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Napa Valley Real Estate Q&A : Spring 2012

Q: What should I watch out for when making an offer on a tenant occupied property?

A: I assume that you intend to take title to the house with the tenant still in possession of the premises, in which case you would become the tenant’s landlord. If this is the case then, in addition to all of the normal inspections that a buyer makes to determine the condition of the property, you must also determine the condition of the tenancy. First of all you should have made your offer using a standard form residential income property purchase agreement or a regular residential purchase agreement with a “Tenant in Possession” addendum (most agents will have access to these documents through the California Association of Realtors). Both documents require the seller, among other things, to provide the buyer with copies of all current leases, rental agreements, service contracts and other agreements regarding operation of the property. You should also receive an estoppel certificate signed by the tenant confirming the terms of the tenancy and affirming that no defaults or claims are outstanding against the Seller. Further, provision must be made for transfer of any existing, unused security deposit from seller to buyer because the buyer, as owner, will be responsible to the tenant for return of the security deposit to the tenant at the end of the tenancy, minus any allowable deductions. There should also be some sort of prohibition on the seller making changes to the terms of the tenancy prior to close of escrow.

As a general matter, if this is your first rental property you should speak with an eviction attorney or service regarding the procedures and costs of removing a tenant from the property should the need arise. Further, review a good book on Landlord-Tenant law so that you will know what you are getting yourself into.

 

Q: I own a small business. Can I use the funds in my business account for all or any portion of my down payment and closing costs?

A: Most lenders require that funds being used for down payment and closing costs be verified with two months of asset statements for personal checking, savings and/or retirement accounts. In most cases, using business funds is not allowed but can be done on a case by case underwriting exception basis. Consult with your lender before committing any business funds towards the purchase of residential property.

 

Q: I am buying a home and need every penny to make the purchase, so do I really need title insurance?

A: It is impossible to give a blanket answer to your question because just as every property is unique, so is the condition of title unique to each property. I suggest that you consult with both your escrow/ title company and with your legal counsel regarding the advisability of buying title insurance for your situation. There are however some practical reasons for obtaining title insurance. The first is that if you are borrowing money to make your purchase then your lender will almost assuredly require that you purchase title insurance to cover both yours and your lender’s interest in the property. Secondly, the title company will run a public records check on the property that should point out problems with the chain of title such as defects in deeds, encumbrances on the property such as easements in favor of adjoining property owners, and the existence of neighborhood conditions, covenants and restrictions that could affect your use of the property. You will want to find these things out early in the purchase process before you remove your inspection contingencies so that you can work out problems, or try to obtain title insurance to cover your particular situation. Finally, even if you don’t want title insurance, the person who you sell to years from now probably will and a continuously insured title can smooth your resale.

 

Q: What are the changes that HUD is making to the FHA loan program?

A: As part of ongoing efforts to strengthen the FHA Mutual Insurance Fund, FHA announced a new premium structure for FHA insured single family mortgages. FHA will increase its annual mortgage insurance premium (MIP) by 0.10% (new rate 1.25%) for loans under $625,500 and by 0.35% (new rate 1.50%) for loans above that amount. Upfront premiums (UFMIP) will also increase by 0.75% (new rate 1.75%).

The 0.10% increase is effective for case numbers assigned on or after April 1, 2012, while the 0.35% increase on loan amounts over $625,500 is effective for case numbers assigned on or after June 1, 2012. The upfront change is effective for case numbers assigned after April 1, 2012.

 

Call (707) 249-1600 with your real estate questions.

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Napa Real Estate Homeowners Should Track This One. Banks with a heart?

3 weeks ago, Bank of America initiated a pilot program allowing homeowners facing foreclosure to remain in their homes as renters. There are important reasons why Napa Valley homeowners should be interested in the success or failure of BoA’s approach.

First, a note about the term “bank owned homes”. It’s not technically correct to say that there has been some huge rise in the number of them, because “bank owned homes” actually describes every home with a mortgage. The mortgage holder always technically “owns” the property, even when the homeowner retains title. However, what is true is that over the last four years, many homeowners learned the hard way just what it means to face the reality of your home being owned by someone else.

Enter Bank of America. Their press release quotes Ron Sturzenegger, a Legacy Asset Servicing executive with the Bank: “Our priority is designing a solution that helps our customer.” Although we might be justifiably skeptical of this as BoA’s sole motive, allowing homeowners to remain as renters in bank owned homes is hardly just a PR move.

The program certainly makes bottom-line financial sense for a whole host of parties, including Napa Valley real estate homeowners who have no difficulty meeting their own mortgage payments.

Under the program, a former homeowner who qualified would be able to continue working and contributing to the economy without the costs, loss of time, and anxiety involved in moving. For all property owners, the ultimate effect is to keep the market from being flooded with distress sales. Every neighborhood would benefit if home values stabilize.

Under the pilot model, bank owned homes convert to investor ownership in a much smoother transition than the foreclosure/short sale model. Instead of the lender being left with an empty property generating zero revenue in the interim, former homeowners simply become renters, making it easier for them to get back on their feet financially.

In my opinion, any move or policy that helps more people stay in homes is a policy worth discussing. BoA’s program is only in a limited test stage, but here in Napa we can hope that it will prove to have multiple beneficiaries: banks, investors, agents, homeowners and neighbors. Everyone benefits when his or her neighborhood’s real estate market is healthy!

Have a question about real estate in Napa Valley? Feel free to contact me anytime with questions. I represent Napa buyers and sellers, and am always available to chat about your own plans.

-Karen Magliocco

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Napa Foreclosure Sales Flood Market

Foreclosures and other distressed properties account for more than a third of all home sales, and data released today suggests that figure may soon grow even bigger.

Lenders in January took back nearly 91,100 distressed properties, which includes foreclosures and short sales, up 29% from the previous month, according to data released this morning by LPS Applied Analytics, which tracks mortgage performance.  In the next few months, experts say those homes will make their way back to the market to join the already high percentage of distressed homes being snatched up by buyers.

That addition of distressed properties will likely lead to further drops in home prices, says Tom Popik, research director at Campbell Surveys, a real estate research firm. Foreclosures and short sales accounted for roughly 35% of total existing home sales in January — up 16% from June, according to the National Association of Realtors. Over that period, the median home price fell 8.5% to $154,700. “Prices are going to continue to go down for a long time,” says Popik

To be sure, distressed properties tend to make up a greater share of overall sales in the winter when investors are the predominant buyers, says Walter Molony, a spokesman for the National Association of Realtors. Families typically purchase a home in the spring and summer before the new school year begins. And because families tend to avoid buying foreclosures, distressed properties make up a smaller market share of home sales during that time, he says.

Still, as banks reclaim more foreclosed properties and put them back on the market, experts say homeowners are likely to feel the impact of a nearby foreclosure on their own property’s value. On average, home property values drop about 1% when they’re within one-eighth of a mile from a residence that’s received a foreclosure filing, according to the Woodstock Institute, which researches foreclosures, and the Georgia Institute of Technology. When the home is sold – whether in an auction or taken back by the lender – homes within a quarter mile lose up to around 4% of their value, which they’ll need between two and five years to recoup, according to a separate study in the Journal of Real Estate Finance and Economics.

For homeowners, more foreclosure sales in their neighborhood can lead to losing home equity at a time when millions already owe more on their home than it’s worth. Less equity will make it harder to borrow against homes for renovations, repairs, or other purposes, says Spencer Cowan, vice president at the Woodstock Institute.

Real estate pros say those who want to sell will likely end up getting less for their property than they expected. That’s because they’ll be competing with foreclosed homes that sell at a roughly 29% discount on average, according to RealtyTrac.com. Of course, these homes may stand out to buyers who prefer to buy a move-in ready home or at least one that doesn’t require extensive repairs like most foreclosures do.

What’s bad news for sellers, of course, is good news for buyers. In particular, experts say the spike in foreclosures means buyers have more leverage to negotiate a price on a non-distressed sale if it’s in a market where a significant number of homes are in foreclosure. They may also be able to purchase a foreclosed home at a relatively low price (though they’ll likely have to pump money into it for repairs).

During the last quarter of 2011, foreclosure sales in Las Vegas accounted for 59% of all home sales – among the highest in the country — according to RealtyTrac.com. Those homes sold for an average discount of 19%. In Sacramento, foreclosures made up 50% of all sales and sold at a 25% discount. But while they may get a deal, buyers shouldn’t count on turning a profit quickly especially if foreclosures continue to rise in the area dragging property prices further down.