf of my Seller client today that exemplifies this “leverage evolution” quite well.

MAIN POINT: Although the Buyer has most of the leverage early in a transaction during the attorney review period regarding contract modifications and repair issues, the Buyer’s leverage advantage lessens considerably the more he becomes invested in the transaction and the closer he gets to the closing…think about a Buyer’s $$$/time investment in a deal as it rolls forward.

These days when I represent a Buyer, I take the position that up front in the attorney review period and certainly in dealing professional inspection issues my position as attorney is to unabashedly try to squeeze the Seller for every last penny. Why? I want to shape the transaction in a way that’s most beneficial to my client. And it’s usually pretty doable because during the first week of a transaction the Buyer has a big leverage advantage. The Seller likely has been waiting for weeks for an offer and might be struggling financially. Meanwhile the Buyer has literally hundreds of backup properties and at this stage the Buyer has made some time investment in putting together an offer but the $350 or so for the home inspection is probably his only monetary investment. So, if the Seller balks at Buyer’s upfront requests, many Buyer’s would simply walk away.

But when ya get to the closing table, the leverage has balanced out. That’s the scenario I faced at today’s sale.

The Buyer’s did a morning walk-thru and raised a couple of extremely minor repair issues when they got to the closing. I questioned the issues primarily because the property being sold had been unused for the month or so between contract signing and closing so any problems had to have existed the day the contract was entered into. Then the Buyer’s proceeded to produce an alleged home inspection that was actually for another property address. My strong opinion was that the Buyer’s were merely trying to squeeze a couple hundred bucks out of a Seller who was already giving the Buyers a good deal. I wasn’t going to give an inch. And here’s why…

Because once the Buyer’s are at the closing table they’ve got a LOT invested in a transaction and it’s tough to walk away. For example, today and generally by the time you’re at closing a typical Buyer will have spent $350 on an inspection and some $400+ for various lender charges like application, credit check, and appraisal fees. Additionally, they’ve often made irreversible plans with movers and may have a hard deadline to vacate a current rental property. Today I knew for a fact that the Buyer’s had a lease ending in 5 days. And you add to that a Buyer’s real estate agent and attorney expecting to see some $$$ once the transaction closes and those Buyer’s have a good deal of pressure to get the deal closed versus breaching a contract and walking away for some bogus $200 repair credit.

I didn’t budge and (no surprise) the deal closed.

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Comments (0) Mar 26 2010

Although I haven’t kept a running total of the total number of residential real estate closing clients I’ve had during my 8+ years in the practice of law, I’d estimate that figure to be around 700 (including both buys and sells). And yet of those 700, I’d say less than 50 have been utterly PERFECT CLOSINGS. Perfect being defined by time (less than an hour), well-prepared clients, accurate documents, and timely receipt of $$$. Well, I recently had a perfect closing and you can to by following a few simple principals:

Lay a Good Foundation Early…Create a Road-map. The biggest mistake I see overall in residential real estate representation is the failure to do the “heavy lifting” in the early days of a transaction which inevitably leads to disorganized rushing at the end. A full contract overview and a discussion of all the issues and procedures with a client up front lead to pleasant closings and clients who aren’t caught off guard. Talk about rough closing scheduling time/location up front, give time estimates on the 2-3 main portions of a real estate deal (negotiations, mortgage approval and closing), discuss walk-thru timing, and talk through specific closing costs in detail.

Periodic “Check-Ins.” Have your legal assistant constantly push the Seller’s side to get their documents ready, namely the title commitment. Same thing goes with a Buyer’s lender, push for an unconditional clear to close letter from the Buyer’s lender…don’t let them keeping asking for more and more financial docs from the Buyer and delay the closing.

Schedule the Closing & COMMUNICATE. My rule is to schedule the closing as early as possible and then communicate the scheduling to everyone. Sort of a self-fulfilling prophecy in residential real estate…make that lender meet the deadline or disappoint their client.

‘Twas the Night Before the Closing. Item #1 above and this, being proactive the day before the closing, are the two keys to perfect closings and truly what separates the thorough real estate lawyers from the lazy ones. Must dos: 30-minutes telephone conference with client working through the preliminary HUD-1 or your closing costs estimate (too important to rush through at the closing and obviously this gives client her bottom-line $$ to bring to closing), deal with any walk-thru issues in advance, remind clients of items to bring to close like official funds/VALID ID/proof of insurance, and massage client expectations in terms of timing and potential closing delays.

Play it Out. The closing of a residential real estate transaction should be the simple culmination of 4-6 weeks of hard preparation up to that point. It’s like the night before that highly anticipated athletic contest and you know you’re as prepared as you possible can be and the game is the easy part…it’s just a matter of “playing it out.” Like back in my college football playing days, Tues.-Thur. practices were when the hard work was done, Saturdays were easy.

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Comments (0) Mar 15 2010

Can Living Near a Train Station Save you From Foreclosure? Well, this piece reported on some research which found that mortgage default rates were higher in locations without ready access to public transportation. Not too surprising as we’ve seen gas prices spike over the last few years. Some interesting discussions about “location efficient” mortgages too. Personally I’m very glad I’ve never been a “car person” and scaling back to one car in our family shortly after my wife and I got married has been a great and relatively easy move for us.

Citi Lets Distressed Homeowners Stay 6 Mos. Free. Hey, foreclosure ain’t a bouquet of roses but this seems like a positive step. Under the recently announced program, eligible delinquent homeowners must have their primary mortgage owned by CitiMortgage and must first be considered for a permanent loan modification. If that is not possible, a short sale will be considered. If neither of those alternatives works, the homeowner could stay in the home for up to six months and at the end receive $1,000 in a cash-for-keys transaction. Program participants also would undergo financial counseling. The program is not being offered to borrowers who have second mortgages on their properties.

FHA Changing Policy on Credit Score, Down Payment. No surprise as FHA loans increased by nearly 100% in 2009 from 2008. To be able to make a down payment of just 3.5 percent on an FHA-insured loan, home-buyers would have to have a minimum FICO credit score of 580, rather than the current 500 FICO outlined in FHA guidelines. New borrowers with less than a 580 score would have to put down 10 percent on a home purchase. The FHA also will increase the upfront mortgage insurance premium to 2.25 percent of the total loan amount, from 1.75 percent. I’ve been rather impressed with FHA’s ability to handle its renewed prominence…they were a non-factor 4 years ago.

Florida asks FEMA to Provide Help in Chinese Drywall Problems. This Chinese drywall endemic in some of the southern U.S. is eye-opening. Florida reports some 2,500 homeowners impacted by this problem. If you haven’t been following the issue too closely, defective, Chinese-imported drywall used to build new homes primarily in the southeastern U.S.  I recall Sean Payton’s home, the New Orleans Saints coach, was impacted by the problem. Again, what’s the worst type of residential real estate to buy?

They Padlocked my Parrot. Squawk, Squawk. Well, I’m not a car guy nor a pet guy but who doesn’t appreciate some litigation against an abusive lender. And the borrower wasn’t even near foreclosure…she wasn’t behind on a single payment. Wonderful business practices, NOT!

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Comments (0) Mar 14 2010

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